Putting the investment decisions in the hands of employees isn't working for Gen Y. When we read that 40% of Gen Y investors reportedly agree with the statement "I will never feel comfortable investing in the stock market," it sends a signal that they are making reactive investment decisions, and those are rarely good in the long run. It is certainly understandable, though, when you think about the timing of their first jobs and their first experiences with investing in their 401k plans.
Imagine seeing your very first statements showing less than what you put in, with your hard-earned money being sucked out to nowhere. It certainly wouldn't give you much confidence. Gen Y never had a chance to learn about investing before its members were jolted by a near 40% market drop in 2008. This drop frightened even the most seasoned investors, but it shook Gen Y investors to the core; 52% of them liquidated a portion of their portfolio in 2010 or 2011 due to market concerns.
They have 30 or 40 years before they need the money, but they are using reactive short-term strategies rather than implementing proactive long-term ones. Still, 71% of employees under 30 who have used our online financial-assessment tool report having a general knowledge of stocks, bonds and mutual funds. The problem may be how to apply this knowledge to their personal situations. Only 23% in this age group (the lowest of all the age groups) report they are confident that their investments are appropriately allocated. The reason they aren't confident is probably because their investments aren't properly allocated.
The average Gen Y investor has 30% of his or her assets in cash, the highest of all demographic groups, according to the latest MFS Investing Sentiment Survey results. This would be fine for a baby boomer or even a Gen X employee, but not for young employees starting out. They might feel better today with a high cash balance, but the risk is that they will feel worse down the road when their assets haven't even kept up with inflation. Moreover, they may be missing out on a once-in-a-lifetime opportunity to accumulate shares of growing companies at low share prices during a weak economy.
They haven't learned some time-tested investment strategies because they have been too busy playing defense. When you are being punched in the face, it is difficult to think about anything other than moving to safety. You just want to get away from your attacker and retreat to nurse your wounds. Because of their focus on defense, something is missing for the Gen Y investor -- a piece of the puzzle they either were never taught or aren't open to because they are too skeptical after their bad experiences.
Gen Y employees might be distrustful of the market and wary of corporations, but they are perfectly comfortable buying their products. The whole world is in love with cellphones, but to Gen Y they are an appendage, not a tool. They also buy iPads after waiting in line at the Apple store, subscribe to DirecTV, grocery-shop at Whole Foods, buy clothes at Abercrombie & Fitch and equip themselves to surf the Internet 24/7 with computers and connecting service. They drive, buy gas and eat fast food. In other words, they are heavy consumers of products but not investors in the companies that make them. Here lies the disconnect, and ultimately the investment opportunity.
Following are some time-tested investment strategies that Gen Y (and the rest of us) can use:
Match your investment strategy to your goal
Simple but true. Every investment has a goal, such as providing future income in retirement, and the strategy needs to match that goal. The greatest investor of all time, Warren Buffett, once said, "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes." If you've done your research when you make your initial investment, volatility shouldn't be the only reason to abandon the strategy. Volatility comes with the territory when investing in stocks.
