(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
April 9 Younger investors may have drawn the
right conclusion about the great financial crisis - that they
were scammed - but their defensive reaction will simply add
self-inflicted wounds to existing injuries.
Specifically millennials, aged 21 to 36, hold more than half
of their assets across all accounts in cash, more than double
the allocation of their elders, according to a survey by UBS
released this year. (here)
Just 28 percent of their assets are in stocks, as against 46
percent for other adults (including retirees who often cut stock
holdings for safety).
And lest you think this is just about being young and broke,
even older millennials, aged 30 to 36, with more than $100,000
in assets were carrying a 42 percent allocation of cash.
While UBS attributes this conservatism to the market
volatility and poor job security that younger people have become
accustomed to, many must also have come to the conclusion that
the investment industry is not a good place to get a fair shake.
Not only have we had (at least) two bubbles, but the news
flow about financial services has been thick with stories about
interest rate and foreign exchange rigging, self-dealing and
outright fraud. The list is long, with Michael Lewis adding to
it most recently when his investigation into high frequency
trading led him to conclude the stock market itself is rigged.
While I share much, but not all, of this outrage over market
and investment practices, the bottom line is that being 52
percent cash at a young age is like mailing yourself a very,
very slow letter bomb.
Cash has its uses, to be sure. It provides optionality and
it gives defense against overvalued markets. But over the long
term - and when you are young the long term is your single
greatest asset - cash is an almost sure loser, not just to other
asset classes but often to inflation.
In the last 88 years, U.S. equities have returned 6.6
percent in real terms annually, as compared to 2.4 percent for
government bonds, according to Barclays data. Cash has shown a
real annual return of just 0.5 percent.
And while equities have done less well over the last decade,
with a 5.5 percent annual real return, cash has shown a negative
0.8 percent annual return in the same period.
The bottom line is that millennials are making a terrible
allocation decision at exactly the worst time, and have, to
boot, largely missed out on the post-crisis rally.
LACK OF FAITH
While younger investors behave as if they are paralyzed by
fear, the way they describe themselves is a bit more nuanced.
The number who describe themselves as 'somewhat aggressive' or
'aggressive' is actually double that of baby boomers aged 49 to
67, but the number who are 'somewhat conservative' or
'conservative' is about half again more than their Generation X
cohort a decade older.
Behind this perhaps is the fact that millennials are about
half as likely to believe that long-term investing is a primary
path to success.
The great irony is that there has never been a better time
to be a small, independent investor, even a bloody-minded one
determined not to unnecessarily line the pockets of
Brokerage costs have cascaded downward over the past 20
years, while the Internet has made researching and transacting
easier than ever before.
Index investing, either through traditional mutual funds or
ETFs, is also easier, mostly cheaper than ever and available for
far more assets.
None of this is to say that there aren't huge issues for
investors. The list is long, including abusively high 401k fees,
over which investors have little control.
Central bank determination to use asset price inflation as a
means to other ends is also concerning, and may end up imposing
higher risk premia on financial assets than we've historically
experienced. Demographics too may mean that long-term asset
returns are lower than we've seen historically, as an aging
population consumes their assets rather than investing in new
It is almost impossible, though, to set up a scenario in
which cash outperforms over the very long haul. It may for
periods, even extended ones, but ultimately the value of cash -
its optionality - is only realized when you use it by putting it
to work elsewhere.
If this unwillingness to invest persists, it is going to be
a huge problem, and not just for millennials. Both the industry
and government stand to suffer; one by losing a generation of
clients and the other by facing a generation with a huge
structural savings shortfall.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)