Millennials are much more likely to make risky investment decisions compared to other generations, according to a study by MassMutual. Life Insurance Co. The firm finds these investors are inclined to make poor investment decisions by reacting to market volatility. They also seek financial advice at a smaller rate than other generations.
“MassMutual’s research finds a real advice gap exists between younger workers and other generations,” says Tom Foster, national spokesperson for MassMutual retirement plans. “We discovered that those who rely the least on professional financial advice are most likely to react to shorter-term market trends by making potentially harmful decisions to reallocate their retirement savings investments.”
Morningstar reports that bad decisions by investors trying to time the equity markets reduce returns on average by 2.5 percent a year. In addition, the longer investors remain in the market, the better their chances of making money, according to data from Standard & Poor’s.
The Dow Jones Industrial average hit 21,000 on March 1, climbing nearly 3,000 points after the November election before sliding back the lower 20,000s and once again approaching 21,000. The CBOE (Chicago Board Options Exchange) Volatility Index, sometimes referred to as the “Fear Index,” which measures expectations for market volatility in the next 30 days, dropped to its lowest level since February 2007 on May 1 after consistently rising in April.
The study also pinpointed major differences in how Americans receive financial advice, if at all. Overall, 32% of Americans polled said they relied on a financial adviser to guide them
However, older respondents were much more likely to use an adviser, with 62% of those ages 65 or older relying on professional money advice as compared to 8% of Millennials. Women (36%) are also more likely to rely on an advisor than men (29 percent), the study found.
“Getting professional advice helps reduce uncertainty about money matters, especially in volatile markets,” Foster said. “Our study showed an inverse relationship between reliance on professional money management and uncertainty about investing.”
The study found that one in 10 Americans admitted to being uncertain about how to invest their retirement savings. Millennials were twice as likely to be uncertain while only 1% of those ages 65 or older said the same. The older the investor, the study found, the more certain he or she was about how to invest.
On a positive note, Millennials were almost twice as likely as compared to the general population to rely on their employer’s educational programs and resources to guide them when investing and allocating their retirement savings. They are also more likely to already be using investment strategies such as managed accounts that automatically allocate investments based on an investor’s age, risk tolerance or other factors.
“MassMutual has been seeing greater adoption of automatic allocation investment strategies such as target date funds and managed accounts as more employers move towards automatically enrolling employees into 401(k)s and other defined contribution plans,” Foster said. “The proliferation of these investment strategies could be the saving grace for many people as target date funds and managed accounts take away much of the guess work and uncertainty about investing for many people.”