A portfolio invested mostly in cash, a conservative approach favored by many Millennials, just won’t get young people where they need to be financially when their working days are over decades from now.
“There’s a symbiotic relationship: The market needs demand and participation from Millennials, and Millennials need to be able to leverage the long-term growth potential of the stock market,” says Ken Hevert, senior vice president of retirement and college planning at mutual fund company Fidelity Investments. “The bigger risk for Millennials is not investing for growth.”
“Are the Millennials important to the market? Absolutely,” says JJ Kinahan, chief market strategist at TD Ameritrade. “You want to make sure this generation is as engaged in the market as their parents were.”
It isn’t just anxiety that’s driving their reluctance. Millennials are also burdened with costly student loans. Median education-related debt is $19,978, according to the 2016 Wells Fargo Millennial Study. College loan balances for those between ages 18 and 34 at the end of 2013 were nearly three times what they were in 1989, U.S. Census Bureau data show. Also slowing this generation’s financial gains are careers that took flight later because of a lack of jobs after the Great Recession.
“They’ve had some rough knocks,” says Sarah Holden, senior director of retirement and investor research at the Investment Company Institute, a trade group for mutual, exchange-traded and other funds.
But with jobs more plentiful and wages edging higher, Millennials who commit to trimming their spending and freeing up cash to invest can get their finances back on track.
“It’s been bleak for a lot of Millennials, but it doesn’t have to be that way forever,” says Andrew Cohen, an ex-Wall Street trader who teaches finance at Old Dominion University in Norfolk, Va. “They should not fear the stock market. They can change things. It’s up to them.”
The question is whether Millennials, as they get older, climb the career ladder, earn more money and start focusing on how their finances might look 20 or 30 years from now, will embrace investing like Boomers.
Life’s financial challenges will eventually lure Millennials into the stock market, some market professionals say. As they get married, have kids, buy their first home, and start realizing they have to save for college and retirement, they will get more active. “Investing is a part of growing up,” says Tobias Levkovich, equity strategist at Citigroup.
Some behavioral finance pros, or experts who study how psychology affects investment decisions, say young people won’t fear the stock market forever. “I don’t think there is any reason to believe Millennials are more risk averse than other (generational) cohorts,” says Richard Thaler, a professor at the University of Chicago’s Booth School of Business.
But skeptics question whether Millennials will ever feel comfortable owning stocks, after seeing the devastation caused by the market’s 50%-plus market drop from late 2007 through early 2009.
Charles Biderman, chairman of TrimTabs Investment Research, a firm that measures the market’s health based on cash flows in and out of stocks, says Millennials will be just as hesitant to invest in stocks as the generation that grew up during the Great Depression after the 1929 stock market crash. The Dow Jones industrial average, he points out, didn’t surpass its 1929 high until the mid-1950s, or more than 20 years later. “I don’t think Millennials will ever trust the stock market,” he says.
Woody Dorsey of Market Semiotics, a behavioral research firm, says don’t expect the Baby Boomers’ kids to invest like their folks did: “It’s just not going to happen,” he says. “Things change. There’s a deep cultural disaffection with the market. It’s a liability.”
Some experts, however, don’t fall into either the bull or skeptic camp. They point out it’s too early to predict to what extent Millennials will own stocks.
“It’s hard to say, given we don’t have the longitudinal data on Millennials to know whether they are truly different from, say Baby Boomers, or Gen Xers, or if they will become more interested in active investing as they grow a bit older,” says Hal Hershfield, an assistant professor at UCLA’s Anderson School of Management.
Some Wall Street pros insist Millennials need the market more than the market needs them. They note that stocks have more than tripled in value since the 2009 market low without any meaningful participation from individual investors. They emphasize that there’s plenty of other buyers of U.S. stocks to push prices higher, including corporations that buy back their own shares and foreign investors looking for investment opportunities in America.
On the other hand, Wall Street firms need Millennials’ cash to grow their own businesses through fees and commissions. That’s why they are reaching out to them aggressively, via the internet, social media, podcasts, mobile phones, and new, lower-fee product offerings, in an effort to get them more jazzed about stocks and investing.
“The nature of things is people are people,” says Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. “This younger generation will eventually be tomorrow’s investor.”