Millennial Investing Habits: Balancing Risk and Returns

A recent international survey by financial advisers The deVere Group finds Millennial employees and their Baby Boomer counterparts share common ground when it comes to keeping the risk level of their investments low. Among respondents ages 18 to 30 (Millennials), 59% say risk level is the prime factor they use to choose an investment. Similarly, 62% of respondents who are in their 50s and late 60s (Baby Boomers) say the same. By contrast, only 26% of respondents who are in their 30s to late 40s (Generation X) label risk as the main factor for choosing an investment.

“Interestingly, it would appear that the investment mindset of Millennials is more aligned with that of the Baby Boomers than that of Generation Xers,” says Nigel Green, founder and CEO of The deVere Group. “Many will find this striking as traditionally risk levels between these two groups would be thought to be diametrically opposed, as the younger generation has considerably more time to reach their financial goals and would therefore be assumed to have a higher appetite for risk.”

There is a reason for this common ground, Fredrik Axsater, senior managing director and head of Global Defined Contribution at State Street Global Advisors, tells PLANSPONSOR. “Millennials have faced the financial crisis head on and saw how it affected them, as well as their parents. The lessons of the financial crisis, such as their conservative investment outlook, will live with them for a long time. Millennials have said they are more savers than spenders.”

The San Francisco-based Axsater says this is good in that younger, Millennial investors are of the mindset that they will retire when they want to retire and not be forced to by circumstances.

“An advantage to being young is that Millennials will have more time to save and recover from losses. They also are more confident than their older counterparts about their preparedness for retirement and have a high level of understanding about the factors that affect saving, such as recessions and inflation, and are learning how to apply those lessons to their portfolios,” he says.

Axsater cautions, “However, over the long term, sticking solely with conservative investments will have a significant impact on their savings in that such investments are likely to produce lower returns and income replacement than those traditionally modeled for younger investors. These lower returns, coupled with the greater longevity of participants, means it takes a greater savings rate to achieve financial goals.”

Axsater says plan sponsors should provide their younger participants with communication pieces about the advantage of saving for retirement using a long-term approach. "The content should be action-oriented and use simple language.” He adds that plan sponsors can also make online tools available that illustrate what returns an investment is expected to provide and how long it will take, given those returns, for participants to reach their financial goals.

Getting participants to engage with the plan should not be ignored, he says. To that end, in-person meetings, either in a group or one-on-one setting, can be used to prompt engagement, as well as making participants aware of the tools at their disposal. Using automatic plan features to keep participants’ investments well-diversified and age appropriate can also be helpful, says Axsater.

Axsater also recommends surveying employees, of all ages, to see what things they would like incorporated into automatic features, such as certain investment choices or risk level considerations or post-retirement income options. “Listen to participants and understand their needs,” he says.

The deVere survey polled more than 880 of its clients between the ages of 22 and 70. Respondents were based in the United States, the UK, Hong Kong, South Africa, India, the United Arab Emirates, Thailand and Indonesia.