Generational Divide: How do Baby Boomers, Gen Xers and Millennials Invest in the Market?
22 October 2018
By Marla Hurov
Investing in the market has always been complex. Baby Boomers, Generation X, and Millennials have each been influenced by different economic events and social factors that have shaped our financial attitudes and outlooks. Boomers lived through the post World War II economic boom and the sweeping inflation of the ‘70s. Gen Xers weathered the 1987 market crash, the dot-com bubble, as well as the Great Recession. And Millennials were coming of age during the recession of the late 2000s, faced with unprecedented student loan debt and difficulty finding a first full-time job. Now we’re all in the midst of a 10-year bull market, and most recently, facing some pretty unsettling market downturns.
It’s compelling to consider what impact all these ingredients have on the investment tendencies and preferences of diverse generations. Here’s a look at how the world’s largest generations invest in the market today.
Baby Boomers (born between 1946 and 1964) have more concentrated spending power than any other generation. How they continue to invest will profoundly impact the investment landscape, as well as the overall economy. Once the first to expand the workforce, they’re now reaching retirement age. And given today’s long life expectancy, they’re looking at a retirement that will last at least 20 years (which is likely daunting for most Boomers, but could actually give investors between 55-60 time to recover from the current market downturn).
According to Heather Lord, Head of Strategy at Capital Group, “Decades of weathering market highs and lows have turned the Boomer generation into seasoned buy-and-hold investors, who take a long-term approach.” She continues, “There has never been a generation as well-off, but they’re now encountering unexpected financial realities.” Overall, the Boomer approach is to outpace market averages over the long term, growing and safeguarding their nest egg against market downturns.
Having lived through the height of the long bull market in the ‘80s, most Boomers are relatively bullish about the market’s future. Compared to other generations, Boomers had the most assets to invest, and thereby the greatest opportunity, to benefit from the extended bull run after the crisis. In its 2017 Global Investment Survey, Legg Mason found that Boomers are the most likely to identify with a “somewhat aggressive” overall risk tolerance for long-term investing. More than half surveyed believe that the market will go higher than it has in the past five years (or at the very least average single-digit returns aligned with historical averages).
Boomers are generally attracted to balanced portfolios and income-generating investments, like real estate investment trusts (REITs) and stocks that pay dividends. With historically strong average returns for retirement, they’re prepared to ride out market ups and downs; though Boomers closer to retirement are more likely to swap-out underperforming investments. In fact, there’s real fear as the Boomers retire, that they’ll convert their investments to cash, seriously reducing the market’s overall demand for investments.
Gen Xers (born between 1965 and 1981) are entering their prime earning years. They comprise the majority of senior management at North American companies, and are also leading the way as entrepreneurs and startup launchers who know how to attract venture capital. In terms of the creation of wealth, economic impact and industry value, they’re expected to surpass both Baby Boomers and Millennials alike. According to a Deloitte study, Gen X investors are projected to nearly quadruple their assets to $22 trillion by 2030, while Boomers will be spending down their wealth in retirement and Millennial assets are forecasted to reach just $11 trillion.
But that’s not the full story. Gen Xers are also infamously known as the “sandwich generation,” stuck between caring for both their aging parents and children. For Gen Xers, the reality of these financial obligations (including the increasing costs of higher education and healthcare) often trumps everything (even their retirement). Not to mention that almost half of this generation reportedly lost their wealth between 2007 and 2010, in the housing and financial collapse of the Great Recession. That’s more than any other generation. The Gen Xer average net worth dropped by 45%, compared to a 25-28% Boomer dip in equity.
On the upside, Gen Xers were actually able to recover substantially faster than the Boomers, more than doubling their median household net worth by 2016. But while Gen Xers are the only generation to recover (and even exceed) to previous levels, their median household net worth is still less than half that of the Boomers. Hannah Ubl, a generational expert at BridgeWorks explains, “While 57% of [Gen Xers] have recovered from the recession, that doesn’t account for everyone. Still, roughly half of X-ers see credit cards as a survival tool and carry revolving credit card debt.” A study from Allianz Life Insurance claims that Gen Xers carry more debt than anybody else. The Pew Charitable Trust says that Gen Xers have six times more debt than their parents did at the same age.
While Gen Xers probably remember the robust stock market and hedge funds of the ’90s and may indeed be benefiting from the market’s steady rise over the last decade, they simply can’t forget their lifetime exposure to a wildly turbulent stock market. From the dot-com boom and bust that probably impacted their parents, to their front row seat in the 2008 financial crisis, they’ve seen the rise and fall (and rise again) of the market and are afraid of getting burned. The mindset of ‘slow and steady wins the race,’ simply doesn’t resonate with Gen X. They’re prone to emotional buying and selling of stocks, and are more willing to bet on riskier assets. When it comes to the recent market drops, Kyle Woodley, Senior Investing Editor at Kiplinger.com says, “The biggest risk to Generation X-ers is themselves. Keep calm. You can’t let something like this rattle you. You have to stick with it.”
Gen Xers tend to be extremely skeptical and self-reliant investors, “They know how volatile and unpredictable markets can be,” says Daniel Fan, Director of Wealth Planning at First Foundation Advisors in California. “Generation X has always been skeptical, and 2008 only made them more so.” This combined with their already entrepreneurial mindset, underlines their belief that they can only trust their own instincts for the future.
Millennials (born between 1982 and 2000) are now the biggest generation in the American workforce. And next year, they’re expected to displace the Baby Boomers as America’s largest living adult generation.
Despite their potential to become the wealthiest generation in history, they’re the most hesitant to invest in the stock market. This comes as little shock, given that many Millennials graduated from college and began assuming financial responsibility during the Great Recession. In fact, the S&P 500 lost 57% of its value, when the oldest of Millennials were in their late 20s.
A decade after the financial crisis, Millennials between 25 and 34 still carry a staggering average debt of $42,000. They’re also clearly more pessimistic about investing than their more mature and experienced generational counterparts. According to Edelman’s recent survey Millennials with Money, 77% of Millennials with $50,000 or more in investable assets agree that “it’s just a matter of time before the bad behavior of the financial industry leads us into another global financial crisis.”
Millennials, in general, are suspicious of traditional investing and are highly gun-shy about taking financial risk. According to a recent Bankrate survey, only 23% of Millennials believe that the stock market is the best place to put money over the next decade. Three in 10 Millennials say cash is their favorite long-term investment, compared to 33% of Gen Xers and 38 percent of Baby Boomers who favor stocks. A Charles Schwab & Co. study says that for 91% of Millennial investors, Exchange Traded Funds (ETFs) are their investment vehicle of choice. Millennials who do participate in the stock market reportedly invest a smaller fraction of their liquid assets and adopt more conservative portfolios than their generational predecessors.
Greg McBride, Bankrate’s Chief Financial Analyst says “a lot of it is being shell-shocked of coming of age during the financial crisis,” He continues, “they seem to be more conservative and less knowledgeable [about investing] than Generation X. We need to educate them to be not too risk-averse.” This may also partially explain the Millennial growing interest in crypto trading. A recent survey by Blockchain Capital claims that 30% of Millennials between 18-to-34 would prefer to invest $1,000 in Bitcoin, rather than bonds or stocks.
Essentially, Millennials want it all and they want it now. It seems challenging for them to maintain a long-term perspective, beyond their short-term goals. Barbara Knoblach, an Associate at Money Coaches Canada says, “I’d categorize the Millennial cohort as growth investors, and Generation X and Baby Boomers as balanced investors. Millennials are more likely to be short-term in their approach, less inclined to buy and hold for the long-term (32%), as compared to Generation Xers (40%) and Baby Boomers (43%).”
The encouraging news is that for the first time since the 2008 global crisis, a new survey from Greenwich Associates finds that Millennials are finally starting to “forgive and forget.” 55% say they are more trusting of the individuals and institutions that manage their money. Despite their self-admitted conservatism, the majority say they’re “very optimistic” about their portfolio outlooks and plan to take on “more risk.” It’s also interesting to note that according to a recent Charles Schwab survey, 76% of Millennials believe they’ll be better off financially than their parents.
This apparent change of heart may be largely driven by their overwhelming trust in new technology. The Wall Street Journal says that at least 30% of Millennial investors are more loyal to brands that are up-to-date in technology. Millennials also seem to have growing faith in robo advisors over human ones. It’s not surprising that the generation who grew up with technology is leveraging all kinds of high tech tools, from social media platforms to websites, and mobile apps to pick stocks. Compared to previous generations who would ring up a broker, Millennials are just a few clicks away from reviewing prospective opportunities, getting financial advice, and instantaneously devoting funds.
Being in-tune with the latest technologies and social networks also make Millennials more opportunistic investors than most. They’re the ones most likely to catch a great IPO opportunity, or spot a stock that could rise sky-high, simply because they’re aware of trending companies and products. They’re also more proactive than their predecessors in managing their investments and educating themselves about investments.
Social and environmental responsibility or “impact investing” also plays a key role in how Millennials invest their money. They want to achieve financial success, while also influencing causes about which they’re passionate. Growing up with the transparency of the internet’s Information Age, they don’t buy the old line of thinking that you have to choose between financial returns and companies that support a sustainable society. Suspicious of the stock market and corporations in general, they’re rewarding their investments to brands who appear to be the best corporate citizens. They also tend to avoid sectors like fossil fuel, oil, tobacco, weapons manufacturing and alcohol. A Fidelity Charitable study says that 77% of affluent millennials have made an impact investment, by most extreme contrast to merely 30% of affluent Baby Boomer investors.
Lule Demmissie, Managing Director of Investment at TD Ameritrade says, “Millennials are purpose-driven. They’re overwhelmingly the generation that wants to invest according to their beliefs, especially social and environmental.” TD Ameritrade conducted a survey to better understand investor sentiment, before launching new ESG portfolios for its robo-adviser clients. 60% of the Millennials surveyed had at least 21% of their money in ESG investments, compared to 49% of Generation X and 45% of Boomers. Demmissie concludes, “For Millennials it’s about making an impact. If you look at the Boomers, it more about, ‘Did it align with my values?’ ”
What resonates across generations
At the end of the day, Boomers, Gen Xers, and Millennials all tend to invest in what they know and love. But what’s less obvious is that they’re all using technology to discover, monitor and interact with their investments. You would assume that adoption would be highest among Millennials who grew up with technology, but Gen Xers are adopting technology at a rate not unlike Millennials. About 54% of Gen X and 56% of Millennials are reported to be digitally savvy. In fact, Gen Xers actually use social media forty minutes longer each week than Millennials. And according to a Pew Research Center report, about two-thirds of those 65 and older are going online.
Economic and social trends may come and go. But corporates everywhere take heed: no matter which investor demographic you’re targeting, you simply can’t underestimate the value of technology in forging relationships and making a lasting impression.
Marla Hurov is the Content Marketing Manager at Q4 Inc and blogs regularly about trends in IR and digital communications.