Are Millennials Afraid Of Risk?
From October 2007 to March 2009 equities lost a sobering 54% of their value.
Many millennials were just getting started in their careers during this time, and many more were still in college watching the horror show from the proverbial on-deck circle.
A recent report from Vanguard shows how the 2007 to 2009 recession is still affecting millennials today.
Vanguard looked at risk taking from across generations by quantifying the percentage of equities in portfolios. There were some some surprises.
As a whole millennials have about 90% in equities, which is in line with most recommendations. However when you look deeper into the data something interesting emerges.
Millennials who started investing after the financial crisis of 2007 – 2009 are more than twice as likely to hold no equities in their portfolio.
Additionally, that same group is way less likely to have 100% of their portfolio invested in equities (14%) as compared to the millennials who had money invested before the recession (33%).
So let’s dig into the psychology here. According to Vanguard:
Memories of the financial crisis may make many
millennials more reluctant to take on market risk due
to heightened fears of market losses. For that group—
millennials who opened accounts after the crisis began—
market risk is more salient than potential return. For
millennials who began investing at Vanguard before
the crisis, the opposite seems true.
Hmmm…. on the surface this seems plausible. If you started investing after a recent horrific crash you’re likely going to be more skittish of the market.
But is it logical? The ones who were invested during the crash had real cash-money in the markets. And lost real cash-money! They had skin in the game and surely the plunge was more traumatic for them.
They saw their net worth take a huge dive, as I did. For me it was the second go-round in that rodeo, I experienced the tech crash of 2000 when I was a relatively new investor. I held steady.
For millennials who were still in college and perhaps just watching it on CNBC with no money invested, I’m not convinced it would have affected them the same way.
Am I missing something here?
I’m inclined to think that if you have money evaporating before your eyes during a crash – to the tune of seeing your portfolio chopped in half – you would be more hesitant to embrace equities going forward than a group who didn’t experience the same thing.
The Trauma Was Real
It Didn’t Come To This For Me But For Some It Might Have
Having been through two huge crashes with substantial money invested in each I can I assure you there is a certain trauma in watching your hard earned money shrink before your eyes. But for me, the trauma was way more real during the tech crash of 2000 than the recession of 2007 – 2009.
Why?
In 2000 I was just getting started in my investment career. Even though I had way less money invested, I had more to lose in my mind. Back then $100,000 was a butt-load of money.
Not that it isn’t now, but when I was still in my twenties it was kind of the equivalent of a million dollars to me. I grew up in the hood in Baltimore, $100,000 was kind of hard to wrap my mind around.
When I reached $100,000 in net worth, it was kind of that first milestone on the path to real wealth. We as humans like even numbers.
By the time the 2007-2009 crash happened, I had wisdom. Sure, I also had a lot more money invested, so on paper my net worth went down by a far larger amount than in the 2000 crash.
But I was wiser and had refined my patience and risk tolerance in the seven years since the tech crash.
Perhaps what the Vanguard report shows is the millennials who were invested before the 2007-09 crash and stuck with it now have the tolerance and patience to be comfortable with more risk. So they’re sticking with equities at a higher rate.
They saw the amazing market recovery starting in 2010 and now realize that what goes down comes back up.
What do you think of this report financial warriors? If you’re a millennial, were you invested during the 2007-09 crash and how did it affect your strategy afterward?
Great post! I’m technically a millennial, but I wasn’t invested in the stock market at the time so I still haven’t really experienced a sharp downturn first hand. Sure I saw it on the news and online. But I don’t think it hit home for me in the same way as it would if I had money in the game.
Thanks for the kudos!
It is interesting that millennials are more gun shy now after the 2009 recession even though as you mentioned they didn’t have much skin in the game at the time. Perhaps they saw what it did to the older generations and with all the media coverage and it got ingrained. The spread of information is a lot quicker and more pervasive than before so every thing gets magnified.
The next generation up may have a different view of investing as they likely only have heard about this amazing bull run we have been experiencing. They might therefore be a bit too aggressive thinking that all one can do is win in the stock market.
Excellent point about the spread of information, and about the next generation. Or perhaps the downturn will come before they can even get in…
Speaking as a millennial, I can say for me it adjusted my expectations of what life could offer me. I personally received rejections from 25-30 firms over the period of a year when finishing graduate school. I exceeded the qualifications for most of the positions or met the required experience and skills for the positions. I didn’t reach on any of the applications. Many of my friends went through the same ordeal coming out of college. Companies just didn’t have the appetite to hire.
I had to move home and live with my parents but accepted a good position after ~6 months of unemployment. I saw the job market was weak and how it affected my life. My salary offer was below average and I had little leverage in the negotiations. I attempted to ask for more and received very little extra because so many people were looking for positions. This lower salary affects my career-earnings trajectory and results in lost lifetime earnings. One Federal Reserve study recently pegged the recession’s average per capita impact as $70,000 in lost lifetime earnings.
My skin in the game was fairly minimal at the time but I could see how my parents had to make some life changes like delaying retirement for fear of withdrawing funds at the bottom of the recession. They managed to come through just fine but the family certainly tightened its belt during the depths of the recession.
Wow, that’s a lot of rejections. I also graduated college during a recession in the early 90’s and was lucky to land a job, but the pay was also low.
it’s funny how some people are worried about losing 10% of their investment in a stock or ETF but will gladly borrow 10x their salary to buy somewhere to live in.
Risk runs both ways – but perception of risk is very bad for most people.
They’ll also pay and extra 10% for an item by putting it on their credit card and paying interest!
Debt and compound interest are a terrible drag to borrowers
Kids these days…. they scare so easily. I held on to the little stock I had at the time as a college student. I also kept investing and keep a very high equity allocation in my non-real estate portfolio.
That’s why you’re on MSN Money!
i’m not a millennial but i play one on tv. i heartily agree with you that it hurts terribly the 1st time and with less money accumulated. we put our first real money in the markets around 2005 and the amount was pretty small compared to 13 years later. it “felt” terrible though, watching the indices plummet, but we stayed the course and in reality that recession got us to financial independence. we were lucky enough to stay employed during the crisis and invested very heavily at the bottom, even increasing the contributions. now when one of my major holdings takes a 20% correction i just wait for it to come back.
i saw you on the tele freddy and you play a helluva millennial – nice beard!
i got beard oil. makes it nice.
To be honest, I think Vanguard might be right. The fear of punishment can be greater than the punishment itself. Those who lost money, know that they can eventually recover. Those who didn’t, don’t know what they don’t know. The unknown can be scary.
Great point, having lost and then recovered builds resolve
At 40, I really don’t think of myself as a millennial, and technically I’m not (1980 – 2000 right?), but I was invested pretty heavily in 2007 when things started going crazy. I remember being legitimately scared about things, and there was definitely a lot of pain seeing those account balances drop, but at the same time, I remember wishing I had more cash on hand to take advantage of all the great buying opportunities. So many stock prices were crushed and the companies behind them were still very solid. One example was Macys. I bought 100 shares for around $8 and I think I sold at $21 a few years later. I would have bought many more shares of that and other companies (and market ETFs!) if I just had the funds on hand.
A good reminder in times like these when the cash on the sidelines isn’t doing anything. It still may make sense to keep it there as “dry powder” for when everyone else starts selling and you can take advantage of the fire sale.
Nice score on Macy’s, and now they’re dying with other brick and mortar. I’m building more dry powder now!
I am 2 years older than you, and I had the same attitude. I had a tip off from a friend that the crash was coming. He saw where housing values were, and that convinced us both it was coming. What did we do, nothing, because who can time such a thing. Since I knew the market would come back, and likely up and down a few times before I retired, all I saw was a buying opportunity. Once the crash happened, I moved my emergency fund into the market, and smiled. It wasn’t much, as I was only a few years out of the military then, and did not have much money. I can hardly imagine that earned less than $80,000 total for 4 years military service, and I was a officer! Anyway, what I had was happy to risk, and I was rewarded.
I’m one of the oldest in the Millennial generation and I find this applies to me. I was already solidly in my career and invested in the stock market when the crash occurred. I started just filing away my 401k statements without looking at them for awhile, as every time I looked at them I felt sick and wanted to stop investing and pull my money from the market…even though I knew that was illogical and the market would likely recover. Fortunately, I did stay the course and that has definitely paid off. I think when the next crash happens, I won’t fret about it as much. I also think 2008 made me even more debt-averse and conscious of keeping monthly expenses low. Seeing talented people lose their jobs and struggle to find a job, lose their homes, etc is definitely an eye opener.
Yep, I sometimes played the “just don’t look” game 🙂
I think the real problem was the job market. It was hard to find a good job. If you don’t have good income, you become much more afraid of risk.
I went through the tech bubble too. Having gone through it once and seeing the market recovered really helped. I knew it’d come back so I wasn’t afraid of investing in equity and piling more money into it. You gain a ton of experience by going through the cycle. Investors who never went through a big crash are going to feel the pain when the next recession hits.
I think Joe is on to something here. Not being able to find a job may have been a bigger factor than the drop in the market itself. I see in the table that the median age of the first group is 32 and the group not invested as much is 30. Not much difference. The difference is when they started investing, which like Joe is saying, may be late because this group didn’t find work. That might mean they got scared of the job market or….could it mean that this is the less employable, not as smart group that were out of work longer? And less able to understand long term investing?
Joe is always on to things 🙂
“the less employable group” – ha, possibly. It’s plausible. As you said the ages are almost the same, so what else is the difference?
Great point Joe! I’m sure that had a TON to do with their perception of risk and how they handled things
I wonder if it’s less a sign of risk and more better financial education and behavioral modifications on the top end. Lack of investable funds on the low end? After all all in on equities is something most financial education preach against. The median is statistically insignificantly different. The 0 folks perhaps have peanuts in their portfolio?
Lack of investable funds is probably a factor, coupled with a lack of jobs to get those funds as Joe said
Fear of losing money in the stock market more often than not results in greater losses, through lost opportunity cost. Although it is painful when the market goes down, generally it moves in an upward direction long term.
Opportunity cost is a devil
Great article, and good analysis! Somehow I managed to be totally oblivious during the tech crash of 2000 – I was in the “just starting to save” mode and had this dumb blind faith that a 401(k) could only ever increase in value. I changed industries and moved to South America, leaving my 401(k) in the hands of a former employer. After a couple of years out of the country, I got online in an internet cafe and learned to my dismay that my balance was considerably tinier than I had imagined, plus the employer was forcing me to either cash out or roll it over.
For the crisis of 2007-2008, something else unusual happened for my portfolio and financial ego. The moment I heard that the FDIC had closed a single bank (a novel event, at the time), I got very skittish. That same day, I moved 100% of my 401(k) balance to a place where it would earn basically nothing but would not be subject to volatile balance fluctuations. Within a couple of years, the FDIC had closed over 400 banks. All my friends and co-workers saw their 401(k) accounts get gutted during that time.
And I was left with the (completely wrong) sense that I was capable of market timing! So, since then, I’ve had 3 more instances where I would get skittish and yank everything into a supposedly safe fund that earns nothing. I’d be waiting out a crash that never materialized, meanwhile losing 6 months of potential gains…then I’d move it all back (to the roulette wheel, so to speak – I choose funds with a high potential return and high potential for short-term loss). Back and forth, 3 times. It was nuts.
My outlook now is that the next downturn will be bad enough that it won’t matter what fund I’m in, so I just leave it be (high risk/high return), and periodically fantasize about putting everything into arable land or a supply of fresh water, or both.
I remember the banks closing, crazy stuff. Ha – arable land and fresh water, things we’ll always need!
Millennials are definitely scared of investing.
I haven’t been through any technically. I was still in high school during the crash being on the tail end of the Millennial cohort. But I still feel a bit insulted when older people say I haven’t seen a thing yet (regarding a crash). Im not saying it wouldn’t hurt but I came from little so its not like I haven’t seen my own share of crap.
Don’t let those old bastards put you down! You’ve read so many “stay the course” blog posts that I’m sure you’re already robotically programmed to do so 🙂
Like you, I lived through both crashes. At the time I was too busy working and making money to care. Would I now? Maybe.
Just a hunch Doc but I think you’ll be perfectly fine in the next crash (putting my Nostradamus hat on…) 🙂
“They saw the amazing market recovery starting in 2010 and now realize that what goes down comes back up.”
Yes, this is what I was thinking as the reason. During the crash, my 401(k) list value but I also kept regular investments. By 2010, I’d seen some recovery of the old money and tremendous growth of the new money.
Absent that experience, perhaps people only see the loss side of the equation and can’t imagine the upside.
Great question. analysis of an interesting part of their report. Thanks.
Thanks Drew!
Fascinating article, Accidental Fire. I’ve always feared investing because I looked at losses in the market as though they were permanent. Now that I know that a permanent loss only takes place when you sell, I feel more comfortable investing. As of now, I am more focused on paying off all my debt.
Experience and some battle scars make things easier!
Not really sure if they’re really scared of another 2008 financial crisis. Just like in stocks, there was also a bubble in real estate and I thought that was even bigger and millennials are investing in real estate. Maybe they saw that the real estate market have bounced back but then again it’s the same with the stock market. Could it be because that real estate outperformed the stock market between 2000 – 2015? One thing for sure, millennials are into research and analysis.
The real estate environment could have helped shaped perceptions for sure, great point!
Great article. From my experience reading many FIRE bloggers, I don’t see that concern. I wrote a post about that on my blog asking newer investors if they were emotionally prepared for a market crash. So many people in the FIRE movement have 90% – 100% in stocks. Many have just US stocks. It’s easy to say “I’m young, I can ride it out.” Or my favorite, “everything will be on sale.”
Those words come easy after 10 years of nirvana in stocks. It’s another thing entirely when the media frenzy is telling you the world as we know it is coming to an end (2007-2008). Or the prolonged 2 1/2 year decline int 2000.
Why would you want endure a drop of over 50% in value just because “you’re young?” No, bonds aren’t paying anything. You shouldn’t be looking to bonds for return, but for portfolio insurance. I fear that message is lost on the Millennials who have so much invested in stocks.
Ok, sermon over. Thanks for a great and thought provoking post.
Great comment Fred, how people behave during the next crash will indeed be fascinating to watch.
I was just starting my investing in ’09 (wish I could have started sooner!) and none of it really affected me. Went straight into the military and was investing from the start there. I am one that holds 100% in equities and don’t really have a fear of a next downturn. Maybe I’m a bit of an outlier among my peers?
According to the VGuard data you’re a bit of an outlier, but not too much.
Really interesting take on the whole thing! I had no money invested at the time of the crash, as I have just recently been awakened so to speak. I think I’m in the inter-generational mini generation known as “cuspers”, and so I very well should have had an investment net worth to drop. Since I have seen only growth, I’m looking at my potential for risk tolerance from an entirely theoretical standpoint. I really like to think I will handle a crash gracefully, but I know inside I will be chomping at the bit.
I’m looking at my potential for risk tolerance from an entirely theoretical standpoint.
I think that’s true for TONS of people so you’re not alone!
So, what industry are millennials killing because they’re afraid of risk?
I had investments during the 2008 fiasco. I had an old 401k that I eventually rolled over into an IRA. The worst investment I had was Prosper.com loans. At that time, you could only invest in one person (they hadn’t yet rolled out those index fund type things yet). Even the people who I invested in that had a top credit rating (AAA or something like that) ended up defaulting. I lost a bunch of money.
Today, I can’t invest in Prosper.com even if I wanted to. I live in Ohio, and sometime after I stopped using Prosper, Ohio made it so they can’t operate in the state.
I didn’t see anyone saying the millennials were killing any industry, whether they’re really afraid of risk or not. The Vanguard report is just highlighting numbers that are possibly showing a trend, possibly caused by the 07-09 recession
As a 28 year old millennial, I was in high school during the 2008 crash and in college until 2014. So, from an investment standpoint. I was unaffected. My greatest impact was to my college fund that my parents had set up for me. We ended up using saved cash for a couple years of school to allow the 529 account to rebound before withdrawing for my last couple years of school. What I have noticed among my friends is that many of them have stayed renters, vs buying a home. This trend is slowly changing as they are getting married and settling down. But most of my friends stayed renting for years after I bought my house. I was student debt free out of college and quickly wanted to save for a house. I wanted a duplex so that I could rent one half out, but my limited budget didn’t quite make it far enough for a decent duplex. I have not heard my fellow millennial talk too much about where they are investing, but judging by most of their lifestyles leads me to believe that maybe they aren’t investing much at all. I can only speak from my personal perspective which has been “We’re in a bull market, I need to invest all of my money outside of my emergency fund”
It’s gotta be tough for folks who started their careers right at or just after the crash. If it made people tepid during this incredible 8+ yr. bull market then they’ve missed out on sooo much compounding.
I’m a millennial and I had just started investing in the stock market as the crash was happening. It resulted in impressive returns that are still being realized. I am 80-90% equities and right now I am not afraid of risk because I have a high paying job and a long time horizon. I can definitely whether whatever storm happens 🙂
Nice!