Gen Y Blows It
Paul J. Lim noted in the New York Times, as quoted in The Week, "Youth is wasted on the Generation Y investor." Of course, that's on average and talking about 401(k) contributions, but the numbers are startling.
31% of 18- to 25-year-olds invests in 401(k) retirement accounts. That makes a likely 50%+ who leave free money on the table in the form of lost company matching. It's a telling stat for the financial planning industry. Someone's going to have to help these people get their finances in order, likely when it's too late.
To make matters worse, the average asset allocation of Gen Y investors is 65% stocks and 35% bonds. That's about the right mix for someone who is 60, not 25.
I'm 29 and I hold about 80% stocks with a lot of diversified holdings across many asset classes like REITs, International and Small, Medium and Large Cap funds.
I can attest to this problem first hand because the number of young workers at my company who I plead with to start their 401(k) is only growing each year. They just don't seem to be interested. We've got an uphill battle here. And yes, everyone should care because if the money doesn't come from their pockets rest assured it will come from ours eventually.
After reading this article I am curious as to how the PFBlog readership uses margin loans outside of security buying. Read
Kiplinger's Personal Finance's Sean O'Neill offered some notes recently on saving money on lawn care. Thanks to The Week for pointing this out on their Making Money page. Read
After a long thread of very interesting comments from some readers, I've been giving more and more thought to the task of completely converting my personal cashflow model to a more traditional set of personal financial statements. Read
Spoke to a client of mine today. We've done one session prior to this with a number of the standard action items from session 1 (get proper insurance, consolidate accounts, pay credit cards, etc.). In addition to mildly poking him for not sending me his ... Read
The 65/35 asset allocation is fine for young people. There is no way old folks should have this asset allocation.
Miserly - Thanks for the note. I'm going to respectfully disagree, but asset allocation is one of those tough questions. My feeling is with retirees having to support themselves much longer and with government assistance likely to evaporate in the future, retirees must get serious about longer term planning. That includes a more aggressive asset allocation plan with appropriate diversification. For young investors, that means much heavier exposure to stocks. However, I'd love to see any alternative thoughts/literature. I appreciate the comments.
Asset allocation should roughly consist of your age, so if you are 25, you should have 25% bonds and 75% stocks. I agree with miserlybastard.
I believe that's too conservative. Sure, you can save enough where you could have 100% bonds and be fine at 60, but most people don't. When we're talking about people who are reaching 30 with almost no savings you simply have to put them in a more aggressive portfolio. I don't think that's a bad thing either. With a 30+ year horizon there's no reason not to. If you run the numbers on the models the stock-heavy portfolio over 30 years always wins.
Money won't come from your pockets, it'll come from Gen X and Y's children's pockets - just as the boomers' retirement will, one way or another, be paid for by Gen X and Y. (Such as taxpayers at large paying the pensions of auto and airline workers whose employers were allowed to underfund pension plans.)
I struggle to see the argument for investing in bonds at all when one is unlikely to be taking the money out for 30 years (55) or 40 years (65).
Bonds are for risk reduction. 100% stocks is just way too risky. Just a small amount of bonds goes a long way toward reducing the overall volatility of a portfolio.
When stocks go to hell (like they do from time to time), balanced investors are rewarded for not being too greedy. Too much stocks is like driving your car with too much speed. Most of the time you can get away with it, but when it goes bad... it can go REALLY bad.
My recommendation for younger investors is to stay balanced, swing for singles, don't get greedy, live below your means, and let compounding do its magic.
There's nothing wrong with 35% bonds for a younger investor.
JC
Great comments all. I think we have to remember the original post was about how Gen Y investors aren't savings *anything*. That puts them in a really bad spot because when they do wake up they'll have to invest more aggressively in order to make up the difference. That means more risk. Of course, if we're talking about someone who *does* invest from an early age then a more conservative mix works because they have a longer time horizon. But, my contention is if you do have that person with the long horizon you can significantly (and safely) goose their returns by holding only 20% bonds through the mid 30's. That means you must diverisfy all your holdings into all types of stocks, REITs, some gold, international bonds, domestic bonds, commodities, maybe even some collectibles here and there. Most folks don't know or care how to do that, so any mix is better than none. I think we can all agree the key is saving early and often, regardless of asset mix.
Actually, I think the fact that 31% are taking advantage of this is encouraging. It's probably a lot higher for those over the age of 21, who are presumably working.
You can have a relatively safe portfolio with no bonds. I think if you diversify properly you can lower your risk (Std Dev) and maintain a decent return.
Bonds are good to help reduce the ups and downs if you are not willing to take the risk of the market. Most people need bonds since they can't really handle the ups and downs of the market. As for me, I can live with a 30% drop in the market since I have 30 years until retirement.
31% is actually worse since they probably won't have much SS to rely on.
