Y Generation to Affect Future Stock Returns?

[tjscott0]

The Y Generation is now moving into prime earning years. That generation has a great distrust of the stock market. As a result have low stock allocations. They will be buying less stocks as boomers liquidate to fund retirement.

Why Generation Y fears the stock market - J.J. Zhang's Winner Take All - MarketWatch

One of the largest transfers of wealth between generations is starting to occur in the U.S. As baby boomers enter the retirement phase, the next generation of workers, Gen Y or the Millennials (those born in the 1980s and 1990s), are now entering the workforce and beginning their prime earnings phase.

the future outlook for Gen Y is that of a nearly bankrupt nation, rising global competition from emerging countries, crumbling infrastructure and insolvent retirement and welfare programs, among others ills. For this generation, financial security is a fragile hope due to high educational debts, stagnant upward social mobility and poor employment prospects.

this generation has also suffered through several financially traumatic experiences that have and are continuing to shape its investing views.

Baby boomers saw a relatively stable and strong growth period during the ‘50-’70s which influenced their long-term belief in market returns. In contrast, Gen Y adults experienced two major bubbles and recessions and high volatility, which have led to one lost decade already.

Indeed, the early vanguard of the Gen Y’ers joined the real world only to experience the dot-com crash. They subsequently started investing in their mid 20s only to find the housing bubble and the subsequent great recession. The first impression is the most important and so far it doesn’t look promising.

This lack of tangible gains, roller-coaster volatility and recent scandals such as the bank bailouts, mortgage shenanigans, Ponzi schemes and scandals like Goldman’s designed-to-fail securities, have all made them cynical and distrusting of the stock market and investing in general.

This isn’t hypothetical. In a recent MFS Survey, 40% of Gen Y agreed with the statement “I will never feel comfortable investing in the stock market.” Among Gen Y investors, 54% feel overwhelmed by available choices and 47% tended to put off investment decisions.

Due to fear of risk, 30% said their primary investing objective is protecting principal and have allocated an average of 30% to cash, more than other age groups, and nearly equal to the 33% allocated to stocks. T. Rowe Price noted in 2010 that almost one in five self-directed participants age 25-35 had over 80% of plan assets in cash.

 

[Andre1969]

I think it's going to be a long time before Gen Y hits its prime earning years. IIRC, Gen Y spans the 1982-2000 timeframe. So that means that right now, they're around 13-31 years of age. How could a group that has a large composition of recent grads looking for work, college students, high school kids, and even 7th and 8th graders be heading into its prime earning years?

Don't most people hit their prime earning years sometime in their 50's?

 

[tjscott0]

I think it's going to be a long time before Gen Y hits its prime earning years. IIRC, Gen Y spans the 1982-2000 timeframe. So that means that right now, they're around 13-31 years of age. How could a group that has a large composition of recent grads looking for work, college students, high school kids, and even 7th and 8th graders be heading into its prime earning years?

Don't most people hit their prime earning years sometime in their 50's?

Thanks for the reply Andre.

Yes the Y Generation doesn't have currently a large influence in the financial markets yet. I would argue that in 10 years the situation is different. Best to be thinking about that potential change.

The Y Generation is roughly the same size as the Baby Boomer generation.
By age 30[1981], I was socking a significant portion of my earnings into retirement accounts. I realized that conspicuous consumption & living "La Vida Loca" weren't the path to happiness. The Y generation will likely come to that realization earlier due to past experience. The question is were their investment $ be flowing? Best to be in that area as large amounts of money will lifting that area.

 

[HFWR]

Don't most people hit their prime earning years sometime in their 50's?

Or get fired because they're in their prime earning years...

 

[timwalsh300]

My wife and I are members of Gen-Y and our 60/40 asset allocation is vastly more conservative than I see among people twice our age on these forums. I used to rationalize it by citing the same uncertainties as this author, but now I think it just reflects our individual personalities more than anything.

My wife and I are cautious in everything we do, so I'm sure we'd have a high savings rate and a conservative portfolio no matter what. This is fairly common among our circle of friends, but there is obvious selection bias in that. The simple fact that we "have a portfolio" at our age probably makes us outliers. I imagine that the majority of our Gen-Y peers in their twenties haven't yet given any serious thought to an investment portfolio.

I also think there is a lot of "hindsight-is-20-20" going on. The Baby Boomers entered a world that just saw a massive global depression followed by a massive global war, the scale of which we can barely comprehend today. The entire world-order had been shaken up, and there was a palpable fear of the next nuclear weapon detonation. I also don't think the 1970s were a period "which influenced their long-term belief in market returns." Did Baby Boomers, at the time, really see the future as being so much brighter than Gen-Y sees it today?

Tim

 

[GrayHare]

If excess cash will be kept at banks, sounds like a good time to invest in them.

 

[haha]

If excess cash will be kept at banks, sounds like a good time to invest in them.

Takes a lot more than deposits to make a bank a good investment. Banks have all kinds of cash today, just not much that they find to do with it and make a profit.

Ha

 

[GrayHare]

Actually, big bank earnings have been on the rise; the earnings growth this year: BoA +262%, JPM +10%, Wells Fargo +10%, Citibank +24%.

 

[vinhmen]

Here's an excerpt from BusinessWeek's infamous 'Death of Equities' cover story in August 1979. Sound familiar? LOL ...

The problem is not merely that there are 7 million fewer shareholders than there were in 1970. Younger investors, in particular, are avoiding stocks. Between 1970 and 1975, the number of investors declined in every age group but one: individuals 65 and older. While the number of investors under 65 dropped by about 25%, the number of investors over 65 jumped by more than 30%. Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks.

The Death of Equities - Businessweek

 

[GrayHare]

Every generation's money has to go *somewhere*. Figure which, invest in that area ahead of the crowd, and you'll do well.

 

[ESRwannabe]

I don't think these polls of the broad Gen Y demographic are all that useful. Stock ownership is concentrated in the top 10%, in terms of wealth. The same will be true for Gen Y. So the real question is how will this top 10% of Gen Y regard the stock market. My guess is that they will not be all that different from the current top 10%.

These people are either going to be DIY that understand the stock market in a broader historical and global sense, as opposed to myopically focusing on the dot com and great recession. Alternatively if they aren't into DIY, they will most likely hire someone to give them advice. In which case, I doubt many financial advisers tell youngish people to avoid the stock market.

 

[Onward]

Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks.

 

[timo2]

The Y Generation is now moving into prime earning years. That generation has a great distrust of the stock market. As a result have low stock allocations. They will be buying less stocks as boomers liquidate to fund retirement.

Why Generation Y fears the stock market - J.J. Zhang's Winner Take All - MarketWatch

The part of the article that clued be in to what baloney it is was "Baby boomers saw a relatively stable and strong growth period during the ‘50-’70s which influenced their long-term belief in market returns." Maybe it was that episode of Captain Kangaroo that focused on equity investing. Being a 2nd wave boomer myself, I can not think of any of my peers who in the 1950-1970's was thinking about the stock market. maybe some of the initial wave of boomers was, but the rest of the boomers were children during that period. (this is typical, take the first wave boomers and apply it to the rest of the generation).

Also, the stock market in 1970 was a different place than today, and I'm not sure the comparison in small investor perceptions of the market are pertinent. Flashbacks of the 1970s for Stock-Market Vets - WSJ.com

 

[JoeWras]

The part of the article that clued be in to what baloney it is was "Baby boomers saw a relatively stable and strong growth period during the ‘50-’70s which influenced their long-term belief in market returns." Maybe it was that episode of Captain Kangaroo that focused on equity investing. Being a 2nd wave boomer myself, I can not think of any of my peers who in the 1950-1970's was thinking about the stock market. maybe some of the initial wave of boomers was, but the rest of the boomers were children during that period. (this is typical, take the first wave boomers and apply it to the rest of the generation).

Also, the stock market in 1970 was a different place than today, and I'm not sure the comparison in small investor perceptions of the market are pertinent. Flashbacks of the 1970s for Stock-Market Vets - WSJ.com

And what about the 70's It was brutal for the market. 5% total over 9 years for 70 to 79? Yeah, that's stable all right if you define "stable" as flat returns in an inflationary period.

How did those young boomers at the time decide to hit stocks and enjoy the 80s and 90s? They should have been horribly depressed by their investments in the 70s, as young earners.

Edit: guess I should have read the flashback link. That's what I'm talking about. Yet those investors were not scarred for life. They came back.

 

[arebelspy]

I don't think these polls of the broad Gen Y demographic are all that useful. Stock ownership is concentrated in the top 10%, in terms of wealth. The same will be true for Gen Y. So the real question is how will this top 10% of Gen Y regard the stock market. My guess is that they will not be all that different from the current top 10%.

These people are either going to be DIY that understand the stock market in a broader historical and global sense, as opposed to myopically focusing on the dot com and great recession. Alternatively if they aren't into DIY, they will most likely hire someone to give them advice. In which case, I doubt many financial advisers tell youngish people to avoid the stock market.

Excellent point.

And here's the thing about the stock market: it's ownership of businesses. If Gen Y doesn't invest as much, that just means you'll get those companies at cheaper valuations and your yield on cost will be higher.

That's a good thing for an investor, not a bad thing, IMO.

 

[clifp]

Excellent point.

And here's the thing about the stock market: it's ownership of businesses. If Gen Y doesn't invest as much, that just means you'll get those companies at cheaper valuations and your yield on cost will be higher.

That's a good thing for an investor, not a bad thing, IMO.

Unfortunately precious few people understand it is ownership. To the vast majority of people, the stock market is just a giant casino. Most think it is rigged casino, where a handful of people make all the money. (They aren't entirely wrong about the rigged part :-( ).

Plus an ever bigger group of feel the best time to buy stocks is after they have been rising long time. I think 5 years is probably enough for most people to think it is safe to go back into the market so I expect more to buy in 2014...

 

[lrak]

The Baby Boomers entered a world that just saw a massive global depression followed by a massive global war, the scale of which we can barely comprehend today. The entire world-order had been shaken up, and there was a palpable fear of the next nuclear weapon detonation. I also don't think the 1970s were a period "which influenced their long-term belief in market returns." Did Baby Boomers, at the time, really see the future as being so much brighter than Gen-Y sees it today?

While it involved a lot of people and there were some attacks on US soil/waters, WW2 was only five years and was over before the boomers were born. The boomers grew up with Korea and Vietnam while the milenials grew up with Iraq, Somalia, Bosnia, Iraq again, and Afghanistan. Smaller but longer conflicts.

Both generations had "wars on ideas" that shaped the country (for the worse imo). The boomers grew up with the Cold War (McCarthyism, Hoover, nuclear proliferation) while the millenials grew up during the War on Drugs (SWAT team raids, highest prison rates of any country) and start of the War on Terror (Patriot Act, no due process rights for accused enemies of the state, TSA abuses of airline passengers, NSA privacy abuses, etc).

Both generations saw huge economic booms in their childhoods (post war & Internet boom) and then experienced stagflation in their early working years.


There are a couple economic differences that could be a factor -

Unemployment is significantly higher among those under 30 and graduating into a recession has signifcant long term implications on lifetime earnings.
http://www.nber.org/digest/nov06/w12159.html

Incomes are not increasing like they were in the early working years of the Boomers.
Fileroductivity and Real Median Family Income Growth 1947-2009.png - Wikipedia, the free encyclopedia

National debt decreased during the Boomers early working years and is increasing for the millenials.
File:USDebt.png - Wikipedia, the free encyclopedia

The cost of college has dramatically risen so many millenials have student debt that will take years to pay off debt before buying a house, starting a family, etc.
http://www.motherjones.com/files/costvstuitionv2.jpg

There are a lot of generational similarities, but also some differences. I certainly don't know what the future will bring. But with most of the world's central banks printing money, negative real returns on bank CDs, risks of interest rates rising on bonds, bubbles and price manipulation of commodities by investment banks, and a housing crash that still hasn't recovered in many areas of the country... I'd imagine the stock market looks like the best option to lots of millenials.

 

[akck]

The fact of the matter is that the majority of stocks are held by institutions and endowment funds. Individual investors will have only a minor effect on the market.

 

[ziggy29]

I think too many of them have too much student loan debt to pay off before they can start seriously investing. Plus, too many of them are underemployed relative to their education. Welcome to the New Economy!

 

[Badger]

It's early yet. I don't buy into many of these predictions. They might as well try predicting the outcome of a football game that will take place years in the future. So many changing variables by the time the Y generation comes into their own.

With the oldest at 31 most of them are still thinking of where the next party will be. Where was your head at 13 to 31? Surely only a select few at that age were even thinking of investing or even aware of the stock market. People change their behaviors as they have more life experiences. I didn't start until I was about 38 and 22 years later on a teacher's salary with a couple of years of unexpected loss of wife's income we were FI. Now we are retired and enjoying a 30% increase in our annual income with a predicted success rate that may also leave over a million dollars to our kids.

So if not investing in the stock market once they are earning a fair income where do you think their money will go. With the taste for satisfying their "wants" and instant gratification (live for today) the money will be spent. Isn't that something that is supposed to spur the economy.

I don't forsee a problem. JJ Zang has a different crystal ball than mine.