By Austin Hooe
We know that Millennials, people between the ages of 18 and 34, vary from other generations in things ranging from global outlooks to food preferences (avocado toast, anyone?). Millennials are also a unique generation when it comes to financial habits.
For example, the motivations behind saving are different for Millennials. While many investors build their funds for their retirement or an inheritance, 29 percent of Millennials plan to use their returns to support work that they enjoy. The desire for purpose and autonomy is often cited as a major driver of Millennial decisions.
How do these kinds of economic preferences affect saving and investing preferences? Let’s take a look at four financial traits of Millennials.
Millennials Aren’t Thinking About Retirement
Millennials, Baby Boomers, and Gen-Xers have varying investment goals. This is logical. After all, preferences and priorities tend to change at different stages of life. It is rare to find Millennials who are investing in health savings accounts. Similarly, you will not find many Baby Boomers saving to pay off student loan debt.
BMO Wealth Management released a report outlining some of these differences in investment reasons.
Source: BMO Wealth Management
According to the report, just 47 percent of Millennials responded that their main financial goal is to save for retirement. 64 percent of Baby Boomers are focused on saving for retirement. The generation now approaching retirement age, Generation X, saves the most for retirement funds.
This result about Millennials matches data about investing patterns. According to a report published by Morgan Stanley, just one-third of Millennial investors contribute to a 401(k).
The data suggest that Millennials are more focused on short-term goals like saving for a holiday abroad. 21 percent of Millennials are saving for these kinds of short-term goals. Meanwhile, only 13 percent of Baby Boomers are saving for a vacation or immediate expense.
What are the reasons for these short-term preferences of Millennials? There are many theories about these trends. One idea is that Millennials tend to be utilitarians who do not have large living expenses. Millennials tend not to have expensive cars and large homes. Baby Boomers are large consumers of sports cars, luxury SUVs, and homes with plenty of square footage.
With fewer major expenses, it is possible that Millennials just do not expect to need large long-term investment accounts.
Millennials Tend Not to Look at the Long-Run
Millennials seem to have adopted Lord Keynes’ philosophy of “in the long-run, we are all dead.” Just 32 percent of Millennials use a buy and hold strategy for investing.
The buy and hold strategy is designed to maximize returns by reducing brokerage fees and increasing opportunities for growth. This is a tried and tested way of growing wealth recommended by finance gurus like Warren Buffett and Jim Vogel. Why are Millennials buying into the strategy?
To be fair, just 43 percent of Baby Boomers use a buy and hold strategy as soon as they come across extra cash. The majority of Millennials who do not use a buy and hold strategy use a “save first, decide later” strategy. Perhaps they are just unsure about upcoming expenses. Interestingly, 21 percent of Baby Boomers use an identical strategy.
It is possible that an uncertain future makes people cautious about using the buy and hold strategy that works well for the most affluent investors.
Millennials Invest in Stock Alternatives
LendEDU surveyed 1,000 Americans to discover where they would put their money after being gifted $10,000. Since Millennials hold an average student loan debt of $33,000 debt, you may expect that young people would pay off their debt. Interestingly, just 22 percent of Millennials stated that they would use the $10,000 to pay off debt.
A large portion of Millennials would use the gift to invest in alternative assets. 15.1 percent of Millennials would invest in real estate. 9.2 percent of Millennials stated that they would invest in cryptocurrency. Not surprisingly, 76 percent of those respondents said they would buy bitcoin.
Millennials Are Cautious
A T. Rowe Price survey from 2015 revealed that 75 percent of Millennials track their expenses carefully. When you compare this to Baby Boomers’ 64 percent, we reach an interesting question. Why are Millennials so afraid of market losses?
Millennials may be cautious investors because they first entered the workforce during and after the Great Recession. Opportunities were scarce, and wealth was hardly guaranteed. To reduce losses, Millennials rarely day trade or invest in get-rich-quick schemes.
Millennials frequently use low-fee microsavings and investment services like Acorns and Albert to earn stable returns on their income while maintaining liquidity. People between the ages of 18 and 34 are also likely to have highly diversified portfolios. 11 percent of Millennial assets are invested in precious metals to hedge against stock market downturns. Millennials are also heavily invested in real estate markets.
It is unclear if their financial habits will last over their lifetimes, but Millennials are proving to have unconventional preferences. From putting off retirement savings to risk-aversion preferences, Millennial behaviors will be interesting to watch over the years.
Austin Hooe is a writer of topics in economics, finance, and everything in between. A data-driven optimist, Austin is always looking for ways to use statistics and the social sciences to make the world a better place. He received his Bachelor of Science in economics from George Mason University.