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Ed’s Rant: Wanting It All

Michael Wilson says that Millennials are less loyal than their elders. Should that be a surprise?

“Fickle Millennials want it all,” said the headlines. Well, I suppose the press has got to sell copies any way it can, so maybe it wasn’t such a surprise to see the whites of the editors’ eyes glaring at us as the news broke. It seemed that a prominent international survey of investors had found that an overwhelming majority of the under-40s had told it that they wouldn’t be prepared to stick with a fund that underperformed for more than a year.

Shock horror, and sharp intake of breath. Barely 20% of the 1,267 younger respondents – from 19 countries, no less! – told the US fund house Legg Mason that they’d be willing to stick with a fund that didn’t shape up. Whereas, the great majority of the 4,103 over-40s indicated that they’d be willing to ride out a bad patch. In Britain, that figure rose to 62%.

Hanging in there, of course, is exactly what most advisers would suggest that their clients should do. You can’t put an old head on young shoulders, they’d sigh wearily, and the costs of fund-hopping would soon soak up any competitive advantage that Generation Y might achieve. And anyway, doesn’t everyone know that last year’s chart-toppers will be this year’s back markers, if only because the cyclical behaviour of the markets favours one type of asset this year and another type the next?

Limits of the survey

To my mind, there isn’t much doubt that the advisers have got it more right than the millennials. And if the young’uns are true to their word, then it’ll get very volatile and very unpleasant, especially for closed-ended funds. But before we run away with our fears, let’s be clear that this wasn’t just any old survey.

The Legg Mason survey (https://ww2.leggmason.com/trendingconversations/) covered 5,370 investors from 19 countries, but it was rather heavily skewed away from North America. Only 458 of the respondents were from the US, compared with 1,600 from Europe (including the UK), 1,150 from Asia, 800 from Latin America and 200 from Australia.

More to the point, the respondents weren’t entirely typical of the advisers’ client bases. All of them were carefully screened to exclude anyone who didn’t have $200,000 of investable assets, excluding their principal residences. Which I’d say would itself have altered the shape of the millennial contingent, wouldn’t you?

We probably ought to add that the under-40s don’t really sit very happily under the definition of millennials anyway, and never mind what the editors might say. 1976 is a rather far-back threshold for a demographic group which is more usually understood to have started in 1990. So let’s be a little careful before we assume that the fickle youth that Legg Mason seem to be talking about are in fact the night-clubbing, footloose, unpredictable and promiscuous people we probably imagine. The majority of the Legg Mason sample will have been professionals, and a lot of them with families.

But does that change the message we need to be considering? Let’s test the waters a little.

I want it all, and I want it now”

Okay, Freddie Mercury didn’t do too much for the image of youth when he came out with that good old line in 1989, just as the first millennials were being born. (He’d have been 70 this year, by the way.) But it’s odd how his message resonates with today’s under-30s, perhaps more than ever.

I think we can probably agree that it’s just a little too easy for us to brush off the complaints of dissatisfied youth about the lousy way that history has treated them. By the time they reached 18 the world was locked into an economic recession where the only thing you really needed to do, as an investor, was to sit and wait. Assuming, of course, that you’d had a chance to build your stash before 2008 – which would have difficult if you were only fifteen.

Instead, the millennials faced the reality of £35K student loans which were pre-primed to sap their disposable incomes as soon as their employment took their earnings anywhere close to the national average. They could only look on with envy at their parents’ boomer-era houses, bought for the equivalent of five times earnings and now worth ten. And no, they wouldn’t really be listening if you told them about UK mortgage rates hitting an excruciating 17% in 1979. What’s your complaint, they’d say? You were on the winning side in the long term, weren’t you?

Changing times, changing viewpoints

They have a point, but it’s the same point that youth has made against its parents since time immemorial. I’m more interested in looking for the structural reasons why the millennials are different from the boomers, or from Generation X for that matter.

Firstly, they have the kind of technology that stimulates an appetite for instant reward. You see something you like? Have it delivered tomorrow by Amazon Prime. You like a music recording? Don’t rush to the shops, just download it for free on Spotify or Deezer. (Never heard of them? Shame on you.) You’ve seen a cheaper supplier for your home energy? You can switch online in six minutes flat. You need a taxi, or a date for Friday night? Look no further than your phone.

Secondly, because they’re not as attuned to the virtues of the property market, which their parents came to see as a one-way ladder – albeit one that had rungs missing in many places. Tell them they need to save for a house of their own, and they’re likely to sigh and tell you that they gave up on that dream ten years ago and settled for a probable lifetime in rented places instead.

That’s important, because home ownership has always been the flagship of the asset-accumulation principle, and part of the rock on which the whole savings habit is founded. But it’s currently holed and sinking below the waves, especially in London. If the millennials say that they’d rather be spending their money on experiences – travel, thrills, sport – than on the hope of owning a crummy two-bed flat in an iffy part of town, then who are we to judge?

Too fast to live, too young to die

Except that, thirdly, the millennials aren’t providing well for their old age. Yes, we know that they’re probably going to need to work till they’re 80 at this rate, but that seems a long way off when you’re 21 or even 30. And the killer punch has been dealt by low interest rates and yields that have massively inflated the size of the required pension (or asset) pot.

Thirty years ago, when I started saving properly for my pension, my adviser told me that a £100,000 nest egg would probably be enough to live comfortably after retirement. Twenty low-inflationary years later, he told me £400,000. But with index-linked annuity yields scraping 2.5% I’d be stuck with today’s lifetime equivalent of £16,000 (adjusted for inflation) – and if I wanted £30,000 I’d do better to shoot for the maximum £1 million at retirement.

Double or quit?

Now, the millennials aren’t stupid. And they can work out a compound return curve as well as anybody else. But the idea of having to accrue the equivalent of forty times today’s average earnings for their retirement can be a little daunting when you know that you’ve only got 40 years in which to raise that cash.

Ah yes, you’ll say, but you’re forgetting the power of the expected return curve from equity gains. So how do you respond when they look you in the eye and ask you exactly what return curve you’re talking about?

Aye, and that’s the rub. The world’s equity indices haven’t grown since 2000 – and although we shouldn’t forget the compounding effect of re-invested dividends, which have (slightly) beaten inflation in most developed countries, that’s not a very reassuring sight if you’re 25.

It shouldn’t surprise us if the millennials are more sceptical than we expect when we tell them that equities always beat bonds and cash in the long term. It simply hasn’t been their experience in this particular slice of history. So why should we be surprised if they demand the absolute optimum returns?

Hope on the horizon?

The worry for advisers, then is that their younger clients will either give up entirely on the long term savings project, or that they’ll be tempted to chance it all on quick fixes and ill-judged gambles which may not pay off, and probably won’t. (High-risk high-yielding funds, anyone? Binary betting? Day trading?)

The challenge to present sounder savings and investment policies to clients is going to become more urgent, at the very time when execution-only platforms and fund-hopping from their mobiles on the way home from work are offering cost-effective alternatives to getting ‘proper’ advice. Already, the Legg Mason survey shows that under-40 investors in the UK are more likely to opt for robo-advice than their elders – less than a third of who say that they’d give a robot house-room in their portfolio decisions.

You probably wouldn’t be surprised to learn that the over-40s keep more cash in their investments (36% in the UK), and that 67% reckon that international turbulence is the biggest disincentive to extending their investments away from the UK. Whereas younger investors have consistently shown more appetite for adventure.

That, of course, is entirely consistent with the higher-risk attitudes that are not only common among younger investors, but also highly defensible. A 25 year old’s risk tolerance can afford to be higher than a 45 year old’s because there’s more time to put things right if they should go wrong.

One last anomaly

But how do we account for our final anomaly? The Legg Mason survey found that its millennials said they believed that they could get by with a 43% smaller retirement nest-egg than their parents. Do they mean that they’ve got alternative plans in mind? (Expected inheritances? Reliance on the state pensions?) Or that they’ve got their hopes set on a calmer, cheaper, less hectic lifestyle?

Or are they just making a virtue out of necessity and disconnecting from the painful urgency of long-term saving altogether? I think we should be told.