Crisis-Scarred Millennials Snub Stocks

Wall Street may have recovered from the financial crisis, but the scars are ever-present, at least for one generation.

Millennials – Americans born after 1980 – have sustained painful financial blows that could forever shape their investing mindset.

A study from investment bank UBS (NYSE:UBS) performed during the first quarter shows Millennials are just about as financially conservative as the World War II generation. That group of Americans, who are currently 68 and older, either directly experienced, or felt the repercussions of, the Great Depression.

“This is remarkable given the impact the Great Depression had on the WWII generation and speaks to the potential permanent scarring that 2008 had on the Millennial investor,” UBS said in the research note.

Echoing that sentiment, Peter Boockvar, chief market analyst at The Lindsey Group, an economic advisory based in Washington, D.C., said “for many, two awful bear markets in 15 years stays in the psyche.” He added that “Millennials are dealing with student debts, high rents, (and a) challenging labor market.”

Unlike the older Generation X and Baby Boomers, the Great Recession struck just as Millennials were entering the workforce. In addition to scary newspaper headlines, it led to widespread unemployment, which has morphed into under-employment, according to a slew of studies. On top of that, many Millennials also remember the dotcom boom and bust that sent the Nasdaq skyrocketing and then collapsing in the early 2000s.

“We’re in this ironic position where the [S&P 500] is near all-time highs and yet it’s not cool to be in the stock market,” said Michael Block, chief strategist at Rhino Trading Partners, a boutique equity research and investment firm based in New York.  He added that he thinks over the next three to five years, the mindset among Millennials could change, which “will give markets some oomph.”

Boockvar shared Block’s position, saying “this is what happens after bubbles pop; it takes a while for people to get the confidence back to step back in. A better economy, though, can more quickly cure that.”

Skittish Millennials Avoid Stocks, Hoard Cash

Still, a review of several studies shows what could be an alarming level of wariness toward investing among a group that represents about 27% of the adult U.S. population.

Millennials, for example, hold 52% of their assets in cash, and only 28% in equities, on average, according to UBS. Strikingly, even older and more affluent Millennials with $100,000 in assets have an average cash allocation of 42%. That compares to 23% in cash and 46% in stocks across other generations. Moreover, a Gallup poll indicates only 27% of 18-to-29-year olds hold any stock at all, according to Bloomberg News.

The financial conservatism has led to a curious mindset among the group. UBS says 69% of Millennials they surveyed said they plan on succeeding by working hard, compared to 51% across other generations. Inversely, only 28% said they would achieve financial success through long-term investing, compared to 52% in other generations. They also broadly plan on relying on spouses, partners, and family members for financial advice, as opposed to traditional financial advisors.

While Millennials are financially conservative, they appear to be eternally optimistic. A Pew Research Center survey from February shows 67% of Millennials feel like they don’t earn enough to lead they life they would like, but 79% of that group believes they will in the future. That’s a higher rate of optimism than any of their peers.

Big Dreams, Big Hurdles

While Millennials might have big financial dreams, generating long-term wealth could be a challenge.

That’s because a key to long-term financial planning is investing the most aggressively at a young age. Cash stored in a bank account provides essentially no returns. Meanwhile, safe-haven assets like Treasury bonds yield low, or sometimes even negative, interest rates when adjusting for inflation. The problem is amplified in an environment where the Federal Reserve is putting strong downward pressure on interest rates.

Riskier stocks, on the flip side, tend to perform well over time, even if crises put short-term pressure on stocks. An investing term called “compounding” adds to the power of long-term investments.

For example, if an investor put $10,000 into various investments that yield 6% per year on average, the portfolio will be worth $30,627 by the time he turns 40, and $102,857 by the time he turns 60, assuming he reinvests the returns, according to a calculation by asset manager Vanguard.

That rate of return could actually be conservative when examining historical trends.  Indeed, average annual S&P 500 returns from 2004 to 2013 were 9.1%, according to a calculation from New York University’s Stern School of Business. Looking at the longer term, from 1964 to 2013, average returns came in at 11.3%, and from 1928 to 2013 they were 11.5%.