My very first job (that didn’t include selling lemonade) was as a Busboy at a restaurant. This wasn’t a chain that you can find anywhere in the United States. It was a very simple, small-town type of restaurant where “regulars” would often come together. The restaurant was officially established in 1941 and I don’t think many changes occurred between then and the day I began working there. I would often do a double-take upon entering the restaurant because the clientele made it feel more like a nursing home than a restaurant where people of all ages are welcome.
One of my favorite things to do as a Busboy, slightly edging out “cleaning up partially-chewed vomit,” was to look at all the old farts and predict how much they would leave for a tip. I swear to you that, regardless of how much food was consumed, the average tip was around 30 cents. Keep in mind that this was around 1999 and 2000, so 30 cents was far from acceptable. I vividly remember seeing an old war veteran leave a nickel for what must have been impeccable service.
Whenever I would share this with friends and family, it was always justified with: “well, they grew up in the depression.”
It’s as if surviving the depression automatically makes someone a frugal, conservative tight-wad.
I feel safe speaking freely about this demographic because if anyone grew up during this time-period, they probably can’t turn on a computer – let alone find my blog within that computer.
“The files are in the computer?” – Zoolander
I wanted to bring up this stereotype of “Depressionists” because it appears that Millennials may have a similar mindset. The Great Depression caused members of that era to become frugal and the Great Recession has caused Millennials to become conservative (in regards to money). But where frugality from the old-folks has led to early retirement, the conservatism by the Millennials may eventually lead to the opposite.
The Next Gen Investor
UBS researched this trend in this UBS Investor Watch report and they found that:
“The Next Gen investor is markedly conservative, more like the WWII generation who came up during the Great Depression.”
The study goes on to blame this phenomena on 2 things:
Access to lightning-fast technology innovation and
Dramatic economic and market volatility that constrained their job prospects and earning abilities, as well as disrupted their parents’ real estate values, investment portfolios and retirement savings.
To uncover this conservative attitude, UBS looked at where Millennials are investing.
When asked to classify their risk tolerance, only 5% of Millennials said that they were “aggressive” while 70% classified themselves as “moderate, somewhat conservative and conservative.”
This risk tolerance classification was accurately reflected in Millennials asset allocations (where they invest).
Asset Allocation Among Non-Millennials
- 46% stocks
- 23% cash
- 16% other
- 15% fixed income
Asset Allocation Among Millennials
- 52% cash
- 28% stocks
- 13% other
- 7% fixed income
What Does This Mean?
You can take this information and make reasonable justifications such as:
“Young people are buying houses, paying off student loan debt, etc. They need their cash on hand.”
But, even older Millennials, those aged 30-36, are designating roughly 42% of their portfolios to cash. These are Millennials with over $100,000 in assets and very little need for liquidity.
Why Does This Matter?
This matters for the same reason that I believe CD’s Are For Hypocrites. Millennials incorrectly associate “risk” with “loss” and ignore the risk of “doing nothing.” Millennials, just like other conservative age groups, believe that they should protect their money from loss caused by market volatility. They have vivid memories of their parents losing half of their retirement funds when the market bottomed during the Financial Crisis and don’t want to be in the same situation. But, they are completely ignoring the fact that their parents’ portfolios have more than doubled in the years since.
To show how costly this conservative attitude can be, Blackrock reminds us of the historical returns of stocks, bonds and cash.
Consider this. If you invest $1,000 per month for 30 years, you could end up with:
b) $700k or
c) $2.3 million
The difference between a, b, and c? Assuming a 0% return, versus a 4% return, versus a 10% return. Cash generally yields 0% (right now, its yield is actually negative). Bond returns traditionally range between 3 to 5% and stocks generally range between 8 to 10% over the long run. The only way to get to the bigger numbers is to take on some risk.
Put another way: if you don’t want to take on risk, you have to save more in cash to make up the shortfall. So, in the example above, you could either sock away $360k and invest it in a diversified portfolio, or try to save $2.3 million in cash.
Would you rather have to come up with $360k or $2.3million?
Remember…a little risk goes a long way.