Millennial investors shun stocks, survey says

Challenge for advisers working with these clients is to warm them up to risk

Feb 20, 2014 @ 11:48 am

By Carl O'Donnell

Fresh out of medical school, a doctor in her early 30s met with Brian Frederick, a financial adviser at Stillwater Financial Partners, to start planning for retirement.

Rattled by the recession, the doctor insisted on taking zero risk, shunning stocks altogether. When Mr. Frederick ran the numbers, he realized that her conservatism would come at a staggering cost: At a 7% annual return on equities, she was forgoing more than $1 million over the course of her career.

Related: One Millennial adviser disputes generational market anxiety

“This was a very intelligent client, but, like so many in her generation, her view of the market was shaded by everything that has happened in the past ten years,” Mr. Frederick said.

She isn't alone. The Millennial generation is among the country's most conservative investor demographics, opting for portfolios high in cash and light on stocks despite having decades to absorb losses, according to study released Feb. 13 by MFS Investment Management.

“Every generation exhibited a major reaction to the last downturn,” said Doug Orton, vice president of business development at MFS. “But baby boomers and Generation X are slowly migrating back to normal behaviors, while the millennial generation is not.”

Every data point seems to paint a picture of financial conservatism. The typical Millennial puts more than 25% of her assets in cash, and only about 30% into stocks. More Millennial identify themselves as savers rather than investors. One of the group's most cherished financial goals is protecting principal.

Perhaps most startlingly, nearly half say they would never invest in the market.

“We are starting to think that Millennials are more like the Great Depression generation, which never really warmed up to the financial system,” Mr. Orton said.

One possible culprit is an excessively dour view of the economy. Fewer than half of investors are optimistic about growth, with 38% expressing outright pessimism, according to the study. Meanwhile, nearly 80% of advisors expect an upturn, while the Brookings Institution, a nonpartisan think tank, predicts 2.5% annual GDP growth in 2014, a substantial improvement from last year.

Much of this negativity is likely stemming from the mess in Washington, which was the most common economic concern among respondents, Mr. Orton said.

But not everybody believes that Millennials' conservatism is stemming from confusion. David S. Oransky of Laminar Wealth says that a bias towards cash is to be expected for a generation that's facing an onslaught of major near-term expenses.

“Millennials are saving to buy homes and start businesses,” he said. “What I tend to see is 100% stock in retirement accounts and 100% cash in personal accounts. This does not indicate a reduction in risk tolerance, but rather smart financial planning.”

Meanwhile, Mr. Frederick argues that even when dealing with investors who are shying away from stocks, advisers would be mistaken to push too hard for increased risk. The most critical point to drive home during the early years of investing is to start saving. Another strategy is to slowly warm investors up to psychology of market risk, Mr. Frederick said.

“I might start by encouraging them to put $10,000 in a conservative allocation fund,” he said. “That way they can get some experience in the drivers' seat. You don't know how you are going to react to volatile markets until you have actually invested some money there.”

MFS, through Research Collaborative, an independent research firm, sponsored an online survey from Nov. 6-15 of 958 individual U.S. investors with $100,000 or more in household investible (non-retirement) assets and 636 licensed U.S. financial advisers (either Finra or SEC overseen) who have been licensed for at least three years with $500,000 or more in annual mutual fund sales.

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