OMG. Millennials are idiots. They put less than half of their savings in stocks. When they’re old, they’ll subsist on a cat food diet because they were terrible investors.
Seven Ways a Vox.com Article Provided No Context
1. The Title
The logical conclusion I reached from this title is: bad investors play it safe, therefore good investors take (uncalculated) risks. This would be a newsworthy conclusion, as it runs counter to most of what I thought I knew about investing. I’m fairly certain that the best performing long-term investors would say this conclusion is complete and utter nonsense—irresponsible, even.2
2. The Second Sentence
Well, here’s one answer that matters: investing makes them really, really nervous…so much so that people age 21 to 36 have more than half their savings in cash, according to a new report from the Brookings Institution.
Let’s parse this in two at the ellipsis and focus on the first 12 words. Since the word “nervous” does not appear in the Brookings study, the “really, really nervous” bit ostensibly comes from Brookings’s citation of a Boston Globe article, which in turn cited an MFS Investment survey: “A recent survey by MFS Investment Management found that nearly half of Millennials ‘never feel comfortable investing in the stock market.’”3
“Never feel comfortable?” That strikes me as a reasonable outlook—after all, one takes risks when investing in the stock market, and risks generally make people feel uncomfortable. And if one views “risk” as the permanent loss of capital rather than volatility, it seems a positively responsible view toward personal finance. It strikes me as a bit of a leap to jump from “never feel[ing] comfortable,” to being “really, really nervous.”4
3. The Chart
On to the second part of the second sentence, “people age 21 to 36 have more than half their savings in cash.” Here’s the chart used to prove it:
Question: What does this chart tell you? Answer: Not much.
Three questions demonstrate why this is a misleading chart that provides no context:
- 52% of what compared to 23% of what? Do people in the younger cohort have $5,200 in cash savings while all other ages have $2,300? Or is it more like the younger folks have $520 in cash savings while other ages have $23,000? This would impact their ability to invest in stocks (i.e., minimum investment amounts in an IRA), but we just don’t know.
- 52% today compared to what 5/10/20/30 years ago? Are “kids” today more conservative than “kids” in the past? We just don’t know.
- Is that 52% figure the proportion of aggregate savings for people aged 21-36 that sits in cash, or is 52% the simple average of survey responses? We just don’t know.5
4. Attribution of UBS Survey Results to Broader Public
Let’s back up a minute. Who took this UBS Wealth Management survey? Does the sample accurately represent the broader U.S. population? Can we use it to discern broader behavior across cohorts?
Here’s what UBS tells us about their survey’s sample. Read carefully:
So 1,069 Millennials who EITHER have *at least* $75,000 – $100,000 in household income OR between $50,000 – $100,000 in investable assets. That is quite a range of potential participants. Is it representative of the broader U.S. population?
Let’s start with income. U.S. Census data show that out of 122.5 million households, median household income in 2012 was $51,017. For single-income households (45.8m, 37.4% of total) it was $43,335, and for dual-income households (38.6m, 31.5%) it was $82,596. “No earners” accounted for 28.6m or 23.4% of all households.6 Marinate on that for a minute. Looking at the data by age of Head of Household, median household incomes in 2012 were $30,604 for those between 15-24 years of age, and $51,381 for those between 25-34.7
What about investable assets? Tough to say, but the Employee Benefit Research Institute runs an annual Retirement Confidence Survey, and the findings from the 2014 iteration show the following:8
So 36% of workers’ households in this survey have less than $1,000 in investable assets. Marinate on that for a minute. Moreover, 69% of households possess less than the $50,000 threshold that UBS set for those between the ages of 21-29.
Finally, the oversample for the “All Other Ages” cohort in the UBS survey includes 564 investors with at least $250,000 in investable assets—49% of whom have at least $1,000,000 in investable assets—while the core sample includes 2,532 investors who have at least $250,000 in investable assets. Please look at the EBRI chart again: the respondents for UBS’s “All Other Ages” cohort sit within a grouping that represents 11% of all households in 2014.
Whether by income or investable assets, I’m not convinced that the UBS survey findings are an appropriate benchmark for comparing Millennials’ saving and investing habits to those of the broader American population. Caution is warranted.
5. The Third and Sixth Sentences
The issue here is that Millennials are conservative at exactly the time when they should be taking bigger risks with their money…Get higher returns when you’re younger, and those returns work for you even when you’ve pulled back into lower-return investments.
Statements like this usually contain a disclaimer that investing carries the risk of loss, and past performance is not indicative of future results.
Why should they be taking bigger risks with their money? I’m familiar with the arguments that young people—in general—should assume a bit more risk in their portfolios because they can weather volatility in the short and medium term (assuming they don’t sell at the bottom…), collect dividends, etc. But why, exactly, should a hypothetical 24-year-old take her $1,000 in life savings and buy the S&P when it’s trading at 1,923?9 There is nothing in this article pointing to dollar-cost averaging, nor links to resources for learning more; on the contrary, there’s a not-so-subtle insinuation that high returns from stocks are virtually guaranteed for younger people. Why not buy now?
More importantly, maybe there are better uses for our hypothetical Millennial’s savings. Perhaps she should be saving up for a car to get to work, or a trip to Zanzibar, or to augment a Fulbright Scholarship to do some interesting research in rural India, or to start up her own business — you know, do something *risky* (or at least life-enriching)?
6. The Seventh Sentence
According to the UBS report where Brookings got these results, millennials were also far less likely to say long-term investing would make them successful.
Hang on a minute. How do Millennials define success, and is long-term investing the appropriate means for achieving it? Turns out that UBS asked that question, and that the surveyed Millennials responded that the largest factors in determining success are emotional and experiential, not financial:10
Moreover—and here’s the kicker—when asked how Millennials plan to achieve “success,” 69% responded “Working hard” (compared to 51% for non-Millennials) and 45% responded “Saving/living frugally” (compared to 39% for non-Millennials). Where’s the Vox story clamoring, “non-Millennials are relying on the market to finance what they were not willing to work hard for, and these spoiled brats are not willing to live within their means”?11
7. The Thirteenth Sentence
Millennials have more student debt than older generations did when they were young, so many young investors may also be busy paying down debt (not that that entirely excuses them from not investing more aggressively).
Here we come to a crux of the issue. How can an article that cites the power of compounding interest as it ridicules Millennials for failing to take risks in their investment portfolios go on to ignore the power of compounding interest on their student loans? You better get greater than a 7% return on your stock investments so that they compound faster than your loans. And you better start off with more money in the market than you took out in loans, because if not, your loans may grow faster in absolute terms irrespective of the rate at which your investments appreciate in value.12 What’s the responsible course of action in this situation? À chacun à son goût.
Saving and Investment
Criticisms aside, the Vox piece may be on to something. Maybe Millennials should be saving more money and investing more aggressively for retirement. That wouldn’t be terribly surprising—look at those data from the EBRI survey: every age cohort has a problem when it comes to saving for retirement.
It’s a shame that we don’t know more about this 52% in cash figure. Maybe the Millennials in question are behaving responsibly, focusing on building up a rainy-day fund before investing for retirement (many financial advisors suggest saving three to six months’ living expenses). We just don’t know.
A skeptic might wonder, who wants these kids to buy stocks and why? It’s disappointing to read an article pushing kids to assume risk in the capital markets without providing a bit of context;13 and it’s disappointing to see narratives take shape and be perpetuated without folks checking their priors. We all love a good story, though.
When I first read the UBS survey a few months ago, I thought the findings were fairly reassuring. Kids want to work hard, they’re willing to live within their means, and they’ve got a balanced view on what success in life means. Sounds like a proper view of the American Dream, if you ask me.
But it’s hard to find an article about Millennials that isn’t downright patronizing, and at odds with much of my first-hand experience working with them. I’ve certainly seen my fair share of underwhelming young people—everyone has their strengths and weaknesses, after all—but on the whole I am consistently impressed by the younger people with whom I’ve worked. They’re intelligent, they’re creative, and they’re generally quick to see through BS.
Millennials are the future of this country, and I suspect they’re going to do amazing things—partly because they’ll have to: they’re inheriting a bit of a mess. Society will evolve, the political pendulum will swing, markets will go up and down. Before piling on with criticism, perhaps it’s worth reflecting on the decisions you make and how you can help shape the next generation’s opportunities for the better.
Postscript on Risk
All this talk of Millennials being cowards brought to mind a story from seven years ago. In 2007/8, a (Millennial) friend of mine flew to London to interview for positions with some investment banks. In a meeting with one of the bulge bracket firms, my friend’s interviewer—presumably a trader—got in his face and said, “I take risk for a living. I want people who take risk. I want killers on my team—people who are aggressive.”
Now, before jerks like this guy blew up the global financial system and consigned millions to unemployment, my friend was serving in Iraq—and in fact is downrange now in a part of the world where 99.999% of Americans will never venture (“too risky”). Baby daughter back home.
But it occurs to me that this country has been sending Millennials off to war for 13 years running; and if you’re reading this, you likely weren’t one of them.14 So what does it mean to take risk? What’s your definition?
Some people invest a lot of their money in stocks. Some people invest a lot of other peoples’ money in stocks. Some people start businesses. Some people work in service of others. Some people smoke. Some people sign a dotted line and surrender their fortunes to the whims of foreign policy.
Who are the risk takers?
# # #
1 This is the second article I’ve read on Vox.com; the first was underwhelming. I just don’t understand how the end result is differentiated from reading a newspaper, but I wish their team luck.
2 See, for example: the writings of Warren Buffett and Howard Marks, Seth Klarman’s Margin of Safety, and the entire Market Wizards series. Or sit down with a pension fund and try to secure a capital commitment without discussing the concept of risk-adjusted returns.
3 Brookings Institution, How Millennials Could Upend Wall Street and Corporate America (May 2014), pg. 12.
4 For example, I “never feel comfortable” about sitting in the middle seat on a transatlantic flight, but it doesn’t make me “really, really nervous” about the outcome. At least no more so than usual.
5 The UBS report suggests it’s the latter.
6 U.S. Census Bureau, Table H-12AR, Household by Number of Earners by Median and Mean Income – All Races: 1980 to 2012.
7 U.S. Census Bureau, Table H-10AR, Age of Head of Household by Median and Mean Income – All Races: 1980 to 2012.
8 Employee Benefit Research Institute, The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans (May 2014), pg.16.
10 UBS, Think You Know the Next Gen Investor? Think Again (1Q 2014), pg. 8.
11 Devil’s advocate. Separately, I thought this part of the UBS survey was fascinating, and demonstrated a much more well-rounded approach to life—one that gives me guarded optimism for the future…limitations of the survey demographics notwithstanding.
12 For example, a $10,000 investment compounded at 10% for 20 years equals $74k, while a $20,000 loan compounded at 7% equals $83k over the same period. These numbers are just to illustrate the point of compounding working both ways. Run your own numbers with projected annual contributions and returns on the asset side, and projected growth of your loans net of payments on the liabilities side.
13 I’m not a financial advisor. Nothing written here should be construed as advice. But one of the most practical investment books I’ve read is David Swensen’s Unconventional Success. He’s one of the more successful institutional investors around, and he developed a simple framework for investing. It ain’t sexy; you won’t be sipping Aperol Spritzes on your 120 foot yacht off the coast of Monaco with it; but it’s one approach that can be informative.
14 Less than 0.5% of Americans serve in the military according to Karl Eikenberry and David Kennedy, “Americans and Their Military, Drifting Apart.” New York Times, 26 May 2013.