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Millennial Investors May Not Be so Different

Christine Benz

Note: This video is one of several interviews that Morningstar director of personal finance Christine Benz had with Vanguard officials at this year's Bogleheads event. See all of the interviews here.

Christine Benz: Hi, I'm Christine Benz from The investing behavior of millennials has been a topic of some debate. Joining me to discuss some Vanguard research on the topic is Jean Young, she's a senior research associate with the Vanguard Center for Investor Research.

Jean, thank you so much for being here.

Jean Young: Thank you for having me.

Benz: Jean, one thing that we started to hear a lot about was in the wake of the financial crisis that millennials, younger investors were not taking risk in their portfolios. They were steering clear of equities. Is that born out by the data that Vanguard has on hand?

Young: The answer to that's really yes and no. I want to take a step back though and there is this focus on millennials, but younger cohorts of investors have always surveyed more risk averse. They've very often taken more conservative positions than their age and their time horizon might suggest. As we look at the millennials that are investing directly with Vanguard, we find there is a lot of them that have very strong equity allocation. They are in the 90% band, and then there is a group of them, about a quarter, who are taking more conservative stances with lower equity allocations. Equity allocations below 50% and then there are, a significant amount of them, about 20% of the total millennial population, has no equity exposure.

Benz: Let's talk about that, the low equity or no equity millennials. They have long time horizons so assuming that this is money for retirement they probably should have significant equity stakes. I know it's hard to generalize about a whole population, but do you have any thoughts on what could be going on there?

Young: You are right. The assumption that they are saving for retirement in their direct investments with Vanguard would be a big assumption. Some of them are probably reacting to the recession and the tech bubble. Now those were two seminal events that would have impacted them personally, it would have had a big impact.

Benz: They might have seen their parents go through some stress.

Young: That's right. So, they would have experienced that directly. On the other hand the behavior could be perfectly appropriate. They could be accumulating their liquid reserves …

Benz: To buy a house or something like that …

Young: They could be saving for a house. Some of them appear to be too conservative. We used to see that in the 401(k) data as well. The equity allocations by age were sort of like a frown whereas they should be more like declining line. Now we fixed that in 401(k) plans largely through target-date funds. But we are seeing some of that for some younger investors that choose to invest directly with Vanguard.

Benz: Let's talk about the other age bands that you examined, slightly older investors, baby boomers and then what Vanguard calls the silent generation. Let's talk about those two age bands. I'd also like to hear about the roots of that term, the silent generation.

Young: We pick up these monikers from the popular press or whatever. We actually use the bands that Pew identifies, and Pew has done the most work around these generational cohorts and their characteristics. Now, what's interesting is if you look at the equity allocations for the silent generation and the boomers, they are higher than you might expect them to be because certainly many of those folks aren’t working anymore. The equity allocation should be getting more conservative. But the folks that are investing directly with Vanguard have higher equity allocation. 

Now for the silent generation it could be a function of the fact that many of those individuals have that traditional defined benefit pension. They can afford to take more risk. For the boomers and the silent generation they've certainly participated in equity markets for a long time. They are comfortable with these higher equity allocations. That's sort of interesting, the young people are lower than maybe we think they should be, and the older people are higher than rational economic models might suggest.

Benz: Jean interesting research. Thank you so much for being here to share it with us.

Young: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz from