If you’ve been reading Investment U for the last year or so, then you’ve probably read some of my articles. Hopefully, you’ve found them useful. But you may have noticed that there’s no photo of me anywhere on the site… and there’s a reason for that.
I am a millennial.
A millennial who has studied and written about finance quite a bit, but a millennial nonetheless.
Ordinarily, I’m not very forthcoming about my age.
In almost any field, being young is conflated with being inexperienced or unqualified.
But I’m revealing this information now, because this article deals with a topic that I am quite uniquely qualified to discuss: investing for young people.
As you can see from the chart above, we’re not very good at it.
Why is my generation so far behind financially? And how can you help your children or grandchildren catch up? I’ll do my best to answer those questions below.
Why “Young Investor” Is Almost an Oxymoron
It might be satisfying to think that my generation has less than $4,000 saved on average because we’re lazy and entitled. And sure, I have some peers who fit that stereotype.
But if you’re really interested in learning why millennials haven’t taken to the stock market, you’ll find that the answer is more complex than “kids these days are spoiled.” It’s a little darker than that.
As children of the Great Recession, we’ve grown up cynical: 93% of people under 35 do not trust the stock market, according to a 2015 survey by Capital One ShareBuilder. After watching our parents lose their life savings in the late 2000s, we don’t think that investing in stocks is a worthwhile risk. Maybe we should… but can you really blame us?
Between 2007 and 2009, when many of us were entering college or the job market, the Dow lost 54% of its value. Two bulge-bracket banks, Lehman Brothers and Bear Stearns, failed outright. And the largest securities firm in the world, Merrill Lynch, got eaten by Bank of America.
In other words, during our adult lives, financial markets haven’t exactly impressed us with their wealth-generating potential.
It’s also worth noting that many young people lack the means to invest. Since the depths of the recession, aggregate unemployment has fallen. But youth unemployment is still near 10%.
What’s more, being nominally employed does not guarantee a steady income for a young person in America today. I am lucky enough to have a steady job with a good company. The majority of my friends in their 20s are not. And many more are saddled with student loan debt, and those payments eat up any “extra” money that might otherwise be available to save and invest.
Instead, millions of millennials cobble together a living out of part-time jobs in the service industry, freelance work, and “gig” income sources like Uber and Fiverr. That’s not because they don’t want real jobs – it’s because there really aren’t that many. The Great Recession hasn’t quite ended yet for the young and inexperienced.
With these things in mind, take another look at the millennials – the “Financial Lost Generation,” if you will. We have mixed feelings about free-market institutions, because we entered adulthood watching them fail. And as a result of the nearly 10-year-old financial crisis, a large portion of us still lack access to a steady paycheck. It’s difficult to budget or save, much less buy stocks.
These factors largely explain why millennials don’t invest- and why we’re represented in the chart above by that pitiful little bar. But each of these problems has a solution.
How the Financial Lost Generation Can Save
You now know that millennials often lack access to basic investing services, like 401(k)s with automatic paycheck withholding. You know that we are highly risk-averse for our age and that we’re not terribly enthusiastic about investing to begin with.
This diagnosis could help you convince that child, grandchild, nephew or younger co-worker to start saving for their future. Let’s take it step by step.
How do you save and invest without a paycheck? Nowadays, thanks to technology, you can do it automatically with every purchase.
Automatic savings apps are one of the most exciting trends in financial technology. Perhaps the most prominent is Acorns. It’s a mobile app that connects to your checking account and “rounds up” debit card purchases to create savings.
Suppose you pay $1.20 for a coffee. Acorns will round the charge up to $2 and transfer the $0.80 to a brokerage account where it’s automatically invested in a custom list of broad-based ETFs. Eighty cents may not sound like much, but doing that for every purchase can add up.
That’s why “microinvesting” is one of the hottest innovations in financial tech right now. There are other apps, like Stash and Betterment, that have similar functions. You can read more about microinvesting here. It might be a good conversation starter for discussing finances with the millennials in your life.
Teaching Good Habits to Disinterested Young Investors
Now let’s move on to the risk-aversion and reluctance to invest. You should be willing to listen to your millennial’s complaints about the economy and financial markets, because many of them are quite valid. But there’s also an argument that the Financial Lost Generation needs to hear – and largely isn’t hearing.
Investing for retirement is just like paying the rent. We don’t have to like it or morally support it, but that doesn’t change the fact that we have to do it.
Social Security and Medicare have unfunded liabilities in the trillions of dollars. Alexander Green has written extensively about this elephant in the room here and here. Maybe by the time my generation is old, we’ll rejigger the tax code to fund those liabilities. Or… you know, maybe we won’t. If there’s one thing millennials today understand, it’s the unpredictability of American politics.
I’m not sure how much a typical young person would respond to the traditional arguments for investing. Many older folks go way too ideological in their pitches. They try to assuage my generation’s doubts about free-market economics, or they get on a soapbox about supporting American corporations.
But ultimately, investing for retirement isn’t about capitalist ideology. It’s about being able to pay your phone bill when you’re 84. And that hasn’t occurred to huge portions of my generation.
Now let’s move on to how millennials should invest. Given their uneasiness in financial markets, young people will be more open to a conservative, low-maintenance portfolio than a trendy stock-picking scheme.
Index funds and broad-market ETFs fit the bill. They do a lot of the diversification and other work for you, and they’re very tax-efficient. That’s important for young people who don’t have access to tax-advantaged retirement accounts.
To go a step further, you can recommend a simple, logical, diversified strategy made entirely of index funds. Our Chief Investment Strategist Alexander Green put together a portfolio with exactly these goals.
The Gone Fishin’ Portfolio, as the name implies, is meant to gather a respectable and safe rate of return from many different sectors while requiring as little activity as possible. It’s the perfect “lazy portfolio” for a generation that’s reluctant to gamble what little money it has in the stock market.
Millennials who want even lower-maintenance portfolios should consider getting some help. Nowadays, there are a variety of financial advisor firms that cater specifically to young people. InvestEd is one of our neighbors here in Baltimore. They offer online financial planning services, and they’re partnered with microinvesting app maker Betterment.
If only the reason for my generation’s financial impairment were as simple as “laziness” or “entitlement.” If this were a mindset issue, then all we’d need would be a few years at a tough job to get us straightened up. But the problem is more systemic than that.
Tell the young people in your life how they can save and invest in a way that works for them. Introduce them to automatic savings apps and lazy portfolios. My peers will thank you when we’re older.
— Samuel Taube
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Source: Investment U