Why Don’t Millennials Like Stocks?
I previously posted about a Bankrate financial security survey in 2017 which found that real estate was the Millennial Generation’s top investment preference over stocks and cash (https://www.cognizantwealth.com/2017/11/24/is-real-estate-best-for-building-wealth/). The post pointed out that real estate as an investment had actually underperformed stocks over many periods since 1900, suggesting that millennials’ expectations of the best long-term investment might not be grounded in fact.
Now fast forward to 2018. Bankrate’s latest survey revealed that millennials had changed their top investment preference. They now apparently believe that the best way to save for retirement is to keep their money in cash, in contrast to every other generation in the survey (Gen Xers, Boomers, and the Greatest Generation/Boomer parents) who all preferred stocks. Unfortunately for millennials, they seem to have gotten it wrong again.
Paul Merriman on MarketWatch compared the performance of one-month treasury bills (the equivalent of cash), large cap U.S. stocks (the lowest-risk U.S. equity investment), and small-cap value U.S. stocks (the highest-risk equities) over fifty-one 40-year periods starting in 1928. He selected 40 years as the average time that millennials (ages 18-37) would be working and accumulating savings before retiring. The annual compound return for each of these asset classes averaged across each of these 40-year periods is as follows:
- One-month treasury bills: 4.5%
- S&P 500: 10.9%
- Small cap value stocks: 16.2%
What’s the impact on retirement? Suppose you contributed $1000 per year for 40 years in one of the above asset classes. Assuming you got the same average return each year, you would retire with about $113,000 from the treasury bills, $629,000 from the large cap stocks, and $2.9 million from the small cap stocks. Said another way, your first-year monthly spending in retirement, assuming a 3.5% withdrawal rate, would have been limited to about $330 if you had invested your money in cash, as compared to $8,460 if you had aggressively invested in small cap stocks. After retiring, the cash investor would be lucky to be able to go out to dinner once a week, while his/her stock-investing friends could be travelling all over the world and possibly even retiring sooner than age 65.
Of course, no one should put all their money into any single one of these asset classes. As I’ve written before, you should at the very least diversify your investments to appropriately balance the risk you need to take in order to get a return commensurate with your future goals. But if you are a millennial with a strong preference for cash, you might end up underinvesting in those asset classes providing the needed growth.
The Bankrate reporter commenting on the survey suggested that millennials say they prefer cash but actually invest in stocks just like everybody else. She cites data from EBRI indicating that cash investments in millennials’ retirement accounts actually amount to less than 2%. That certainly is good news. But it isn’t necessarily the case that all young investors should take the maximum amount of risk when trying to grow their savings for the long-term. Those whose emotional risk tolerance for investment volatility is low will have a very difficult time dealing with the ups and downs of the capital markets. I believe it’s worth sacrificing some amount of returns in order to maintain your comfort level with your investments as long as you’re not giving up too much growth. If you’re not sure where that balance point should be, or are an overly fearful investor, getting some objective help might be warranted.
Here’s a link to the Bankrate report: https://www.bankrate.com/investing/financial-security-july-2018/ .