Why Equities is the key to Wealth for Millennial Investors

I recently caught-up with a school friend over beers to reminisce about old times and discuss the usual suspects – career, common friends, family, marriage, travel plans, etc. Since he’s also in the startup world, we also discussed various new apps/services and which industries technology will revolutionize in coming years.

Interestingly, even though we hadn’t met in years, our views & ideas were quite similar in many ways. Us millennials have many common traits, many of which are in stark contrast to the generation that raised us. We marry at a relatively older age, are savvier with new technology, and prefer to rent rather than owning things, reports the Times of India.

Unsurprisingly, we millennials also have distinct habits when it comes to personal finance and investing. For example, most of us want to retire early & also expect to live longer than previous generations – yet a large majority have stayed away from investing in the equity markets. One of the reasons, Accenture reports, is that “this demographic sees traditional wealth management as a bureaucracy (which isn’t unlike how they see many large institutions and industries).”

Some of these trends/expectations are quite obvious, some highlight the paradoxes typical of our generation, and some of these habits are glaring mistakes that we should avoid & instead learn from our elders. Let’s look at what some of these trends are across the globe.

Trends of Millennial Investors

• 66% of millennials globally prefer to use a tech-friendly investment platform that has online support and can help with financial education, according to Accenture. Not finding such a service is one of the main reasons that keeps them away from investing 

• Similar to preferences in other aspects of their life, millennials like simple investments that they understand and stay away from things they don’t. Paradoxically enough, while 65% want to learn more about investing, a staggering 74% admit they have neglected doing so due to time-constraints. As such, despite a strong interest towards investing, many postpone it to their own detriment.

• In this regard, thematic investing has gained popularity amongst millennials, as it allows them to invest in themes & ideas they understand, claims a report from Schroders, one of the largest asset managers in the world. This is particularly true for the 25-34 age group

• We are also more aggressive in our return expectations, with more than 46% millennials in India expecting returns of greater than 15%. In spite of such ambitious targets, more than 50% of millennials have their largest allocation in cash – as a result, the bulk of the assets don’t even beat inflation and result in the relative loss of wealth

• When millennials do invest, we like to avoid complication. Millennials are a big driver of the push toward index mutual funds, especially in the developed markets. In the US for example, ETFs are the investment vehicle of choice for 91% of millennial investors, according to Charles Schwab, one of the largest brokerages in the world. More than 95% millennial investors also believe ETFs provide the flexibility they need to react to short-term market swings

• Accenture reports that millennials are far more likely to regularly discuss fees than older investors. And in the US, 60% of millennials recognise that passive investments present a lower-fee option to generate market returns. This is a great trend thanks to years of investor education, as fees are a significant driver of long-term returns

Why Millennials Should Consider Equities

As a millennial, I can relate to many of these findings, having experienced them at different stages of my life. Of course, it’s difficult to generalize across an entire generation – plenty of millennials are asking the right questions and making smart financial decisions. But what these stats & findings highlight is that many millennials have stayed away from investing in equities, even though it’s most ideal for them.

smallcase was started by 3 millennials because like many others in the peer group, Vasanth, Anugrah, and Rohan were also looking for investment products that were user-friendly, easy to use, and transparent. And low-cost, because high fees eat into your ultimate returns – and we all like returns!

But ultimately, what’s most important is that millennial investors start investing in equities. Whether you do it in a smallcase, an ETF, an index fund, or an active mutual fund is secondary, as long as you start the process. I say equities because the great advantage the youth have is time. Time is a powerful investment tool because it provides the ability to ride through the inevitable market ups and downs. Market crashes like the 2008 global financial crisis look completely different if viewed through the eyes of a 20-year old (investing opportunity) versus that of a 50-year old (major income/lifestyle change).

Let’s say that you are currently 20 years old, and will work until you become 60 years, and let’s assume you can make average equity market returns of 15% each year. If you invest ₹1 lakh now and if you wait 5 years until you are 25 years, how much do you think the difference will be by the end of your retirement? The results are quite startling:

It’s likely that most of us want to retire before we turn 60 years old – which makes it all the more important that we start early. And if you don’t invest, that money won’t really grow at all. So if time is on your side, make the most of it and start investing in equities now. 

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This article was also published on Moneycontrol.com on 10th January 2020.