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Are Millennials Too Conservative with Their Money?

One of the more interesting bits of information that has come in my way recently is a report from UBS about investors and generations. According to this report, Millennials might be too conservative with their money.

According to UBS, it appears that Millennials are almost on par with the generation that had the Great Depression as a formative experience when it comes to risk tolerance. Here is a chart from the UBS report showing risk tolerance amongst various generations:

Millennial Risk Tolerance

As you can see, Millennials are fairly conservative when it comes to money management. The report goes on to point out that many Millennials are worried about retirement, but that they are also leery of stocks.

Why Are Millennials Concerned About Risk?

When one looks at the experiences that have formed the perception of Millennials, it because a little clearer. Millennial perceptions of the world have been formed by 9/11 and the financial crisis/Great Recession. In a world like that, uncertainty is a big key, and there are worries about how safe the money is. Concerns about financial institution failure are widespread among Millennials, according to the UBS report, and many of them saw the stress that came when their Boomer parents’ accounts were decimated by the stock market crash of 2008-2009. (The fact that holding the course would have meant recovery means very little to many of these Millennials, who only saw panicked selling and concern over temporary account dwindling.)

I myself am not a big risk-taker, although most of my investment portfolio is in stocks. I consider myself as having a moderate risk tolerance, which puts me in line with Gen X. (It’s worth noting that the UBS report considers me a Millennial, even though I self-identify better — on a number of levels — with Gen X.)

The events I’ve witnessed and been influenced by, including the tech bubble burst as well as the financial crisis, haven’t led me to shun equities as many Millennials apparently have. Instead, I make use of index funds and ETFs. It’s the act of individual stock picking that I eschew. I love stocks — as long as they are part of a larger investment product.

The Problem with a Too-Conservative Financial Approach

Being conservative with your money isn’t all bad. Conservative financial practices, such as living within your means and getting rid of debt, can benefit you in the long run. However, being too conservative with your investments can come back to haunt you in recent years.

UBS says that Millennials are worried that they won’t have enough for retirement. Unfortunately, they are probably right — as long as they stay away from equities altogether. The reality is that the return from a savings account, even though it is safe due to FDIC and NCUA insurance, isn’t enough to help you build an adequate nest egg. In fact, once you factor in inflation and taxes, most savings accounts lose you money in real terms. In fact, even Treasuries, which are also considered safe and may come with a higher yield than a savings account, might not even be sufficient to overcome interest and taxes.

A too-conservative approach with your investments can lead to trouble down the road. UBS says many Millennials are reluctant to invest in company retirement plans, and that could hurt them. These plans come with tax advantages and with the potential for better growth.

Part of the problem is that Millennials are notorious for failure to look ahead (in reality, most humans have a hard time putting the future into context), and it’s hard to see beyond the problems of right now. However, a good start for Millennials is understanding how they can benefit from investing in stocks via index funds, and learning that they need to take the long view of stock market performance, rather than getting hung up on current challenges.

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