Having come of age around the time of the Great Recession, Millennials are sometimes described as having less subjective tolerance for equity market volatility, preferring to hold savings in cash or safe assets. However, more objective analyses of the generation show they are just as eager as older Americans to take advantage of long-term market growth in order to build wealth.
According to Katherine Roy, chief retirement strategist at J.P. Morgan, as a general matter, Millennials should feel comfortable taking on significant investment risk. And while relatively few Millennials identify themselves as capital market experts, survey data shows many of them do feel comfortable investing through target-date funds and other asset-allocation vehicles.
“They have so much time to recover from any losses,” Roy says. “The short-term volatility they may experience at different points is quite small relative to the value that their compounding contributions and returns are generating over time. They should take on sufficient risk and benefit from their 30- to 40-year retirement horizon.”
Roy urges Millennials to pay close attention to their investment choices, but she says it is also quite important to focus on saving enough and establishing good budgeting habits. Research shows that an individual’s savings rate, rather than the rate of return of different high quality potential investments, is the leading factor in building retirement readiness.
Roy observes that Millennials are making up an increasing portion of the 401(k) plan population. Because many of them have been automatically enrolled when joining a new employer, education and communication are crucial for keeping them comfortable with their investments.
While market volatility can deliver buying opportunities for Millennials, it can also lead to periods of insecurity for uninformed investors, says Tina Wilson, head of investment solutions at MassMutual. There is also the challenge to consider the youngest Millennials are stilling working to establish financial independent and security. And even older Millennials—those in their early- to mid-30s—can experience bouts of financial insecurity.
Wilson suggests plan sponsors and advisers can offer financial wellness support and education solutions to improve Millennials’ ability to save both for the near-term and for retirement. She says supplying Millennials with a retirement readiness score could help them stay the course during periods of market swings and downturns. Those with a good score can feel good about being on the right track, while those with a low score may feel a greater sense of urgency, especially when their score is compared with their peers.
Wilson further encourages advisers to consider the emotional elements of investing that could be holding some Millennials back. As noted, older and younger Millennials have unique needs that can be addressed. As Wilson observes, younger Millennials—those in their mid- to late-20s—will generally have felt less of a career impact from the Great Recession. Millennial workers in their 30s, on the other hand, may have experienced more recession-related hardship, as most had just entered the workforce 10 years ago, during the depths of the market downfall.