Imagine that at 28 you just bagged the biggest bonus of your career and are wondering where to splurge. Add a second car to your collection? Maybe finally grab that Rolex Yacht Master that’s been teasing you in the mall? Or book that ticket to Ibiza for a sun-soaked beach adventure in the Mediterranean? How about all of them – YOLO, right?
Our advice is, none of them.
Read on to find out why.
Millennials – Role, Challenges and Investing
You’re a millennial — marketing speak for the generation that was born in the 80s and 90s, witnessed the turn of the millennium, attended university during the noughties, and watched Obama get elected twice [and cringe to see Trump becoming frontrunner]. You’re empowered by technology, confident to take a stand on social and environmental issues, fickle when it comes to brand loyalty, and value spending on experiences more than saving up. Companies spend billions to know what you think about them, and governments are wary of your collective power.
You’re also a generation that has it more difficult than the ones before. You witnessed the financial meltdown of 2008 while in university, and immediately felt its impact when you graduated to a recessionary job market. The UK’s Institute for Fiscal Studies reported that the average income for 20-30 year olds in 2016 was eight percent lower than 2008 levels.
The idea of investing for a secure retirement looks bleak when rent and climbing student debt take up almost half your disposable income. Widespread distrust of the financial system further makes you wary of wealth managers making risky plays with your money. Faced with complex investment ideas, going to Ibiza for a holiday seems like the best way out.
Yet, you need to stop delaying your investing plans today and take concrete steps.
Millennials’ Earnings Potential and the Necessity of Financial Planning
While most millennials would be happy with adopting the save-and-budget approach, such a conservative policy brings only limited gains to an already limited base. A report by The Guardian revealed that between 1979 and 2010, pensioners in the UK saw a 62 percent average growth in their disposable incomes, compared with a negative two percent growth for young adults aged 25-29 in the same period.
Still, global cohorts of millennials command a collective spending power of nearly $3 trillion (approx. £2 trillion) as of 2015, and are well on their way to achieving $8 trillion (approx. £5.5 trillion) by 2025.
That’s a lot of cash in hand. And by the looks of it, cash-in-hand it is likely to remain for the most part:
Source: Private Banker International
Cash provides flexibility other investment tools cannot match, but generates lower returns than stocks and bonds — a fundamental principle ‘Investment 101’ courses keep drilling in. Here’s a look at how cash holdings performed for their investors, compared to stocks and bonds after accounting for inflation and taxes.
Across the globe, financial advisers recommend building up a balanced portfolio of different asset classes (i.e. GILTS, corporate bonds, stocks, etc.) to reduce volatility as an alternative to holding large cash reserves. As a young millennial investor, it’s time to flip out the calculator and crunch numbers to define your optimal cash requirements.
Financial Planning Can Help You Manage Risks
The best things in life are unexpected. Well, not quite.
Planning for the unexpected situations life throws your way is essential. One way is to begin investing now and save up for an emergency fund.
Millennials face more financial risks than previous generations. The average UK graduate can expect to rack up £35,000 – £40,000 for a three-year course, exclusive of interest. A degree is the price for entry into a decent company, yet monthly payments continue to stress graduates the most.
Layoffs continue as companies face the prospect of lower growth over the next few years. Tata Steel, IBM, Oracle, and others have recently culled thousands of jobs across the UK. As an employee in a volatile job market, having an emergency fund and savings invested in the right portfolio can soften the blow and help you reorganise without fear of falling back on rent and other basics.
Tip – our recent piece on Income Protection (IP) Insurance provides invaluable insight regarding how you can secure an income in the wake of employment calamity.
Investing Means Lifestyle Changes
Investment in today’s crippled economy requires making hard decisions with big payoffs that aren’t visible until several years later. This makes it easier to delay making those decisions, particularly when they involve important lifestyle changes.
Living by (or even below) your means early on can save you a few hundred quid a month that could be crucial in protecting you from dire prospects after retirement. Let go of the season-tickets for football matches, reduce your weekly night-outs to the pub, and travel by public transport as much as you can. Stay clear of piling debt on your credit card, and fight back the urge to buy the latest collection from ASOS. While we do not recommend adopting an extremely ascetic approach, small changes to reduce your daily expenses will get you into investing mode without the feeling of missing out [aka FOMO] on enjoying your best years.
The graph below shows where most of the UK’s millennials are spending their disposable income as recently as January 2016. If this chart reflects your spending habits, it is time to call your financial advisor.
Investing Today Will Save You More in the Long-Run
Let’s crunch numbers to show how much delaying investing will actually cost you.
Consider a 28 year old investor who earns £40,000 and receives 2% annual raises. This investor can accumulate £1 million by the age of 67, assuming he invests 11% annually and earns 6% on his investments. If he waits until 38 to begin investing, his required annual savings target to reach the seven-figure mark peaks to 17.5%. That’s a whole £100,000 more that he would need to contribute to the retirement account because of delaying investing till “the time was right”.
The magic of compound interest works in mysterious ways to ensure that smaller investments made over a longer period of time can still contribute a higher output compared to later, larger investments.
How Millennials Will Invest in the Future
Investment funds understand that Millennials are different from the unquestioning and somewhat one-dimensional clients of previous generations. They value ethics, good corporate governance and evaluate the social impact of their decisions. To woo this socially responsible investor, firms are devising newer products that provide healthy returns along with environmental or social benefits, a trend called ‘Impact Investing’.
A Morgan Stanley survey found that Millennials “were twice as likely to invest in portfolio or individual companies that seek to have positive environmental or social impacts.” According to the Social Investment Taskforce Report of 2014, there is an estimated funding gap of between £300 million and £1 billion among organisations falling under the ‘impact investment’ market in the UK, with a considerable portion of demand originating from London. In the US, the market is expected to grow to $1 trillion by 2020, according to a JP Morgan forecast.
On the other hand, Millennials complaining about small savings as the reason for falling behind in their investment plans now have an offer they can’t refuse. The evolution of artificial intelligence has brought a new kind of wealth advisor that doesn’t charge as much as the traditional kind, nor asks you to start with a hefty minimum balance.
Firms such as Betterment, Charles Schwab and Nutmeg have introduced “robo-advisers” which are the new wealth managers of the future. Anyone can easily set up an account after answering questions about his/her investment aspirations and risk appetite. Millennials’ openness to technology adoption makes this an excellent option as your wealth portfolio is easily accessible on your smartphone – providing you transparency and flexibility with your money. (Also see our article on artificial intelligence in financial services.)
The financial services industry has evolved considerably to offer Millennials products that match their initially low investment base. Moreover, the industry has matured since the 2008 recession, while regulatory oversight ensures less risky plays with your hard-earned money.
We at Holborn Assets know much about cash, Millennials and investments. We understand that to invest means to take on reasonable risk. Our financial consultants are equipped with countless years of global market experience to advise you on an investment package that best suits your lifestyle and future plans. Save right; get in touch with Holborn Assets today!