• / Free eNewsletters & Magazine
  • / My Account
Home>UPDATE: Millennial investors are either very confident... or very cocky

UPDATE: Millennial investors are either very confident... or very cocky

UPDATE: Millennial investors are either very confident... or very cocky

09/27/2017

By Ryan Vlastelica

Four times as many younger investors as older investors view themselves as knowledgeable about their finances

Are young investors just naive or acting in a way that makes a lot of sense, given where they are in their careers and how most experts say portfolios should be configured?

Maybe a little of both.

According to a survey conducted by AMG Funds that was released earlier this month, 81% of millennial investors considered themselves "extremely or very knowledgeable" when it comes to their finances. Just 19% of older investors felt the same way.

Some may view the results as a sign of arrogance on the part of millennials. That has some credence given the more modest assessment from older investors, who have been through a number of market cycles--including two massive recessions in the past 20 years--and may have been humbled as a result.

While the financial crisis scared off some millennials from investing entirely (http://www.marketwatch.com/story/millennials-are-finally-warming-up-to-the-stock-market-2017-06-06), the ones who did put money in the market may be feeling good because they have almost assuredly made money doing so. The U.S. stock market has been in an essentially uninterrupted uptrend ever since the 2009 bottom, more than tripling since that low, and with few major pullbacks along the way. Major indexes have hit repeated records this year (http://www.marketwatch.com/story/thatll-do-dow-the-averages-9-day-rally-is-overbut-still-historic-2017-09-21), volatility has been near all-time lows (http://www.marketwatch.com/story/is-this-the-day-wall-streets-fear-gauge-hits-rock-bottom-2017-05-08), and even mild declines of 3% have been in short supply (http://www.marketwatch.com/story/a-problem-for-buy-the-dip-investors-no-dips-to-buy-2017-08-08).

The risk of such an environment is that young investors may be complacent about the prospect of a major selloff, something analysts are growing increasingly concerned about (http://www.marketwatch.com/story/stocks-at-their-4th-most-expensive-level-ever-are-smack-dab-at-the-heart-of-bubble-territory-2017-09-22). In August, a survey from E*Trade suggested that a quarter of millennial investors (http://www.marketwatch.com/story/a-third-of-millennials-think-now-is-the-time-to-jump-into-the-market-2017-07-31) were planning to move out of cash and into new positions over the coming six months, showing far more risk appetite than their elders.

However, there are some reasons why younger investors should feel confident. According to data from Charles Schwab, millennials are big users of exchange-traded funds (http://www.marketwatch.com/story/millennials-love-affair-with-etfs-is-nowhere-near-over-2017-09-07), which typically have lower fees compared with mutual funds. Furthermore, ETF investors overwhelmingly favor passive products, which mimic the composition of indexes like the S&P 500 , rather than relying on portfolio managers to select the holdings of the portfolio.

Data have repeatedly shown that passive products in aggregate do much better than active ones over the long term, even before their lower fees are taken into account. Most investment advisers recommend buying low-fee funds and holding them for the extremely long term, riding out market cycles and getting the benefit of compound interest. Investors who attempt to time markets or make short-term bets typically do worse (http://www.marketwatch.com/story/how-trading-etfs-may-lose-you-moneyespecially-if-youre-a-guy-2017-03-27) than their buy-and-hold counterparts.

Related:Long-term stock investors may not be thinking long-term enough (http://www.marketwatch.com/story/long-term-stock-investors-may-not-be-thinking-long-term-enough-2017-08-21)

Don't miss:Why a little apathy might be good for your long-term investment returns (http://www.marketwatch.com/story/why-a-little-apathy-might-be-good-for-your-long-term-investment-returns-2017-09-08)

AMG defined millennials as investors between the ages of 18 and 35, while baby-boomer investors were between the ages of 52 and 70. The survey polled 1,000 individual investors with at least $250,000 in invested assets. The survey didn't indicate how its respondents were positioned in the market, but the results implied fairly concentrated holdings.

Per the survey, roughly 10% of millennial investors said they understood the benefits of diversifying their portfolio, compared to 50% of boomer investors.

Jeffrey Cerutti, chief executive officer of AMG Funds, said the results were a sign that better financial advice was needed across the generational spectrum. Advisors "should make a concerted effort to educate current and prospective clients on managing their portfolio toward financial goals, including how to best manage risk and utilize diversification, as well as optimal asset class allocations," he said in a press release.

However, young investors can arguably justify their lower inclination towards diversifying their portfolio, assuming their plan is to buy and hold index funds until they retire. Historically, stocks do much better than other assets over the long term, albeit with greater volatility. Most experts say that younger investors should be overweight risk assets when they're young, when they have the ability to compound their gains over time, and then gradually diversify by moving into safer, lower-growth securities like bonds as they near retirement.

Read: Millennials ought to be 100% invested in stocks, says top-ranking newsletter editor (http://www.marketwatch.com/story/millennials-ought-to-be-100-invested-in-stocks-says-top-ranking-newsletter-editor-2017-05-03)

Opinion: Millennials are making the same dumb investing mistakes their parents did (http://www.marketwatch.com/story/millennials-are-making-the-same-dumb-investing-mistakes-their-parents-did-2017-07-11)

-Ryan Vlastelica; 415-439-6400; AskNewswires@dowjones.com

 

(END) Dow Jones Newswires

09-26-17 1532ET

Copyright (c) 2017 Dow Jones & Company, Inc.

©2017 Morningstar Advisor. All right reserved.