Millennials And Investing: A Study And Six Tips

 Millennials are not all alike.

This fact is probably news to no one, yet the number of myths permeating this age group is numerous.  Millennials are the largest generation at 35% of the US labor force and have been so since 2016. They have growing assets ripe for wealth accumulation, stock market participation, and retirement planning to secure a promising financial future. Our post reviews Millennials and investing.

FINRA Investor Education Foundation study measured attitudes on investing among three millennial segments–those with no investment accounts or non-investors, those with retirement accounts only, and those with taxable investment accounts. Most of the latter group also owned retirement accounts.  The study debunked seven myths about millennials and investing and provided constructive implications for millennials and those financial businesses that court them with financial products. Before we get the study, here are seven tips for Millennials, and for all who want to create good financial habits. 

7 Tips for  Millennials:

1. Save. Adopt a savings habit by cutting out unnecessary costs. See our post on 25 Ways to Save Money And Feel Good About It.
2. Set up an emergency fund. You need to set up an emergency fund for liquidity by saving money in a readily accessible liquid account.  This fund should cover at least six months of living costs and reduce your need to turn to credit cards.
3. Get rid of high-interest-cost debt. If you have outstanding credit card balances, pay this debt first because of its high-interest cost. 
4. Use your workplace retirement plan. If you have access to an employer-sponsored 401 K retirement program and your employer provides a “matching contribution,” make sure to take advantage of that. If you don’t, you are leaving your money on the table.
5. Set up your Roth IRA. In addition to an employer-sponsored retirement plan, set up your own IRA/ Roth IRA accounts. If you are self-employed or are a small business owner, consider setting up a SEP IRA. The point is that you need to save for retirement as early as possible. Consider saving for retirement a form of investing.
6. Invest, invest, invest. You should invest the rest of your savings in a low-cost index fund, such as in small, medium, or significant market capitalization stocks, or in an S& P index fund that mirrors the market and its returns. There are a lot of good choices to consider, whether you prefer staying in the US market or diversifying to potentially faster growth in global markets. You could look at Fidelity, Schwab, and Vanguard options for a start. You can use a financial professional to discuss the possibilities or consider alternative Robo-advisors, such as Betterment. 
7. Women Millennials, in particular, need more confidence in investment decision-making. My experience as an equity analyst in a male-dominated Wall Street environment was often a challenge. Make challenges your opportunities. Women investors are often less risk-oriented than men and adopt buy-hold strategies. Nothing wrong with that if you are diversified. See our post,  Women and Money: 7 Steps To Better Control Your Finances.

8 facts about millennials and investing

1. Millennials are not alike, and millennials with retirement accounts and taxable accounts are ahead of those non-investor millennials who do not yet have either.
2. Millennials will have more opportunities for employer-based 401K plans, even if they are part-time workers, interns, or independent contractors.
3. High smartphone usage provides millennials access to online money management capabilities, notably fintech transactions and information.
4. Millennials with retirement and taxable accounts have been using financial professionals for years.
5. Be aware of minimum asset requirements for a financial professional and the fees their advisors will charge them.
6. Millennials have cost-effective alternatives to financial advisors that could amount to over 1% of their managed assets if they are making DIY investments such as ETFs or Robo-advisors that provide more personalized guidance in addition to their digital platforms.
7. According to the study, only 3% of Millennials used Robo-advisors, and only 16% were “very interested” in learning more about these advisors. Other emerging products, such as cryptocurrencies, investment crowdsourcing, and socially responsible (ESG) investing, also received relatively low interest from Millennials. More financial education is needed.
8. Women millennials trail men in all aspects of financial education, and women tend to be more conservative about their financial abilities. This is consistent with a separate study that looked at women investors across three generations (including Gen Xers and baby boomers) compared to men.

Here, I want to review some of the findings and expand our facts about millennials investing and saving for retirement. Read on.

Given the trends in Social Security and life expectancy,  Millennial retirement in 2046, when the oldest millennials turn 65 may not be realistic. 

1. The non-investors are less likely to believe they can retire comfortably. With a median annual income of $35,000, this group pointed to the most significant investment barriers as insufficient savings, not enough income, and paying off debt. This group has more financial challenges than the other two groups. Compared to the other groups, only 44% of these non-investors are full-time employed compared to the higher percentages of 87% for those with retirement accounts and 79% for those with taxable accounts and largely hold retirement accounts too. However, 34% of the non-investors will likely start investing in the next five years.
2. Those millennials with retirement accounts only have a $54,000 median income, and 32% of this group plan to begin investing outside their retirement accounts in the next five years, and paying off debt accounts for their most significant barrier to investing.
3. Clearly, the healthiest financial group was those with taxable accounts. They generate $73,000 in median income, and 31% of this group started investing before they turned 21 years. They cited individual curiosity and parents/family as influencers to begin investing. According to the Pension Rights Center, only 23% of all US workers participate in a pension plan, and most of those that do, work for the government at federal, state, and local levels. It will be hard to rely on Social Security as a retirement vehicle in the future. Even if it remains with federal funding, Social Security retirement only amounts to about one-third of your income, so retirement planning is a must.

Financial education should help those millennials that cite income and debt as challenges and provide a path to investing.

Millennials need more opportunities for employer-based 401K savings education, even in part-time work, which could prompt non-investing millennials to begin to invest. More part-time employees, interns, and independent contractors are eligible to be offered 401K plans if they are at least 21 years of age and worked 1000 hours in one year. The Pension Rights Center’s statistics show that 33% of all part-time workers in the US have access to 401K, but only 17% take advantage of the plan.

In the Millennials and Investing study, only 52% of the lesser employed non-investors have an employer that offers a retirement plan. The other two groups of the study were in better shape, with higher percentages providing the retirement plan, with  90% or above participating. One hopeful sign for those working in companies that do not offer 401K plans is that more financial companies, like Betterment and Human Interest, provide lower-cost 401K plans for employers. A tighter labor market is an essential perk for employers to provide upon hiring. Human Interest even has 401 Ks designed for small companies and startups, not typically the kind of companies that offer retirement plans.

There should be more opportunities for financial education, not just for Millennials, to the different mindsets of non-investors, retirement-only investors, and taxable account investors. They are at various places in their education, resources, and experience.  Home buying falls much lower (23%-26%) in all three millennial groups than 45% for GenXers and 46% for Baby Boomers, when they were at age 27,  as a financial goal. The reverse occurs when considering “saving enough for retirement” as a financial goal for the two better-situated millennials groups with retirement accounts and taxable accounts at 39% and 46%, respectively, compared to their older generation counterparts.

Financial education programs directed at millennials, Generation Z, and others are available at many different levels, particularly since the Great Recession. Whether it should be taught at schools and colleges, in a workplace environment, through not-for-profit organizations, books, or blogs is not a question. It is a societal need even at early ages for school children. Over 90% of millennials own smartphones with ready access to money management capabilities. About 80% of millennials use their phones for transactional fintech transactions, while 90% use their phones for information on fintech.

Financial professionals can expect to be an essential resource for many millennials. The study recommends that financial professionals’ outreach to millennial non-investors should address perceived expenses and needs.   About 41% of the millennials who have retirement and taxable accounts work with financial professionals for several years but have mixed opinions about working with their financial professionals, citing it as too expensive. I don’t think this is very unusual for anyone using a financial professional, particularly if you look at the declining market performance. The average fee for assets under management (AUM) for high-net-worth clients is typically 1%, but a recent study reported that the true all-in-cost for financial advisors could be 1.65%. There are so many investment opportunities for millennials to consider.

There are so many investment opportunities for millennials to consider. According to a recent Schwab study, millennials say 42% of their portfolios are currently in ETFs, and 56% of millennial investors have replaced their securities with ETFs. The average ETF carries an expense ratio (its fee) of 0.44%, meaning it will cost you $4.40 for every $1000 you invest. Nevertheless, millennials and other investors have access to financial advisors, that is, human advisors, through some of the largest Robo-advisors and legacy providers with Robo-advisor platforms. Schwab Intelligent Portfolios, its Robo-advisor business, is a cost-effective option, with or without a human element, if you have $5000 to invest and will not charge an advisory fee. Wealthfront, a Robo-advisor has a $500 minimum, and its fee is 0.25% fee on all assets.  Among the largest Robo-advisors, Betterment offers portfolio management and personalized guidance on retirement and home buying but requires a $100,000 minimum. Their fees are 0.25% of assets for their digital platform up to 0.40% for personalized advisory services. Vanguard provides full access to their professionals for $50,000 minimum and a 0.30% fee.

Besides Robo-advisors, the study’s other emerging products and services were socially responsible investments, cryptocurrencies, and investment crowdfunding. There was high use of cryptocurrencies compared to other products like crowdfunding, while socially responsible investments received the most interest. I would expect these types of offerings will broaden and become more competitive, benefitting millennial users in particular as they seek your assets.

Millennials need educational opportunities for emerging financial products and services. The study suggests that millennials need to be educated more on the fees and minimum amounts required to get financial professionals. In the survey, they underestimated the investable assets needed to work with a typical financial professional at only $10,000 or less while the fees they would be charged be 5% or higher. The study disclosed that only 3% of millennials used Robo-advisors. Still, more surprisingly, only 16% were “very/extremely interested in using/investing” Robo-advisors, and 46% were “not very/not at all interested in using” Robo-advisors. Juniper Research indicated that Robo-advisors will grow significantly, 70% through 2022, and would be essential for wealth managers to reach millennials as clients. A Schwab report said 60% of Americans will be using Robo-advisors by 2025. 

The study also studied certain subsegments of  Millennials, further proving this is not a homogenous group.  These subgroups are millennials from rural areas, female millennials, trailing millennials in the younger age (22-29) group, and African-American millennials,  further proving the initial statement that millennials are not a homogenous group. 

In this study, women millennials trail men millennials in several areas. Women millennials have lower percentages as “a taxable investor,” “being employed full time,” “in their confidence in decision-making about investing,” and “in reaching key financial goals.” The female millennials registered lower optimism rates toward the economy or financial markets. They cited their lack of knowledge as a barrier to investing and said they needed more knowledge.

The data from this study is not surprising as women often are more conservative about their abilities. I don’t have a survey to point to but aren’t women often more comfortable than men asking for driving directions? Kidding aside (and I am not entirely joking!), FINRA Financial Capability Insights reported that women consistently score lower than men on financial literacy measures. This gender-based gap may negatively impact women’s long-term financial well-being. This gender gap, where women trailed men over six years, was regardless of generation. Positively, while the gender gap for boomers and Gen Xers stayed the same from 2009-to 2015, the gap for millennials narrowed, driven by a decrease for millennial men and a slight increase for millennial women. Women rated their financial knowledge lower than the men, consistent with the millennial study. Still, we come back to the need for excellent financial education for all millennials and our population in general.

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