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Millennials and Money—Conversations Worth Having

How Millennials’ Are Taking a New Approach to Investing
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Demetra Sullivan, vice president of portfolio consulting at Schwab Private Client Investment Advisory, Inc., talks about the unique generational challenges that Millennials face as investors. 

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Janet Alvarez:

Millennials, the young adults born after 1980, are widely regarded as a well-educated, tech-savvy generation. But having come of age during the Great Recession, many Millennials also exhibit different attitudes toward saving, investing and planning than previous generations. Demetra Sullivan, vice president of portfolio consulting at Charles Schwab, joins us today to discuss how Millennials’ financial behaviors differ from older generations, shedding light on their financial priorities and habits.

Demetra Sullivan:

They witnessed national credit emergencies both here and abroad, Ponzi scheme tragedies, and three major crashes in the stock market that make them generally more risk averse when it comes to discussing portfolios and asset allocation models.

Janet:

You’re listening to the Insights & Ideas podcast, brought to you by Charles Schwab. I’m your host, Janet Alvarez. A number of studies suggest that Millennials may have different ideas and attitudes about money than their predecessors, which include greater risk aversion, lower home ownership rates, but also a higher degree of entrepreneurship. Demetra Sullivan notes that while the Great Recession did impact Millennials’ financial habits in some key ways, in many others, they still share certain core values and priorities with previous generations.

Hi, Demetra. Thanks for joining us today.

Demetra:

Hi, Janet. Happy to be here—thank you.

Janet:

So, Demetra, today we’re talking about Millennials and money, and, you know, there really are various definitions of the term Millennial, but for our general purposes, who are they?

Demetra:

So when we talk about Millennials, we’re defining the demographic cohort that follows Generation X. So their birth years will range from the early 1980s to the early 2000s. So basically the group between the ages of 20 and 34 today.

Janet:

And from a financial standpoint, what are some of the main features that distinguish them from previous generations?

Demetra:

Well, that’s a good question. I think there there’s a number of them, but top three, I would say, from a financial standpoint, would be, number one, higher student loan debt, number two, higher unemployment rates, and then, number three, they tend to be less comfortable with some of the traditional investment methodologies.

Janet:

In some ways, Millennials really did bear the brunt of the Great Recession. Many of them were trying to enter the workforce or start households during the crisis. How has that made their financial attitudes, actions and situations unique?

Demetra:

So I think that what Millennials experienced during the Great Recession has heavily shaped the financial circumstances they face today. Take student loan debt, for example.

While the Millennials did have higher college enrollment rates than previous generations, it’s also possible that that coincided with a time when they could not depend as heavily on their parents for financial support they needed as previous generations may have. They entered the workforce during a weak job market, and in 2009, for example, the 20- to 24-year-olds had the highest unemployment rates of any of the generations, at 16 percent. So the combination of high student debt and a hard time finding jobs meant more Millennials were living at home for a number of years. More so than previous generations did.

They witnessed firsthand the impact of the Great Recession on their parents, which seemed to validate the skepticism they likely already felt toward financial markets and investing. Remember, they witnessed national credit emergencies both here and abroad, Ponzi scheme tragedies, and three major crashes in the stock market that make them generally more risk averse when it comes to discussing portfolios and asset allocation models.

At the same time, though, they do have an entrepreneurial spirit, they value business innovation, and they can see paths to wealth from startups and private ventures and areas that previous generations might’ve considered actually the riskier investments.

Janet:

How does that affect other aspects of their financial planning and investing, though?

Demetra:

Sure. Well, as you might expect, they’re prioritizing getting out of debt and trying to even save enough for down payments for home purchases. And that’s taking longer than it did, just based on the amount of debt, just as you said. So life events like home ownership and starting a family, which usually are that point that triggers individuals to settle into their careers more long term, are happening later in their lives.

So since the Millennials are achieving those milestones later, they’re actually having more years of what you’d call flexibility, to move or change jobs, and the impact of that in their financial plan is also very interesting. They tend to be starting over with new employers more frequently, which may or may not hurt their long-term financial plan. As long as they can stay focused on fundamentals like saving more and spending less and reducing that debt, then they are on the right track.

Janet:

The homeownership rate for Americans under 35 has fallen considerably since the financial crisis, with just 34 percent of them owning a home, according to Fannie Mae’s National Housing Survey. That’s down 20 percent from the mid-2000s. Digging deeper, 93 percent of renters between 25 and 35 years old believe they’re likely to own a home someday. But the reality is a different story. Roughly a third of 18- to 34-year-olds now live with their parents, making this the first time since the 19th century that more young people in that age group lives with their parents than with a spouse or partner in their own household.

Janet:

And what other key advice would you give to investors who reach these life milestones, like buying a first home, later in life?

Demetra:

So, as I mentioned, the fundamentals don’t really change too much. I’d recommend that they start by outlining their goals. A good financial advisor can help them with that conversation, since this can be very difficult for any amount of wealth, really just teasing out what those goals are.

For Millennials in particular, their goals may be very unique, possibly influenced by philanthropic ventures or entrepreneurial desires and others like that. So defining those goals is a great first step. And then building out from there.

Janet:

There’s research that suggests that Millennials are actually more risk-averse investors, perhaps impacted by the volatility that they saw during the financial crisis. Is this consistent with what you’ve found? And what do they need to know about the risks of perhaps being too risk averse?

Demetra:

I think it’s true that they are more averse to the risks of traditional portfolio of investments and Wall Street in general.

They’re more comfortable in cash and focusing on savings than they are with investments. A positive impact we see is that research shows Millennials saving a greater percentage of their paycheck than any other age group in America. Staying in cash, though, as you mentioned, has a downside. And if they stay on the sidelines for too long, they’ll be giving up on years of growth of their long-term wealth potential.

So starting early and starting with something small and gradually adding to their investments over time, perhaps with dollar cost averaging, is a great way to ease into the markets.

Janet:

The workplace that Millennials entered is unique in many ways, and perhaps most notable development is the rise of the so-called “gig economy.” What distinguishes the gig economy from previous labor markets isn’t a shortage of jobs, but an increased reliance by companies across all industries on temporary workers, short-term contract employees and freelancers. While these jobs often offer flexibility and a degree of entrepreneurialism, they typically lack the benefits and security of traditional employment. The gig economy is only growing, it seems, with 40 percent of the workforce likely to be part of the gig economy by 2020, according to a study by Intuit.

Janet:

How has the rise of the gig economy entrepreneurialism and an overall landscape of less-stable careers impacted the way Millennials invest and save? Surely, that has to have had some impact on retirement planning and saving, for example.

Demetra:

It sure has. While the gig economy offers a number of important benefits to individuals, such as greater flexibility and work-life balance, the downside is there’s a loss of job protection and job security. By nature, the gig economy means temporary work, and that doesn’t often provide the same benefits and protection as a permanent job. For example, benefits such as maternity pay, healthcare and retirement savings plans, like the 401(k), are usually not available with gig work.

So that puts the responsibility really on the individual to set up a good framework for major financial life events or any financial risks. And that’s a lot to handle if you’re not someone who’s really familiar with the industry or don’t have somebody advising you on how to make that happen.

Janet:

What are some of the biggest myths or misconceptions about Millennials and their financial habits that you’re hearing?

Demetra:

Some of the biggest misconceptions about Millennials include just being negatively typecast as entitled or overconfident and even hooked on social media to get their news and even financial advice. But in reality, the Millennial generation is very entrepreneurial, highly educated, and working hard to climb out of a rut of student debt and unemployment challenges that came with simply the timing of their entrance into the workforce.

They’re making different choices than previous generations. They’re scrutinizing and prioritizing their savings accounts and foregoing some of the more traditional life-event type purchases like buying a car or buying a home. They’re very socially conscious. They want to know their money is invested in a way that aligns with their beliefs and their values.

Janet:

Given that they may have experienced a rocky start, how can they best position themselves for a safer financial future?

Demetra:

It’s all about the fundamentals. So start by defining your goals. Once you’ve arrived at a place where you feel like you’ve set some near and long-term goals, start saving. And first build an emergency fund, something that could cover you for, say, three to six months' worth of living expenses should you not have income for a period of time. Also, pay down debt aggressively.

So if it means taking on extra hours at work and really watching the spending and reducing that aggressively, even if it’s temporary—paying down that debt is an important box to check off. And then, finally, take advantage of the time that you have now and the years you have left to start investing in retirement accounts early. And be disciplined about making contributions over the long term, always paying yourself first.

Janet:

Demetra, thank you very much for speaking with us today.

Thanks, Janet.

Janet:

Demetra Sullivan is vice president of portfolio consulting at Charles Schwab. That’s it for this installment. The Insights & Ideas podcast is brought to you by Charles Schwab. You can find us on iTunes or at insights.schwab.com. If you enjoyed this episode, please subscribe, and write a review on iTunes. Thank you for listening.

Important disclosures:

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Schwab Private Client Investment Advisory, Inc. (SPCIA) is a registered investment advisor and an affiliate of Charles Schwab & Co., Inc. (Schwab). SPCIA and Schwab are subsidiaries of The Charles Schwab Corporation (Charles Schwab).

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