Much as the Great Depression spawned an entire generation of skeptical and conservative investors, the current financial crisis could have a similar effect on the financial tendencies of today's "Millennial" generation.
Much as the Great Depression spawned an entire generation of skeptical and conservative investors, the current financial crisis could have a similar effect on the financial tendencies of today's "Millennial" generation.
Advisers say the behavior of younger investors, specifically those between 25 and 34, is slowly starting to change. Many are getting more conservative with their money, opting for secure investments that preserve their wealth — and at the same time placing a greater emphasis on avoiding debt whenever possible.
"This generation — my generation — may end up thinking and acting a lot like our grandparents," said Thomas Cloud Jr., a financial planner at Eleven Two Fund Management in Marietta, Ga., a fee-only service.
"This could well be a generation that only buys what it can afford, and focuses on saving more than anything else," he said.
FIRST MARKET MELTDOWN
It's a logical progression for these younger investors, many of whom have just experienced their first market meltdown.
Coming off 2008, in which U.S. stock markets declined by roughly 40%, some younger investors are rejecting the "equity culture" that many of their baby boomer parents have embraced for years, Mr. Cloud said.
Some of his younger clients have also begun paying off debt — whether from credit cards or auto loans — because they're now viewing interest rates as just another form of negative investment returns.
"They have found out, in a major way, just how much loss and how much risk they can really tolerate," said Matthew Kelley, 33, president and chief executive of GMW Financial Planning in Boulder, Colo., which manages $20 million in assets. "And that will stick with them for a long time."
That's prompting some of Mr. Kelley's younger clients, to dial down on the equity exposure in their portfolios in favor of more fixed-income-oriented vehicles or cash.
Even though he has suggested that his younger clients may want to be more aggressive right now because equities are trading at such low levels, some of his Millennials are going the other way. "They'd rather save more and invest with a modest level of risk — even if they have 30 or 40 years to absorb the risks they take when they're young," Mr. Kelley said.
He and Mr. Cloud noted that many individuals who experienced the stock market crash of 1929 and grew up during the Depression swore off of stocks and never again returned to the markets. They preferred — and many still do — low-yielding, standard bank deposit vehicles over anything that possessed the slightest hint of risk.
"Their investment decisions were driven almost entirely by avoiding the unknown," Mr. Cloud said.
It's unlikely that today's Millennials will be that gun-shy. But as they attempt to reduce their debt and save more, investment products that offer more predictability and less volatility could have considerable appeal, said Paul Ballew, senior vice president of customer insights and analytics at Nationwide Mutual Insurance Co. in Columbus, Ohio.
MORE DISCERNING
"We've asked this generation to be more responsible for their day-to-day finances and their long-term needs in retirement than any other generation before them," said Mr. Ballew, a former economist with the Federal Reserve.
"And now they may be in a position where it could take up to a decade before they've fully recovered from the losses that they sustained over the last 18 months."
Another byproduct of the market meltdown, Mr. Ballew added, is that younger investors are becoming more discerning about the financial services firms that they rely on to invest their assets.
As some of the country's largest banks, brokerages and insurance companies have fallen in recent months, Millennials will be likely to "unbundle" their investments to keep from being too heavily concentrated with any one financial provider.
"There's certainly a higher level of suspicion now, and younger investors are less comfortable having all of their assets with just one financial institution," said Mr. Ballew, who added that younger investors will likely demand more disclosures and transparency from financial institutions as well.
E-mail Mark Bruno at mbruno@investmentnews.com.
