Yahoo Finance Why Younger Investors Are So Optimistic
Cynics might chalk it up to the optimism of youth: A new study from Scottrade has found that investors under age 45 are more optimistic about their investments than older investors are, and they're also more engaged and informed about their holdings. They check their accounts more often and are more likely to say they will add money to their investment accounts over the next year.
Among Gen Y, the cohort primarily in their 20s, 85 percent said they expected their portfolio to finish the year up. Meanwhile, 3 in 4 Gen Xers, who are in their 30s and early 40s, said the same. Around one-third of investors under age 45 said now is the "best time to invest and get in on some great deals;" just 13 percent of baby boomers and 8 percent of seniors said the same.
"Since 2009, we've seen their expectations for their portfolio increasing ... They're feeling confident and empowered," says Kristin Grupas, assistant director of client education at Scottrade, of investors under age 45.
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Gen Y's optimism extends beyond the investing world, too: A survey released in September by the Gen Y consultancy Millennial Branding and career site Beyond.com found that almost 9 in 10 Gen Yers are optimistic about finding a job, compared to 8 in 10 Gen Xers and just over 7 in 10 baby boomers. "They have their whole lives ahead of them ... they are saving more, managing their money, and are savvy investors because they have access to a whole online network of experts," says Dan Schawbel, managing partner of Millennial Branding.
Schawbel says the younger generation's engagement in their own financial management is a result of their hesitancy to trust financial institutions. "They understand the spending mistakes of their elders and don't want to make the same ones. They want to be careful about how they spend money and where it goes," he says.
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Other research shows that younger investors are also more risk-averse than previous generations were at their age. "When left alone, the younger set of individuals joining plans will choose something more conservative," says John Ameriks, head of Vanguard's investment counseling and research group. "That's different than the generation entering plans 20 years ago, in the early 90s, when younger investors were choosing more aggressive investments," he adds.
Ameriks attributes that choice less to the traumatic experience of the recession than to the fact that many young investors simply aren't paying much attention to their investment choices. As a result, he says, they are heavily influenced by what they hear in the news. In the 1990s, they heard positive stories of stock market growth, so bought more stocks; in recent years, they heard more about stocks losing value, so gravitated toward bonds and other more conservative investments.
Young people can be both risk-averse and optimistic at the same time, Ameriks says, because they are focused on the future and excited about it, but they're also not spending much effort doing their own research on how to invest, which results in their more conservative portfolios.
Those unique attributes of 20-somethings means that financial institutions--and parents--might want to consider reaching out to them a little differently. Ameriks suggests, "Folks who have more perspective can say, 'Focusing on what you heard on the evening news might not be the best way to build a portfolio for retirement.'... Help them focus on the long-term nature of the choices they're making. It's not about what's going to happen in the next one, three, or five years; it's about 10, 20, and 50 years for people."
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Since people tend to select investments and leave those selections in place for years--Ameriks refers to this tendency as 401(k) inertia--he says another useful option for people is to select lifecycle or target-date funds, which automatically shift into more aggressive investments as retirement approaches.
The Scottrade survey also found that Gen Y and Gen X optimism has grown steadily over the past few years: In 2009 and 2010, fewer than half of Gen Y and X investors said they expected their investments to gain value for the year. But in 2011 and 2012, the majority said they thought their investments would end the year up. They also started checking their accounts more frequently during that time period, with about one-quarter of Gen Yers checking their accounts once a day in 2012.
The post-recession economy, it seems, inspired both optimism and engagement among younger investors.
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