Getting older is a curious phenomenon. For instance, I have a hard time remembering what I had for lunch, but I can clearly remember a presentation I heard back in 1991 by Joe Nocera. Readers of financial literature (now there's an oxymoron) will know Nocera as a columnist for The New York Times, Fortune magazine and Bloomberg News, as well as the author of numerous financial books.
Back in the day, the editors of Worth magazine asked him to make the trip up to Boston to talk to us about our baby boom generation. At the time, this group was getting much attention from the financial services industry (think today's millennials).
Back then, we baby boomers were widely considered by the generations both before us (the “Greatest Generation,” which won World War II) and after us (Generation X, which resented that our large numbers made us the center of, well, just about everything) as a bunch of pot-smoking slackers whose idea of financial planning was to spend money faster than we could earn it. (Let me just state for the record that while I may have taken a toke or two, I never inhaled.)
Nocera's message is memorable, even to this day: While we were, in fact, a generation of drug-addled spendthrifts, “it wasn't our fault.” Many of us had been saying this for years, but, of course, nobody listened. However, rather than repeating our lame excuses, Nocera had a well-reasoned theory based on history, psychology and economics.
I was reminded of Nocera's talk by two recent articles on ThinkAdvisor.com: Michael Fischer's May 19 story, “Millennials Are Top Savers, but Not for Retirement,” and Emily Zulz's June 1 story, “Millennials Scarred by Financial Crisis.” Both articles address the financial attitudes of the next generation coming into its financial prime, and Nocera's theory about boomers can be very instructive for advisors trying to understand today's millennials.
A Little History
Younger readers may be aware that there was a market crash back in 1929 that made the 2008 mortgage meltdown look like a market correction. The grandparents of most of us baby boomers lived through that crash and the terrible economic depression it caused for the next 10 years. What's more, many banks and brokerage firms went bankrupt, causing depositors’ and investors’ life savings to vanish, literally overnight.
Those losses and the years of hardship they created for many, many families forever changed that generation's attitude toward financial institutions into one of deep distrust. Many never deposited or invested their earnings again, and those who did were always fearful that their money could disappear at any time.
In response, when boomers did manage to save some extra cash (often literally under their mattresses), many of them chose to invest in tangible things that they knew couldn't disappear: gold, diamonds and real estate. Most of them held on to those attitudes for the rest of their lives (which, in the case of my grandparents, was into their 90s).
So, I hear you ask, how does that earlier generation's hardship absolve my slacker generation? Nocera's point was this: Just as in other areas of psychology, people form their attitudes about money and finances from their experiences at an early age. Those attitudes tend to stay with us for life. This means the financial events that occur when we are young — either good or bad — can determine how an entire generation views money and investing.
In the case of baby boomers, that event was the hyper-inflation of the 1970s. Toward the end of that decade, inflation rates hit the double digits (10% or more every year). This meant that any cash you had would be worth 10% less next year than it was this year and 10% less again the following year.
This wreaked havoc on the stock market, as you might imagine, but it also meant that the price of stuff — cars, houses, clothes, food, bicycles, artwork, everything — went up each year. Nocera's point was that in baby boomers’ formative years, it made a lot more sense to spend money to buy things, anything, now — because tomorrow everything would cost more and your money would be worth less. We may still have been slackers, but our spendthrift ways were perfectly rational based on our economic experiences.
These formative experiences influenced our investing when we reached later stages in life. Back in the mid-’80s, we put our money into tangible assets: real estate, oil and gas, and gold. When I started my career in journalism, those were the three asset classes of what was considered a well-diversified portfolio.
Of course, with the stock market boom in the later part of that decade, we learned to buy stocks, but we’ve never lost our inclination to live in the present by buying “stuff” rather than holding on to cash.
Millennials Redefining ‘Freedom’
How does this ancient history help us understand today's millennial generation? Fischer's story tells us that a recent Merrill Edge report revealed today's millennials are significantly more interested in saving so they can “live their desired lifestyle” than boomers or Gen Xers (63% to 55%). They are also “more focused on working at their dream job” (42% versus 23%) and “traveling the world” (37% versus 21%). Aron Levine, head of Merrill Edge, noted in a statement that today's “young adults tell us they are willing to do whatever it takes to achieve freedom and flexibility, even if it means working for the rest of their lives.”
The story written by Zulz tell us why. “According to a new survey from Legg Mason Global Asset Management,” she wrote, “millennial investors in the United States reported that the financial crisis and subsequent ‘great recession’ strongly influences their investment decisions, leaving them more risk-averse than any other age group.”
In that survey, 82% of millennials said their investment decisions are influenced by the financial crisis, with 57% saying they are “strongly influenced” by it. In comparison, 39% of Gen Xers, 13% of baby boomers and 14% of those over 65 said their investment decisions are still “strongly influenced” by the tumultuous global financial events that began in 2007 and ended in 2009.
The survey also found that “78% of the surveyed millennial investors said this year they plan to take on more risk — with 45% saying ‘much more risk.’ About 66% say they are interested in investing in equities. Meanwhile, just 27% of Gen X investors plan to take on ‘much more risk.’”
Tom Hoops, executive vice president and head of business development at Legg Mason, said of millennials, “The pain their parents and grandparents experienced left an indelible impression that is only now manifesting itself as they begin to engage with the markets. They are not emulating previous generations in their investment behavior.”
What it Means for Advisors
I can't help but notice how similar today's millennials are to both my Depression Era grandparents and baby boomers back in the 1980s. They’ve lived through a major financial crisis, and their confidence in the financial system is quite low. To compensate, they’ve adopted a live-for-today lifestyle and a low-risk approach to their finances. They may talk about taking more risk, but based on history, the chances of that kind of psychological overhaul aren't good.
Consequently, financial advisors are going to have to adopt some of the strategies from the ’80s to reach this generation. That's when financial planning flourished, “life-planning” was born, and James Schwartz wrote “Enough: A Guide to Reclaiming Your American Dream.”
With millennials’ deep-seated distrust of the stock market and a focus on the present, financial advisors should approach them through the things they are interested in: their jobs, their lifestyles, their avocations and their desire to position their children to enjoy their lives, as well.
This is a very different conversation than most financial advisors are used to having. It's not about accumulating money. It's about how much money they need to live the lives they want — and finding the most satisfying jobs and the lowest-risk investments to attain it. It's my guess that these millennials will drive a resurgence in both financial planning and life planning, which will last, well, a generation.
--- Read Industry Needs to ‘Modernize’ to Accept Smaller Investors: Schwab on ThinkAdvisor.