In a newly published research paper, Vanguard found that most millennials maintain appropriate allocations to equities given their age and financial goals, despite having experienced two severe bear markets during their lifetimes.
“Risk-Taking Across Generations” – which analyzes investor behavior and risk-taking across the 22-37 age group – revealed that the typical millennial investor allocates 90 percent of their portfolio to equities, which is consistent with professional portfolio allocations, such as the glide path of Vanguard Target Retirement Funds.
Vanguard researchers from the Center for Investor Research analyzed four million Vanguard retail investor households, holding a combination of IRA and taxable brokerage or mutual fund accounts. The Center is committed to improving investor outcomes through behavioral research and experimentation on individual investors, advisor-dependent clients, and 401(k) participants. Also, the Center is renowned for its proprietary research on defined contribution plan participant behavior and plan design.
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Millennials migrate toward target-date funds
The research also found that millennials, similar to other generations, have been adopting balanced investing strategies. During the period from 2012-2017, investors shifted away from extreme equity allocations; in fact, the millennial group experienced a seven percent decrease in all-equity portfolios, which could partially be attributed to the increasing use of target date funds (TDFs). Among IRA holders in the sample universe, about one-third of all millennials own TDFs.
Vanguard’s annual defined contribution benchmarking report – “How America Saves 2018” – complements the findings on the increasing use of TDFs, with 82 percent of plan participants under the age of 25 allocating their portfolio to TDFs, while 67 percent of those ages 25-34 were invested in these funds.
“Target-date funds are reshaping investor behavior of millennial and Gen X investors, with the potential to improve outcomes over an investing lifetime. Younger investors are benefitting from balanced, diversified portfolios, and shifting away from the extreme equity allocations that we’ve witnessed in the early years of previous generations,” said Jean Young, Senior Research Associate for the Vanguard Center for Investor Research and author of the paper.
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Risk-averse behavior occurs most around bear markets
While most millennials hold age-appropriate allocations, an increasing cohort hold zero-equity portfolios – 19 percent in 2017, up from 13 percent in 2012. One reason may be the apparent reluctance toward equities among millennials who opened accounts after the global financial crisis of 2008-2009.
Pre-crisis (2007 and earlier), only 10 percent of millennial investors held zero-equity portfolios, and 33 percent held all-equity portfolios. During and after the crisis, more than twice as many millennial investors held no equities in their portfolios (22 percent), and the percentage of millennial investors holding all equities in their portfolio fell to 14 percent.
Other reasons for zero-equity portfolios cited by Vanguard researchers are inertia and investing for short-term goals, such as a house purchase.
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