It’s been widely reported that millennials have resisted investing, instead favoring low risk savings accounts and term deposits to save for retirement. This risk adverse approach can have a dramatic effect on returns over time. An analysis using a simple online savings calculator puts the potential cost of dodging investments (I.e.: not investing in the markets) in the millions by the time a current 25-year-old millennial retires at 65.
The chart and table highlight the dramatic difference in retirement savings after a 40-year period.
Strong cases of Millennials investments during the pandemic
New reports suggest that Millennial spending and investing during the COVID-19 pandemic is vastly different than the way Millennials managed their money in 2019.
A spike in new accounts at online brokers show that young and inexperienced investors saw the coronavirus downturn as an entry point into the world of investing and not a time to hunker down and stuff money under the mattress.
Major online brokers including Charles Schwab, TD Ameritrade, Etrade and Robinhood have seen growth in accounts spike by as much as 170% in the first quarter of 2020, when stocks experienced the fastest bear market and the worst first quarter in history. But some younger consumers have embraced the economic downturn as an opportunity to buy stocks, most notably, familiar technology stocks.
Wealthsimple’s total number of clients increased by 54% in March. In April, it has seen 7,000 new users per week. According to Ben Reeves, WealthSimple’s Chief Investment Officer, 55% of those new clients are under 34 years old.
Robo-advisory firms such as Justwealth also appeal to younger investors with modest investment funds. Andrew Kirkland, Justwealth’s president, said the generation makes up about a third of his clientele. A bulk of the new clients signing up now fall in the 24 to 35 age group.
Why millennials are migrating to DIY investing?
DIY investing has become increasingly mainstream for a variety of reasons perhaps including the proliferation and greater understanding of ETFs and the online based platforms that sell them. Additionally, the Internet is filled with articles, tutorials, and videos on how to invest, perhaps encouraging younger investors to manage their own investments.
Digital investment platforms have also lowering investment minimums making it easier to get started with a small deposit. Plus, there are no awkward or time-consuming meetings required, everything is done at the client’s convenience.
Many of these DIY investors may also prefer investing through apps, which have smooth or frictionless on-boarding processes and instant investment options.
A few examples of better-known apps include:
- Betterment has introduced a socially conscious portfolio option, which seems custom-built to appeal to millennials’ values-driven sensibilities. Betterment made its name on the promise of personalized, professional-grade financial advice without the professional-grade fees.
- Wealthfront offers a wider range of investing products than Betterment, including 529 savings accounts and alternative asset classes, such as natural resources and real estate. It also offers a digital financial planning tool called Path, which helps users adjust their long-term goals of saving money as their financial situation changes with things like new jobs, children, and home buying.
- Wealthsimple has higher management fees than either Betterment or Wealthfront at .40% – .50%, compared with the flat .25% per year charged by Wealthfront and Betterment. Like Betterment, Wealthsimple offers a range of socially responsible investment (SRI) options to appeal to values-driven millennial investors.
- Ellevest seeks to differentiate itself in the crowded robo-advisor market by targeting its services specifically at women. The company says that it designs its products to account for the unique financial needs that women have, such as longer lifespans and covering child and eldercare obligations.
- Stash is another micro-investing app, built its platform around the promise of empowering users to invest in portfolios that align with their values. This would appeal to millennials, who are 2 times more likely than other investors overall to make impact investments.
Why millennials were not investing before?
Some millennials were putting off investing because they viewed saving cash for a down payment on a home as a more urgent priority. While Millennials may have high levels of education and are comfortable with technology, they also face significant challenges when it comes to saving and investing their earnings. The Ontario Securities Commission reported in 2017:
- Though millennials have higher incomes than Generation X had at their age, millennials also have been squeezed by shelter, transit, and education expenses that have risen faster than incomes.
- 68% of millennials who don’t invest said they have “other financial priorities,” and 53% cited debt as a specific obstacle to investing.
- In addition to paying off debt, many millennials identified homeownership as a key financial priority.
- 59% of millennials who don’t invest said they don’t understand enough about investing to get started.
- Relatively few millennials reported having high knowledge of investing or investment products.
- 57% of millennials who don’t invest said they’re worried about losing money in the financial markets—even though younger investors generally are best placed to wait out periodic downturns and reap significant long-term gains in the markets—and 30% said they “don’t trust big banks or investment firms” with their money.
Covid-19 has made millennials take a hard look at their spending habits
According to a recent 2020 Deloitte Millennial survey, millennials expressed a strong commitment to financial responsibility and saving, and favorable views of the responses to the pandemic by government, business, and their own employers.
A key takeaway from the study found that long-term finances are a top cause of stress, but more than half of millennials, and nearly half of Gen Zs, are saving money.
Additional findings from the report that surveyed consumer pre and current pandemic:
Getting started in the investment world can be intimidating and first-time investors shouldn’t be made to feel that their initial investments are too small to warrant professional advice. The goal, especially during a market downturn is to seek advice and perhaps take advantage of opportunities to purchase lower priced stocks, mutual funds or ETFs. This would especially be a good time to set-up weekly contributions to dollar cost average during turbulent times.
Investment firms like WealthBar or WealthSimple are making the above increasingly accessible.
Other factors for credit unions to consider include:
- Referral programs are a must for any financial institution. If the credit union doesn’t have one, it is suggested that one or two are developed, even if for highly targeted services like wealth management. A quality lead is worth the investment.
- Canadians are awakening to the need to be better stewards of the country’s sustainability. Ensure that socially responsible investments are clearly noted as an option when speaking to their members about investment opportunities.
- Communications that appeal to a post-pandemic consumer will be essential. The world has awoken to a new reality any many realize they need to make a difference; this includes in what companies they will support through trade and those they may support with their investments.