Rich millennials aren’t investing their savings. At least that’s what the findings of a recent Merrill Edge report suggest.
The report, which surveyed individuals with investable assets between $50,000 and $250,000 — or with investable assets between $20,000 and $50,000 and an annual income of at least $50,000 — found that two-thirds of affluent millennials plan to rely on their own savings account 20 years from now instead of investments.
So rather than put their hard-earned savings into the stock market, these wealthy young people are hoarding the funds in barely-no-interest savings accounts.
What is driving young investors away from the stock market? “Throughout the Great Recession millennials witnessed their parents and grandparents suffer and struggle with Social Security uncertainty and whether it will be enough,” says David Poole, head of Merrill Edge’s advisory and client services in Jacksonville, Florida.
This led millennials to adopt the view that the stock market can’t be trusted to provide for them when they need it.
[Read: How to Solve the Millennial Investor Problem]
“Even though we’re 10 years from [the recession] and the market has done basically nothing but gone up since, there’s still some hesitation and reluctance to rely upon it as a primary source of savings,” says Bill McManus, director of strategic markets for Hartford Funds in Wayne, Pennsylvania. Many young investors — specifically older millennials — had just come of age during the Great Recession, with their most formative years shaped by the 2008 crash.
The paradox of millennial investors. The irony is millennials are optimistic about the stock market even though they invest like their grandparents. Personal Capital found that 67 percent of affluent millennial investors believe the market will perform better in 2018 than it did in 2017, compared to 53 percent of Generation X and 32 percent of baby boomers. And yet 25 percent of rich millennials have most of their net worth in cash compared to 16 percent of the overall affluent population.
Even when millennials invest, 85 percent of them “play it safe,” with 46 percent believing themselves to be even more financially conservative than their parents, according to Merrill Edge’s report. This conservativeness may be less about fear and more about having a different set of savings priorities than other generations, says Peter Faust, a wealth advisor with Tanglewood Total Wealth Management in Houston.
Perhaps these young investors are saving for a down payment on a house or building an emergency fund, in which case putting their savings into the stock market — where it would be at risk of losing value in the short term — may not be the wisest choice.
[Read: Millennials Stop Doubting Your Investing Decisions]
Don’t miss out on the power of compounding. While there are many valid reasons to keep cash on hand, holding too much cash is a risky move in a low-interest-rate environment like the one we’re in today, says Michelle Brownstein, senior vice president of private client services for Personal Capital in San Francisco.
“With a portfolio designed for long-term performance, [millennials] shouldn’t be overly concerned about a market contraction,” she says. “They should be more wary of missing out on the compounded returns if they don’t invest.”
Compounding is one of the strongest tools in any investor’s toolbox, but the power of compounding needs time to work. In other words: The more time your investments have to grow, the better chance you have of success. Luckily, time is one asset young investors have in abundance. Or perhaps unluckily.
Having time on your side can be a double-edged sword. “If something isn’t an immediate need, we tend to put it off,” McManus says. This can lead young investors down the slippery slope of saying, “I’ll start investing next month, or next year, or after I buy this one last piece of furniture for my new place,” until one month becomes 10 years. Each year spent putting off investing is a year of retirement contributions and potential compound growth that can’t be reclaimed.
Use a bucket strategy to get started. “If you’re hesitant about investing, take a step back to determine why you’re experiencing this feeling,” Poole says.
There are many resources available to the new investor, from online investment screening tools such as those Merrill Edge and other financial services companies provide, to industry publications or even local investing clubs. “If you don’t know where to start, think about meeting with a financial professional who can help you determine your investing goals and create a strategy to pursue them,” Poole says. If your company has a 401(k), chances are you already have access to a free hotline of financial professionals who can help you get started.
[See: 10 Questions to Ask Before You Hire a Financial Advisor]
Before getting your feet wet investing, you might try a bucket strategy for your savings in which you allocate your funds across different savings vehicles depending on how soon you’ll need the money, McManus says.
For instance, you might keep some cash in a savings account to cover immediate expenses and open two brokerage accounts to invest the funds you won’t need right away: one for shorter-term investments for near-term financial goals, like saving for a home, and another for longer-term savings, like retirement, where you can gain greater market exposure. Once you line up your buckets, you can select investments suitable for each bucket’s time horizon and start investing.
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Why Rich Millennials Aren’t Investing originally appeared on usnews.com
