Millennials are saving. And they are too conservative
Millennials tend to be viewed as free-spirited by the older generations. However, when it comes to investing and saving, they are extremely conservative. Let’s look at the findings from FinaMetrica, a psychometric firm from Australia. They ran risk assessment data on 25,000 millennials from the UK, US, New Zealand, and Australia and found that the risk tolerance for this group in the US (born between 1980 and 2000), was 52.3 out of 100. They discovered that the millennials were only comfortable having 43% to 63% of their portfolios in equities. The way they are saving though does not provide proper asset allocation for a 30-year-old.
Why Are They So Conservative?
When compared with many investors from previous generations, it is obvious that they are more conservative, and this begs the question as to why. The most likely reason is that many of them grew up during the economic downturns of the 80s and the mid-2000s. They’ve seen just how devastating these events can be when it happened to their parents and grandparents. These downturns wipe out retirement accounts. Even those who had college degrees often had problems finding a job during the financial crises.
Many of the millennials have decided that the safest place for their money is in checking and savings accounts. While the money might be safe there, it is not doing them much good. The interest it accrues will be miniscule, and this is not the proper asset allocation for a 30-year-old.
According to research from Fractl, a digital ad agency hired by eBay Deals to survey Americans about their saving habits, nearly 85% of millennials were saving part of their income. This is a larger share than any earlier generation. Even though they are saving, they may not be saving enough. More than half are saving less than 10% of their income.
Millennials need to make sure they divide their savings properly. They should have emergency funds, which will ideally cover up to three months of expenses. They should also have medium term saving goals. These would include saving for mortgage down payments, as well as education for their children. In addition, they need to have savings for their long-term goals, namely a retirement nest egg.
Experts believe that while it is possible to hold the emergency funds in a zero interest savings account, it is best to invest in short-term investment grade corporate bonds. These could be ETFs or individual bonds. They could yield to a maturity of up to 2%. It’s a good idea to invest in a dedicated portfolio of individual short to mid-term bonds that have predictable returns for their mortgage down payment and children’s education. They should know what they need to save and the annual return. These types of bonds are a great match.
To help build the nest egg for retirement, millennials could invest in equities ETFs, as well as mid-term bonds including international bonds and high-yield bonds. However, it will depend on how willing they are to take risks.
Millennials should strive to save and invest at least 20% of their income each month. This can be difficult for many millennials, especially those still saddled with student loans, but it should always be the goal.