A 2011 study by several University of Missouri professors found that by and large, age has a negative relationship with risk tolerance such that the older you get the more risk averse you become. This relationship is known as the generational effect and is fairly intuitive when you consider the average retiree who is often drawing on their portfolio and has less time to recover if the stock market takes a plunge. The silent generation came of age following the Great Depression and WWII and grew up in a time when the financial markets were not widely available, and media exposure was limited.
In the first quarter of 2014, UBS came out with a study on millennials titled "Think You Know the Next Gen Investor? Think Again." Surprisingly, they found that millennials exhibited similar investing characteristics as the silent generation with 13% identifying as conservative investors (more than twice as much as the generation before them - generation X). When it came to their chosen allocation, the study found that on average millennials held more than half their assets in cash with less than a third invested in equities. Returning to the proposed generational effect previously mentioned, this starts to make sense if you consider the fact that millennials came of age during and after the financial crisis of 2008, which was paramount to the Great Depression. While this fear of investing makes sense, it should also be cause for concern if you consider how little the average individual has saved and is saving for retirement. As things currently stand, hefty pensions are becoming a thing of the past, and with a squeezed social security budget, millennials are less likely to see social security payouts of the same size and format as their parents. An additional finding of the survey showed that while 72% of boomers believe they are more successful than their parents, only 53% of millennials expect to be more successful than their parents.
If you believe that millennials will face a different financial environment than their parents, there are several takeaways. The first is that millennials will carry a greater burden of savings for things like education, retirement, and home than previous generations. Second, contrary to their current preferences, millennials will need to do a better job of investing their savings. Cash, while the safest asset, also earns nothing. In fact, when you consider the concept of inflation and a rising cost of living, holding all of your assets in cash can actually cause you to fall behind. If you’re a millennial, the parent of a millennial, or even a conservative investor of another generation and would like to learn more about how to become more financially stable in today’s environment, check out some of our other literature, or give one of our advisors a call today!
UBS. (2014) “Think You Know the Next Generation Investor? Think Again” UBS Investor Watch. Retrieved from:
Yao, R., Sharpe, D., and Wang, F. (2011). “Decomposing the Age Effect on Risk Tolerance.” The Journal of Socio-Economics. 40, 879-887. Retrieved from: http://pfp.missouri.edu/documents/research/yao_decomposing.pdf.