Depressed wages, escalating living costs and a struggling global economy – millennials have a lot on their plates. They need investment income to support short and long-term financial aspirations. Does something have to give and is the perfect investment storm brewing?
Millennial investors have a worringly short-term outlook
Are investors expecting too much, too soon?
According to the recent Schroders Global Investor Study 2016 millennial investors (those aged 18-35) have unrealistically high income expectations, a worryingly short-term investment outlook, and many dependencies to support both now and in the future.The result could see millennials fall drastically short of their investment goals.
The Study revealed:
• Millennials demand more income (10.2%) than other investors (8.4%)
• Millennials have an extremely short-term investment outlook, with 63% holding investments for less than 2 years
• Millennials are risk averse, prioritising capital preservation and a return higher than inflation when choosing an investment
• Millennials’ income is being stretched across a wide spectrum of dependencies from supplementing salary and pension to supporting children and buying houses
Is a financial storm brewing?
It is a potentially toxic mix. We live in a world where most developed nations’ interest rates are at or below 0.5%, and, in some cases, heading lower. The average stockmarket yield is just 3.8%1.
To get the higher income they demand millennials would either need to take more risk or hold investments for a longer period in order to ride out market cycles, neither of which they seem willing to do.
The major risk is that millennials are labouring under two misapprehensions:
• Their investments will grow faster than is realistic
• The pot they ultimately do build will pay a far higher income than is likely
Compounded over a 20 or 30-year time frame, the gap is potentially huge, making the mismatches between expectation and reality identified by the Schroders Global Investor Study 2016 a cause for real concern.
Stretching incomes to the limit
To make matters worse, millennials have a far greater number of depndencies than older generations over which their income is being stretched.
Schroders Global Investor Study found the main reasons millennials invested were:
1 To supplement salary (46%)
2 To grow a portfolio (41%)
3 To supplement pension (35%)
4 To provide income for children/relatives (30%)
5 To buy something other than a home (28%)
6 To pay for a deposit for a home (26%)
7 To pay education fees (26%)
8 To pay for healthcare (22%)
The chasm that has opened up between millennials’ investment goals, their unrealistic income expectations and short-termism needs to be addressed, otherwise we could be heading for another social and economic crisis.
1. Source: FTSE, S&P 500, CAC, DAX, Shanghai, Nikkei, ASX, Hang Seng, Bovespa, Mexbol. Average forward 12-month yield across 11 indexes as at 18 May, 2016, according to Bloomberg data. ↩