Investing can be like taking a swim, says Chris Buttigieg, director of BMO Wealth Management’s Wealth Institute. Some people need to dip their toes in to test the waters before diving in.
How much time you take, and how much coaching is required to get you in the deep end, can depend on personal experience as well as more general demographics.
“Depending on the severity of the experiences that you’ve had, or that you’ve witnessed, it seems to have an impact on how you view risks,” says Anish Chopra, managing director with Portfolio Management Corporation.
Baby boomers have been through several cycles and survived the ups and downs. As a result, they’re generally less fazed by market turmoil. The financial crisis would have impacted the outlook for those retired just before it, Chopra says. But boomers who stayed invested through 2008 have seen tremendous gains in this extended bull run.
Some gen X investors were likely just starting out during the late-90s dotcom bubble, only to be hit again a decade later.
“You had two hundred-year floods in a 10-year period,” Chopra says.
Partly owing to these events in their formative years, millennial investors have become notorious for treading carefully when it comes to stocks. Although most were too young to be investing seriously in 2008, they were likely affected by their parents’ experience and the bleak economic climate at a time they were launching careers and becoming financially independent, Chopra says.
“That’s a severe backdrop to live through,” he says.
As a result, millennials share characteristics with their grandparents or great-grandparents who lived through the Great Depression. Unlike the steady bull run since 2009, stocks didn’t recover for 20 years after the 1929 crash, Chopra says.
“The thought process of the people who lived through it was just save as much as you can and [that] the stock market isn’t a safe place to invest,” he says.
An OSC study from November 2017 shows a similar tendency among millennials: while 80% of Ontarians aged 18 to 36 save, only 47% invest, it said. A January report from Merrill Edge showed wealthy millennials as big savers relying on savings accounts, rather than investments, to fund retirement.
A BMO survey from November 2017 also found millennials were more likely to put money aside and decide what to do with it later than investors from other generations, and less inclined to buy and hold for the long term.
In addition to their market skepticism, Buttigieg says millennials often have shorter-term goals, such as saving for weddings, buying a house, or paying off student debt, so many prefer stable investment tools such as GICs and savings accounts that provide easier liquidity.
But there is a cost to not starting to invest at a young age.
“There’s so much opportunity and growth potential when you have time on your side,” Buttigieg says, giving investments have a chance to compound. He uses the rule of 72: if you divide 72 by a rate of return, that’s how many years it will take an investment to double. Investments earning a 6% return, for example, would double in 12 years. The benefit of 20 or 30 years in blue chip stocks is clear, he says.
Which brings us back to the swimming pool. Some investors need to start small and get a feel for it, Buttigieg says.
“You get your first statement, you have an opportunity to talk about what we’ve seen over the last month or last quarter. That builds confidence.”
Once young investors get to see the process, “you can start getting them to take more of a position in equities—not jumping full-out into the pool.”
Chopra says he helps investors understand historical returns and the “volatility path.”
“Historically equities have returned better, but they have a lot of ups and downs. It’s really important to understand your risk tolerance,” he says, and to diversify holdings across different asset classes.
Millennials are also starting their careers in an economy where freelance work is more common and traditional savings tools, like defined-benefit pensions, are rare. For most new investors, stocks will be an essential part of retirement planning.
“As an investor, you really have two choices: you either accept the lower rates of return, or you can adjust your risk preferences,” Chopra says.
For millennials, it may be daunting to choose an equities strategy and stay invested, but that choice will likely be rewarding in the long term.