Millennials don’t invest, but they should be involved in online trading

Millennials take a different view from their parents and grandparents to money and toonline trading. While it is dangerous to indulge in stereotypes, the generation born between 1980 and 2000 has grown up with technology and thinks differently.

Professional services firm Deloitte calculates that millennials will be the largest adult segment by the end of this decade. Deloitte expects millennials to grow their wealth significantly in the years ahead.

While most are currently still in the phase of creating wealth, there is going to be a massive shift in the future as they enter their prime earning years.

High-tech world

Millennials raise a number of issues. They are the first generation to have been born into such a relentlessly high-tech world. This has inevitably shaped their views and behaviour in a number of areas.

Millennial attitudes towards the acquisition of material goods, ownership and payment differ greatly from generation X before them and baby boomers before them.

Sharing is becoming more prevalent than ownership, via the likes of music service Spotify and car service Zipcar.

Both ofthese businesses – and many others like them – have disrupted traditional business models, observes Amanda Young, head of responsible investment at Standard Life Investments in Edinburgh, the capital of Scotland. Disruption comes naturally to millennials.

Immaterial wealth

John Auckland, a crowdfunding specialist and self-styled Chief of the Tribe at www.tribefirst.co.uk, has witnessed firsthand the millennial attitude to online trading.

He argues that millennials are misunderstood. That their emphasis isn’t solely on smart phones and selfies, as caricaturists from an older generation might believe. These are just symptoms of something much deeper that’s happening.

“Both are indicative of a new sense of identity, one that’s not defined by material wealth but instead by your online reputation and influence. I think once you realise this it actually makes sense, and it’s much easier to engage on their terms,” he says.

What is saving?

It would be wrong, then, to think that they are not interested in anything as traditional as saving. It is just that, as with almost everything else, they have a different view of what constitutes saving.

This can be attributed partly to a lack of cash and partly to a distrust of traditional financial institutions in the wake of the global financial crisis.

They might not have much in terms of spare cash to invest, but they are nevertheless involved in online tradinginvesting quite heavily in one of the financial world’s fastest-growing asset classes, says John Auckland. “There is a clear trend.” Which immediately prompts the question, why?

Why not invest alternatively?

John Auckland’s answer is simple, but thought-provoking for those who belong to an era that was the future once, but now looks increasingly sepia-tinted – like a horse-drawn hansom cab in the coming age of driverless electric vehicles.

He replies: “If banks are offering nothing in the way of interest, and are generating suspicious products involving complex derivatives, why not? Alternative assets and bigger risks are the only way forward for a generation that cannot buy a house without parental help.“

Although it is a very risky asset class, they feel they have more control. They tend to have a more emotional decision-making process and in crowdfunding and other aspects of life, and they will take more risks.

“Personally speaking, if I make an investment as a borderline millennial, I don’t look at meaningless forecasts. I look at the team. I look at the idea. Can I believe in it? Can they be market leaders? Compared with this, pensions are boring and opaque.”

Pensions are boring

A pension is nowhere near as much fun as ‘investing’ £50 to help an ambitious young woman open a German-style Biergarten in an ancient traditional English market town.

But the return, say a VIP invitation to a beer-tasting evening dedicated to investors, or a reserved space behind the bar for one’s personal beer mug, is much more enjoyable in the here and now.

Even if, in effect,the millennial has given the money to the ambitious young woman rather than invested it with her, it feels good and this is an element of investing that millennials have embraced, argues Amanda Young. That there is more to financial life than profit.

“Millennials are increasingly distrustful of traditional financial institutions, with many preferring to take and share advice with peers online,” Young says in a document that sits at the heart of discussions at conferences and with clients. There is much emphasis on the digitisation of daily life and the impact that this has on behaviour.

Differing expectations

“The expectations and values of this tech-savvy group differ from those that have gone before, most notably when it comes to social, economic and environmental issues.”

She argues that the investment management and pension industries must adapt to capture this next generation of investors. This will include creating products that reflect the Millennials’ attitudes and beliefs, as well as reappraising the nature of investments and how returns are generated.

They have grown up in a period of rapid change, including huge technological leaps (the internet and smartphones) globalisation (shared experiences and norms across cultures and countries), climate change and economic upheaval (the global financial crisis and the Great Recession).

The events of 9/11 and subsequent conflicts have also shaped the Millennials’ world views.

This has earned millennials the title ‘the first digital natives.’ These factors have given them markedly different values, priorities and expectations from their predecessors.

It has also shaped the way they view money and how they invest. And money they will have: over the next several decades around $30 trillion in financial and non-financial assets will be passed from baby boomers to millennials in the US alone.

Rejecting tradition

Pending the inheritance of such assets, millennials have time on their hands. Some might even have modest quantities of spare cash to put to work somewhere.

The traditional advice is not to even think about investing directly in individual stocks until you have a reserve equivalent to six months’ expenses in cash or near cash.

The traditional advice is to invest indirectly via a collective fund vehicle, once called a unit trust or investment trust in the UK, and mutual fund in the USA, but more likely today to be an exchange-traded fund, or a UCITS (undertaking for collective investment in transferable securities) fund. Funds exist to satisfy just about any investor need.

But the age-old warning of caveat emptor – let the buyer beware – should never be forgotten or ignored. It must be the order of the day for the unregulated peer-to-peer lending, also known as loan-based crowd-funding, sector.

Regulation failures

But the global financial crisis and the chaos that has often been followed by its regulated big brother rather calls into question the value and effectiveness of regulators.

The traditional advice is not to try and time stock purchases because uninformed individuals simply cannot do it successfully. But millennials, like all younger generations before them, think they know better.

Tradition is for museums, not something to be embraced in everyday life. If the creators of Facebook, Amazon, Netflix and Google had taken a traditional view, the FANG acronym would not exist and there would be several fewer mega-rich people on the planet.

Where to begin?

What should millennials take into account when investing? Where to begin? The same as everyone else if we think purely in financial terms. But we have already discussed the generational differences that causes the financial element of an investment to be just one factor to take into account, not the only one.

The range is extensive. Cash deposits? Zero or near zero return. Bonds? These can be difficult, even well nigh impossible, for an individual because of the amounts of money required for a minimum investment.

Beware of bonds offering an unusually high rate of interest. Beware of contingent convertible bonds, which can be converted to loss-bearing equity in times of disaster.

Shares are available to individual investors for online tradingand they are much more accessible today than even a decade ago. But draw on sector knowledge in making the decision. And invest a relatively modest sum that you could afford to write off if you get it wrong.

Property? Difficult for an investor with a limited budget but there are real estate investment trusts which own and operate income-generating real estate.

The traditional advice is not to invest in anything you do not understand. The traditional advice is not to invest for a tax break. But there is always a place for at least considering that.

Retirement planning

Almost every responsible article about millennials and savings will at some stage focus on retirement planning. However enthusiastic an individual might be about jumping in and taking risk, the best approach to saving is to take a long-term view.

And the best way to save over the long term is via a traditional pension scheme. Tax breaks from governments incentivising people to save, mean free money for the savers. But for many people the mundane reality is that long term is boring and a better use can be found for money today.

Millennials in employment need to save some 18% of their annual earnings in order to enjoy an adequate retirement income. This is one of the key findings of a new international report, produced by the International Longevity Centre-UK think tank.

The Global Savings Gap report (supported by Prudential plc) finds stark intergenerational savings gaps around the world. It explores the pension systems of 30 high-income countries and regions, measuring performance according to affordability, adequacy and intergenerational fairness.

Other key findings include:

A reliance on public provision plus any current mandatory pension schemes will only be sufficient to deliver adequate retirement incomes in 3 out of the 30 countries and regions explored for this report

28 of the 30 countries and regions examined face an intergenerational savings gap. The average amount that someone entering the workforce today will have to save to enjoy the same retirement income adequacy as current retirees is around $5,080 or 12.6% of earnings

If people fail to save in the USA and UK, the report projects that they will face an intergenerational gap in excess of $10,000 a year (over 20% of earnings.

The report considers a number of possible policy solutions to address such intergenerational savings gaps. These include:

• raising private pension coverage and contributions
• raising financial capability with mass market advice and sensible defaults
• facilitating longer working lives, and reducing inequality of retirement outcomes

In addition to the international analysis in the report, bespoke survey data was commissioned to examine savings behaviours across five countries.

The data confirmed that only 12.4% of people in the UK are saving more than 15% of earnings, meaning the majority are far off achieving the 18% required for an adequate retirement.

No savings whatsoever

Furthermore, over 30% of people between the ages of 25-44 make no savings whatsoever. This group is particularly vulnerable, and unless they can accumulate some private savings over the coming decades, they will retire with extremely inadequate incomes.

Fewer than 1 in 10 [9%] had a specific savings target for retirement, compared to around a third in the US and Singapore [29% and 33%] and over half in Hong Kong [59%]

Laura Newman, head of private client advice at Child & Co, one of the oldest private banks in the UK, says: “To take control of their retirement planning, millennials need to sit down and start to understand what they want in retirement, in lifestyle and financial term, at what age they are likely to want this, and work backwards from that point to understand how much they need to save to achieve these goals.

“This is the starting point for any good financial plan; what are you ideally trying to achieve, what do your current arrangement actually provide, and what steps do you need to take to meet any gaps and shortfalls in achieving your goals.

“Furthermore, there is sometimes a problem with perception: millennials (and many others) see retirement planning as complex and not a priority (I’ll look at this later, my priority is buying my first home etc.)

“In reality time is the most critical aspect to planning a comfortable retirement – it is an irony that those who are in many ways best placed to plan their retirement are the most reluctant.

“Finally, the landscape has changed so much with pensions freedom, lifetime ISA (individual savings account) and the reduction in automatic enrolment in generous final salary schemes that the need for advice has never been greater.”

Putting a live human face on even the most technical issue can help bring it to life, in the way that a picture paints a thousand words.

Fareed Sahloul, online editor, Financial News, edging beyond his mid-30s, strictly speaking falls just outside the millennial classification, but he knows well the issues facing younger people:

“It is important to save,” he says. “Even if you don’t know right now which products you might like to invest in to help make your money go further. Just save. As much as you can.”

In conclusion

The millennials distrust of traditional financial institutions is a concern. If the asset management industry did not already exist, few younger people would wish it into existence.

The developed western economies have existed for generations on trust. Might we be about to find out what happens when that trust evaporates?

Ifmillennials fail to invest, it will be bad for news for economies as a whole and for the millennials themselves.