Written by: Thilan Kiridena, ChFC® | Capital Elements Advisors Inc.
The generation born between 1981 and 1996, known as “Millennials,” is now knocking on the door of middle age. Most of this generation entered the workforce after the 2008 financial crisis and are experiencing a market downturn for the first time.
As millennials are approaching the age of 40, the conversations with the older generation are likely to be less confrontational than they used to be two decades ago. A friend who decided to switch 40% of his portfolio to crypto back in 2019 had a chat with me about home ownership and asset/investment ownership with his parents. Some interesting insights:
- His parents started working for a company that had ”pension plans,” and therefore, in their careers, investing in a home was a priority and was considered their main asset. Putting 20% down and seeing property prices increasing over the first 15 years of their 30-year mortgage, they have used the home equity gain to purchase a second home for rental income. The other motive was to ensure that both their kids would inherit a house.
- While the parents have maintained investment accounts, it’s only very late in their careers that they have planned for retirement accounts. His father has joked that in a 45-year career, he has set up a 401K only in the last 15.
- For millennials today, home ownership is a tough conversation. With the increases in real estate over the last two decades, most millennials, at least in metro areas, have used savings/investment vehicles as their preferred method.
While exposure to markets can be a good thing over the long term, most millennials have had different “reward expectations.” The 2022 Millennial Investor Report published study by Natixis Investment Managers covers this issue and states that Millennials may be falling victim to recency bias.
“Millennials have reaped the rewards of the recent market run-up. Overall, they report returns of 14.3% above inflation during the first wave of the pandemic in 2020. Halfway through 2021, they predicted the bull market would keep running and expected returns of 14.6% above inflation for the year. Good fortune was with them, and markets delivered.
Going into 2022, hopes were even higher, with Millennials expecting long-term returns of 16.3% above inflation. Their optimism may be driven in part by outsized returns over the past few years as the S&P delivered returns of 28.88% in 2019, 16.26% in 2020, and 26.89% in 2021.
This was a historic time for investors. But history suggests it’s likely that they will experience a reversion to the mean. In fact, the returns generated over the past three years run two to three times the 4.57% average annual price return the S&P delivered over the 20 years between 2000 and 2020.”
Returning to my friend’s conversations, I believe 2022 will be a year that millennials like my friend rethink retirement. Especially ones that overinvested in emerging asset classes, crypto, or were over-excited with SPACs promoted by so-called “SPAC Kings” have gone through a steep and expensive learning journey. Emerging asset classes, including crypto, will still be part of millennial portfolios. However, they would be more receptive to increase or, in some cases, include allocations towards more traditional asset classes. In short, the discussion on diversification is likely to be much smoother.
Early on in my career, I was told by a mentor to have “multigenerational” friends. He told me that when you speak to people in various age groups, your thinking diversifies, and you accelerate your learning since you build on their expertise compared to peers who don’t do the same. He also mentioned that this exposure would help me in tough times over the good times. This original advice was referenced to “career leanings” in that particular discussion. Still, over time I have learned that having multigenerational insights is better in all facets of life.
In the last few months, having conversations with “multigenerational” investors has been exciting, and I have learned a lot. I met one senior advisor that has seen more cycles have encouraged clients to be more liquid since the early days of covid. He has had tough review meetings with clients in the last two years but is starting to get more praise this year. He advised me to frame conversations with clients, show how markets have reacted to downturns, and get them to approach planning more holistically. Bit of a cliché as it seems to be what we do all the time, but those boring conversations can be what help clients the most in a time of need.
The results from the 2021 Natixis Global Survey of Individual Investors mentioned above give great insights for any advisor serving the millennial market. While the finding cannot be generalized across all millennials, The study focused on Millennials with $100,000 in investable assets or more, a sub-section that would interest most advisors.
I will end with the five key truths that millennial investors in the above survey revealed and hope it will help you frame better conversations In this segment:
- Algorithms can’t answer every financial question
- Risk is real when there’s more on the line
- You don’t have to sell out to be a capitalist
- Retirement feels a lot closer at 40
- Pandemic habits are reminders of financial basics
Related: “Risk” From a Client Perspective
Thilan is the Founder/CEO of Capital Elements Advisors Inc. A New York-based financial planning and advisory firm specializing in Life Insurance Premium Financing and other structured financing solutions for Small Businesses.