Millennial investors expect lower market returns than their parents. That’s probably a good thing.
The formative experience for young investors was the global financial crisis of 2008 and 2009. Stocks lost nearly half of their value – and Millennials’ new 401(k) balances fell right along with them.
Now, in an echo of those events, we have had a midsummer correction and spike in volatility. In many ways, Millennials were prepared for this. They haven’t wholly accepted the idea that investments will work out for them. They don’t expect markets to be smooth. And, so, they’ve adopted a generally pragmatic approach to their financial lives.
Recently, Natixis Global Asset Management surveyed 750 investors throughout the United States. We discovered some contrasts – both positive and not – between Millennials and their older counterparts.
Among six key differences, Millennials:
- Anticipate lower returns: Millennials (age 18 to 35) say they can live with lower returns than their elders and still meet their long-term needs. The target for Millennials is 9.8% a year, after inflation, compared with 10.6% for members of Generation X (age 35 to 49) and 10.3% for Baby Boomers (age 50 to 69).
- Define their goals: More than half of Millennials (57%) have a clear set of financial goals, a key ingredient of financial success. That figure is 10 percentage points more than for Gen Xers and Boomers (47% each).
- Seek alternatives: Millennials are open to alternative ways of reaching financial goals. Seventy-six percent invest in alternative assets (such as private equity or long-short funds), compared with 62% of Gen Xers and 32% of Boomers.
- Are wary of stocks: Millennials are the least bullish stockholders. Just 35% think stocks will be the best-returning assets in the next year, compared with 46% for Gen X and 53% for Baby Boomers. Perhaps surprisingly, more than a quarter of Millennials think cash will be the No. 1 category.
- Take a risk: It may be a function of age, inexperience or having a longer time horizon, but 71% of Millennials are willing to take more investment risk than they were a year earlier. For Gen Xers, that number is 61%; for Boomers, just 25%.
- Want to retire early: An ambitious 57% say it’s realistic to expect they’ll retire by the age of 60. Only 24% of Gen Xers think they’ll stop working by 60.
All in all, the numbers show Millennials as a mix of drive and caution. They’re willing to accept the risks of investing, yet put a lot of faith in cash. They expect to end their careers early, while earning relatively modest returns. They know what they’re saving for and they branch out beyond conventional investing categories to get what they need.
401(k)s, Tech and Advice
Where does that leave Millennials? Are they better off than older investors?
A few factors tilt in their favor.
More than Gen Xers and Boomers, their financial futures depend on their own efforts to save. The Millennial generation is the first to live entirely in the 401(k) era. For good reasons, they don’t think Social Security will contribute much to them when they retire.
Luckily, the data shows Millennials are participating in workplace-sponsored retirement plans at the same rates or higher than the older generations. Chipping away at retirement goals – even in the face of student loan payments and high housing costs – will work in their favor over the long haul.
Millennials have also come of age as personal technology flourished. But they like a human touch, too. Finance-related apps and websites have improved and expanded, helping Millennials invest smarter and with more confidence. At the same time, Millennials are comfortable working with personal advisors; 68% consult with a financial professional. The combination of tech and advice could be a big advantage, one Gen Xers and Boomers haven’t had until recently.
There’s still a long way to go.
Millennials would do well to rein in a natural tendency to believe they’ll meet their goals simply because they identified what they want to do. Life could surprise them. Markets don’t move in straight lines. But they already know that.
Edward Farrington is the Executive Vice President of Business Development and Retirement with Natixis Global Asset Management. Twitter: @NatixisGlobalAM