Portfolio manager Patrick O’Shaughnessy was talking with friends last year when he told them he invests only in stocks.
“They thought that this was an incredibly risky proposition,” said O’Shaughnessy, 29, of O’Shaughnessy Asset Management in Stamford, Connecticut, which has about $7 billion under management. “I found pretty universal skepticism.” He plans to publish a book this year on young people’s finances.
While investing in equities has dropped across the board since the recession, so-called millennials born after 1980 have continued to forsake the market even as it rebounds, according to a Gallup poll taken April 3 through April 6. Just 27 percent of 18- to 29-year-olds reported owning shares outright or in funds, down from 33 percent in April 2008, the survey found.
The aversion means the group is missing out as major indexes reach records, potentially imperiling their future financial security, especially at a time when these Americans are also shunning investments such as real estate. Instead of plunging into stocks, which can provide better returns over the long run, young people are stashing savings in bank accounts and securities that pay near-zero interest.
“We call them Recession Babies,” said William Finnegan, a senior managing director at MFS Investment Management in Boston, drawing a parallel to “Depression Babies” who avoided banks and investing after the 1929 crash. “If the cumulative return of the past five years didn’t convince you that the stock market might be an OK place to be for a long-term investor, I’m not sure what else is going to. These folks have been scarred.”
As the oldest millennials approached college graduation in 2002, they witnessed a 78 percent plunge in the Nasdaq index as the bubble in technology shares burst. As they reached their mid-twenties in 2008, the Standard & Poor’s 500 Index dropped 38.5 percent, the worst single-year performance since 1937. The gauge dropped 57 percent from October 2007 through March 2009.
“It’s not as bad as the Great Depression, but if it’s your first adult experience, it’s making you cautious,” said Jeff Scott, head of market research for UBS Wealth Management Americas in Weehawken, New Jersey. “I don’t think there will be a complete jump-back moment. It’s a permanent mind shift.”
About 46 percent of millennials with more than $100,000 to invest say they will never be comfortable in the stock market, MFS, with $423 billion under management globally, found in a survey released in February. About 52 percent of 22- to 32-year-olds said they are “not very confident” or “not at all confident” putting money in equities for retirement, according to a February 2013 survey by Wells Fargo & Co.
Affluent millennials hold 52 percent of their money in cash and 28 percent in stocks, compared with 23 percent and 46 percent for older people, a UBS survey released in the first quarter found. The study focused on 21- to 29-year-olds with $75,000 in income or $50,000 in investable cash, and 30- to 36-year-olds with $100,000 in income or assets.
“They are risk averse, so they have the most conservative portfolio profile of any age bracket under 65,” said Neil Howe, founding partner of LifeCourse Associates, a consulting service for generational marketing and workforce issues. Howe is credited with coining the term “millennial.” “They look at the stock market and they see nothing but danger,” he said.
Last month’s Gallup poll found that 54 percent of all those surveyed reported holding stocks, down from 62 percent in April 2008. Older groups have begun to make a turnaround.
Among 30- to 49-year-olds, a group that includes most of Generation X and the oldest millennials, about 67 percent hold stocks this year, up from 58 percent in 2013, said Frank Newport, Gallup’s editor-in-chief. For those under 30, comprised solely of millennials, ownership was unchanged at 27 percent.
There is probably more at play than just squeamishness over equities. Unemployment, heavy student-debt loads and the effects of the housing crisis are probably also restraining young people.
“They experienced market volatility and job security issues very early in their careers, or watched their parents experience them,” Emily Pachuta, head of investor insights at UBS Wealth Management Americas, said in the UBS survey’s press release.
The share of 25- to 34-year-olds who were employed in April was 75.5 percent. That ratio hovered between 78 and 80 percent in the three years leading to the recession that began in December 2007, according to Labor Department data.
Almost 45 percent of 25-year-olds had student debt at the end of 2013, up from 25 percent in 2003, based on New York Fed data. The group’s average student loan balance reached $20,926, Meta Brown, a senior economist with the research and statistics group, wrote in a blog post yesterday. It was about $11,000 a decade ago.
College enrollment is also delaying workforce entry, leaving millennials with less to spend on housing and stocks.
“Wealth accumulation, building a nest egg, takes time,” said Richard Fry, an associate at Pew Research Center in Washington. “You need a high enough income to basically begin saving. Millennials, by delaying their entry into the workforce, are deferring building their nest-egg.”
The longer it takes, though, the less wealth will be accumulated.
“There’s potential for them to have a financial crisis later in life if they aren’t building up wealth at a higher rate now, when they have the chance,” UBS’s Scott said.
Someone putting $100 in the Standard and Poor’s 500 Index in 2003 would have had $260.69 by 2013, using Bloomberg calculations based on New York University data analysis. That compares to $117.71 for an investment in a 3-month Treasury bill, which has very little risk and therefore pays low interest. That said, the value of the $100 stock investment would have dipped below the value of the 3-month Treasury bill investment in 2008.
There’s still hope for today’s youngest investors because more employers are automatically enrolling workers in retirement plans, Pew’s Fry said. What’s more, housing is a more important wealth builder, he said.
Even here the news isn’t positive. Census figures show homeownership among America’s youngest buyers has also dropped, and private data show contributions to retirement plans like 401(k)s have also shifted away from stocks since the recession. In 2013, 20- to 29-year-olds had 41.1 percent of their defined contribution plan assets in equities, down from 62.4 percent in 2007, based on figures from Aon Hewitt, a global retirement and human-resources business based in Lincolnshire, Illinois.
For millennials, their conservative portfolios are one symptom of a wide-ranging fear of risk, demographer and economist Howe said. The generation was marked by a drop in teen pregnancies, teen drunk driving, and now that they’re adults fewer move away from their families or buy houses.
“Millennials were risk-averse before, and now they’re becoming more so,” Howe said in a May 8 presentation at the St. Louis Fed. “It’s fair to say that the Great Recession has totally dominated their view of the economy.”