First impressions often form the basis of how a young person perceives an object for the remainder of that person’s life. The object in question could be another person, a business, an industry, a group of people, or even a part of society. Deeply-seated beliefs are entrenched during several stages of formative development. Psychologists point to the first five years of a child’s life during which personality traits begin to form and certain world views, inherited by the environment (such as parents), solidify.
Late adolescence is considered another formative period. In the period between the late teens all through the twenties, adulthood is beginning to set in, and the events around the world determine how someone might understand and interpret more complex societal issues. There’s less influence from parents and more from world events, other news that someone might be exposed to, and the lives of friends.
Millennials, also known collectively as Generation Y, have shared experiences that color how they look at their finances and the financial industry. They’ve experienced the recession and an extended period of employment. They’ve seen their parents struggling financially.
- They’ve seen their grandparents, despite their investments, retire with a smaller nest egg than expected, and perhaps they’ve had to move back in with the family.
- They’ve seen a movement grow with strong sentiments against the culture of Wall Street amidst white-collar scandal and crime.
- They’ve lived through a period with a government that either hasn’t done enough to crack down on unethical business practices or hasn’t done enough to leave the financial industry alone to regulate itself.
- They’ve heard about the trends in income inequality, and perhaps they see the stock market as a vehicle to make the rich richer and the poor poorer.
Older people might see today’s problems as a passing phase and recognize a trough in a cyclical economy, but millennials haven’t experienced the peaks yet. What they know about the stock market and its industry is that it has torn apart the lives and finances of their friends and families.
It’s not surprising that millennials are avoiding the stock market. A survey conducted by Wells Fargo earlier this year shows how these impressions of the financial industry are are affecting millennials’ behavior with investing.
More than half of millennials (52%) say they are “not very confident” or “not at all confident” in the stock market as a place to invest for retirement. This is particularly true for millennial women of whom 67% are “not very confident” or “not at all confident” in the market versus millennial men (38%). For those saving for retirement, 32% of millennials are “not sure” how much of their savings are invested in stocks or mutual funds. Nearly one in five (18%) millennials say they are invested 100% in stocks or mutual funds, 14% say 75% stocks/mutual funds, 10% say 50% stocks/mutual funds, 15% say 25% stocks/mutual funds and 11% say they are all in cash/bonds.
The first problem is that the economic struggle in general amonst millennials is providing this generation with a cash flow problem. Without steady income, investing for the future can be tough to rationalize. Typical financial advice suggests saving a percentage of income regardless of other expenses; there’s always a way to find another one percent of income to put away. But in reality, financial struggle and the need to focus on the baser psychological needs like shelter and food preclude the higher-level focus on the future. The real, immediate needs outweigh potential, future needs.
For those who do have the option to save a portion of their income, the choice to invest in the stock market is not perceived as a safe investment. That’s a good thing, because stocks are not safe investments. Millennials are correct! Today’s millennials are more educated than any previous generation of twenty-somethings. More than any other generation at that age, these millennials, who have been exposed to the worst of what the stock market has had to offer since the Great Depression, understand the risks of the stock market.
The financial industry naturally sees this as a problem. Millennials are their future customers. The financial industry must protect its future income and business model by convincing that they should not be avoiding stocks. The industry is right, too; the reward of investing in a low-cost index mutual fund over the course of several decades offsets the short-term risk. But again, it’s hard to discuss long-term advantages with a group of people who are focusing on satisfying immediate needs, looking for jobs, and trying to put cents together to move out of their parents’ homes.
Partially due to the recession, these rites of passage have effectively extended adolescence several years. It could be some time before Generation Y, as a whole, is comfortable enough with themselves, their personal financial situation, and the financial industry to start investing in stocks. It will probably take another bubble-based period of irrational exuberance in the stock market. That’s a terrible time to start investing and just leads to buying high and selling low, the problem that exacerbates the significant gap between advertised “stock market returns” and the real investing results experienced by any one person buying and selling mutual funds.
So what can millennials do?
Get a job. At this stage, cash flow gives you more options. And if you can get a good job in a well-paying field, all the better. I’m not suggesting to pursue only the highest paying careers. But ignoring a financial reality isn’t a good idea.
I ignored my finances working in a non-profit for three years after graduating college. That was too long, and my future suffered because of it. I was passionate about the organization’s mission and I’m still very concerned about arts education, and knowing what I know now I’d find other ways to make the job financially viable, but I was meeting my present needs much less my future needs until I hit a bottom in my life.
Realize everyone has a motive. The news media have to sell advertisements. For financial news, those advertisers are financial industries. YOu can be sure the media is unlikely to risk losing advertising revenue by criticizing the industry too strongly. The financial industry has their profits to protect, which they do by convincing customers to keep trading stocks and buying financial products.
Millennials seem to be more often skeptical than not, and this skepticism is healthy; many millennials will have no problem with comprehending the various financial forces behind messages in the media.
Boost human capital. The same factors that make someone a well-rounded individual lead to a potential for higher income over time. Ensuring a steady stream of income reduces the need to rely on the stock market for income in retirement. Suze Orman suggests her listeners invest in the stock market for its long-term growth prospects, and that’s fine advice. But if you look at her own portfolio, a small percentage is in stocks — the rest is in safer investments, like bonds.
She’s built enough wealth from her media empire than she can afford to be less risky overall. Now you can’t assume that you’ll have multi-million dollar spokesperson contracts and a profitable business in radio, television, books, and seminars to your name, so the stock market is good safety net for the long term. But even on a smaller scale, striving to be the best in your industry pays off in ways that reduce reliance on the overall stock market.
Have the appropriate expectations. One piece of beginning to trust the stock market is to have appropriate expectations. You will not get rich investing in an index mutual fund. People love to talk about the millions of dollars you’ll have in retirement just by investing a thousand dollars each year for thirty-five years. Today’s million dollars has the purchasing power of less than $300,000 from thirty-five years ago. Inflation eats away at the purchasing power; you will not be financially “rich” several decades from now with a million dollars.
The definition of rich is flexible and relative, so you might disagree. The chances are good you’ll still be ahead of the game if you increase your investments today, but don’t expect to be retiring in thirty years with enough money to buy an island if your only savings consists of putting a portion of your earnings into the stock market.
Be cautiously optimistic. Considering the cyclical nature of the stock market, you’re more inclined to be able to make long-term growth work for you. The question I’m asking is whether millennials should trust the stock market, but the answer depends on what one might trust the stock market to do. Millenials can trust that the stock market will
- favor those with more money (who have access to deals like preferred shares),
- attempt to take your money from you (through hidden or poorly-communicated fees),
- continue to market its own industry as a path to wealth (it’s a long-term plan, and by the time you reach it, the mark of wealth will change due to inflation), and
- still be the only way for many people to build financial comfort with a manageable level of risk (by maintaining an awareness of market trends and a level head).
Should millennials trust the stock market?