Millennials Are Risk Averse and Hoarding Cash

The young and the restless aren't that way anymore. The latest generational studies show that millennials are increasingly risk averse, hoarding cash instead of making investments, even more than older generations. That comes as a surprise, as traditionally older generations tend to be more averse to risk.

In research that stretches from ages 25 to 74, BlackRock’s Global Investor Pulse Survey looks at all but the youngest millennials (ages 25 to 35), plus Generation X (ages 36 to 51), the baby boomers (ages 52 to 70), and the youngest members of the Silent Generation (ages 71 to 74). 

The BlackRock findings reveal that while 59% of millennials have started saving for their retirement, they are reluctant to actually invest their savings. This is likely not good news for their future, as it means they're shutting themselves off from the historically higher returns investments yield long-term over cash and also squandering the compounding advantage of starting retirement planning earlier in life. 

BlackRock researchers report that, on average, Americans hold 58% of their assets in cash. That number is 65% for millennials, a slight drop compared to 69% recorded in 2016, but decidedly higher than the cash allocation recorded for other age groups – Generation X (59%), baby boomers (54%) and the Silent Generation (47%).

Another survey, the Global Investment Survey, conducted by Legg Mason, also uncovered an increasingly risk-averse mentality among millennials. It found that 85% of millennials considered themselves “conservative” when it came to risk tolerance, while a majority subset of that group pegged themselves as “very conservative.” By contrast, fewer than a third of baby boomers surveyed reported themselves as very conservative investors.

This diminished risk appetite is reflected in the investing patterns among young people. The Legg Mason survey shows that only 15% of the millennial portfolio on an average is invested in equities, a sharp contrast to 24% for the baby boomers – an older group that's supposed to be averse to equities due to being near retirement or already retired.

In a world where one in three millennials in the U.S. continues to live with their parents, it would seem that what's holding back investing might be financial constraints such as student debt or lack of capital to invest. But the reluctance seems to go deeper.

Another big factor keeping millennials out of the stock market and other investment vehicles is the long emotional tail of the 2008 global Financial crisis. Four in five millennials in the Legg Mason survey admitted to the crisis still influencing their investment decisions, while 57% felt that it plays a role in their decision-making process. That exceeds the 39% of Generation Xers or 13% of the baby boomers who felt similarly.

“Given the scale of economic carnage that many young investors witnessed firsthand in their own lives and those of their families – and the degree to which attitudes are shaped in late adolescence and early adulthood – this isn’t entirely surprising,” the Legg Mason report says.

Money lying idle in bank accounts is earning low interest. Despite the Federal Reserve’s rate hikes, banks are yet to pass on much of the increased rates to deposit customers.

A look back at history shows that during the Great Depression, people literally stored their money under their mattresses. It was considered safer than putting in a bank in those days, before FDIC protection for bank deposits, which was created in 1933. The millennial generation of recession babies probably doesn't save under their mattresses, but the emotional underpinnings aren't that different. 

Having witnessed the severity of the financial crisis, millennials have yet to regain trust in investing money and prefer to hold it in cash. But the safe approach actually might be just the opposite if you're young and have years to build up your retirement kitty. “Forgoing returns in the interest of 'safety' simply won’t deliver the returns you need to achieve your long-term goals. In fact, it would take a U.S. investor 35 years to double his or her money in cash, assuming a long-term expected return of 2%,” says Rob Kapito, president and director, BlackRock.

But does that matter to millennials? Apparently not, according to this research by Merrill Edge, which suggests that the FOMO (Fear of Missing Out) attitude of millennials would have them choose to set aside money for their desired lifestyle than save for retirement. With 59% of them already saving for that future, that conclusion may not be entirely fair. But it does speak to a need for the newest generation of American adults to find advisors they trust – human or robo – who can help them map their own path forward. 

To explore this topic further, see New Help for the Millennial Money Dilemma.