Monday, September 1, 2014

Millennials are playing it safe, and that makes them bad investors

OK, youngsters. If Chris Evans bangs the gavel at the NYSE, will you be pumped about stock then? Getty Images

Millennials are an endless source of fascination for researchers and commentators who can't stop wondering what makes the kids different. Well, here's one answer that matters: investing makes them really, really nervous...so much so that people age 21 to 36 have more than half their savings in cash, according to a new report from the Brookings Institution.

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Source: Brookings Institution.

The issue here is that Millennials are conservative at exactly the time when they should be taking bigger risks with their money. Keeping their money in cash (a category that includes CDs and money market accounts) is the opposite of taking risks. Younger investors are often advised to put more of their investments into stocks, then gradually transition to safer things like bonds as they get older, letting the magic of compounding do its thing. Get higher returns when you're younger, and those returns work for you even when you've pulled back into lower-return investments.

According to the UBS report where Brookings got these results, millennials were also far less likely to say long-term investing would make them successful. Only 28 percent of millennials said this, compared to 52 percent of non-millennials.

Then again, there are a few reasons not to be too harsh on the kids (ahem, us kids). For one thing, one reason that Brookings cites for millennials' risk-averseness is the recession. Having seen their parents' 401(k)s sucked nearly dry by the recession, young adults may distrust investing. In addition, millennials have "high levels of mistrust" of financial institutions.

Millennials have more student debt than older generations did when they were young, so many young investors may also be busy paying down debt (not that that entirely excuses them from not investing more aggressively). And that also means many young adults may not have a lot of money leftover for putting into the stock market. But then, starting early on investing for retirement is really, really, really important. And if young adults wait too long, they will miss out on this important early period of investing.

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