Millennials prefer cash to stocks, and it could cost them millions
Millennials profess a love of money that shows their economic reluctance, while demonstrating an intolerance to risk that could cost them dearly when they stop working.
A decade into the most devastating financial crisis in nearly a century, millennials’ propensity for money security belies their need to build long-term wealth, which is best done with a combination of stocks and bonds.
Still, when it comes to how millennials actually invest their retirement savings, they embrace stocks as much as previous generations, despite what they might tell a pollster.
So the question is, why do millennials claim that money is their preferred asset when it isn’t?
The stock market is the first investment choice
A third of Americans (32%) say the stock market is the best investment for money they won’t need for a decade, according to a new Bankrate survey, while less than a quarter (24%) say that risk-free money is their first preference.
“For investment horizons longer than 10 years, the stock market is a very appropriate investment,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “The money isn’t, and especially if you’re not looking for the most competitive returns.”
It’s the first time in four years respondents were not in favor of real estate, which recorded 22% in this survey. Gold, bonds and bitcoin round out the top six, with cryptocurrencies receive only 2 percent.
Real estate is a bit down. Sales of previously owned homes fell 2.2% in June from a year earlier, according to the National Association of Realtors, despite an improving economy. New home construction and mortgage applications also fell as prices rose.
This is because the houses have increased a lot.
The median price for existing homes was $276,000 in June, according to NRA, up 5.2% over the past 12 months. Home values have increased year over year for 76 straight months. Meanwhile, the average 30-year fixed rate mortgage sits at 4.68% as of July 18, according to Bankrateagainst 4.11% a year ago.
Millennials love cash, everyone prefers stocks
Three in 10 millennials say cash is their preferred long-term investment, while each successive generation claims stocks – a third of Gen Xers, 38% of baby boomers and 44% of the silent generation.
However, the second most sought-after investment by Millennials is the stock market, while around a fifth of all others chose cash.
Millennials would lose dramatically if they acted on this bias. For simplicity, let’s say you’re a 22-year-old worker planning to retire at age 67 and you save 10% of your $50,000 salary in your 401(k).
If you have invested in a Money market funds giving 2 percent, you would end up with around $359,000 when you retire. If, instead, you contribute to a balanced stock and bond fund that earns 8% per year (similar to Vanguard Wellington performance over the past 15 years), you would have $1.9 million.
Do Millennials Really Hate Stocks?
While millennials may assert their aversion to stocks, reality says otherwise.
Thanks to the introduction of auto-enrollment in target date funds — which are mutual funds made up almost entirely of stocks when you’re young, then slowly shift to bonds as you get older — millennials have a ton of exposure to the stock market.
According to a study Employment Benefits Research Institute report. Meanwhile, those in their 30s owned more shares than those in their 40s, who owned more shares than those in their 50s, and so on.
Cash investments made up just 1% of the portfolio for millennials and 2% for those in their 30s.
So what’s going on?
Millennials may confess a love for money because they desperately need it.
Half of 18- to 29-year-olds say they are better off financially than their parents at the same age, according to Federal Reservecompared to 56% of people over 60.
Households headed by people under 35, according to the Fed, belong $2,600 median savings in 2016that’s about a quarter of the total compiled by the Silent Generation.
Millennials are delay starting a family because of to record levels of student debt and high housing costs, leaving them less room for error.
With little hope of a pension enjoyed by half of the over-60s, 41% of millennials have no retirement savings, and only a quarter feel their savings are on track for a secure retirement.
Given this anxiety, millennials may say they prefer cash because it’s hard to imagine owning funds you won’t need in a decade.
What Americans Earn on Short-Term Savings
Millennials, and Americans as a whole, don’t earn as much with the savings they have.
Only 6% of respondents said they were earning more than 2% on cash, which is the upper limit of the Fed’s short-term interest rate target. More than a quarter didn’t know what they were getting, while 13% felt no interest.
Millennials were the least likely to receive more than 1.5%, thanks to their meager assets, while baby boomers were the most likely.
Why Americans Don’t Seek Higher Yields in Online Banking
Americans looking for higher yields just have to consult their web browser. Online banks, by Bankrate data, are much faster at transmitting higher yields to consumers after the Fed raised interest rates than traditional brick-and-mortar outfits.
Most do not consider a switch worthwhile, with 36% feeling comfortable with their current bank and 31% wanting to switch to a local branch.
Almost a fifth of Americans, however, were unaware such accounts existed.
“The best performing bank savings accounts and money market deposit accounts available nationally can be found with very low minimum deposits, and in some cases no minimum deposit at all, making these accounts literally available for every American household,” McBride says.
This study was conducted for Bankrate.com by GfK Custom Research North America on its OmniWeb online omnibus. The sample consists of 1,000 completed interviews, weighted to ensure an accurate and reliable representation of the total population, aged 18 and over. Fieldwork was undertaken July 6-8, 2018. The margin of error for all respondents is +/- 3%.