Remember when investing seemed straightforward? The Economist's recent piece, "How the young should invest," is a wake-up call. Gone are the days of the 'golden age' of investing between 1981-2021, where young investors could expect robust returns. Today, we live in a more sobering reality fraught with challenges like rising inflation and reverse globalization. Young investors now face an environment where historical gains aren't guaranteed, and bond yields, once a reliable source of growth, now present new complexities.
But here's the twist: while The Economist lays out the challenges brilliantly, it's like a cliffhanger without a resolution. This article steps in to fill this void. We take the hard facts — diminishing returns, the switch from bond yield trends, the appeal and risks of thematic ETFs — and pivot towards actionable strategies. Our focus is not just on understanding this new investment world but on maneuvering it with savvy and resilience through FINQ.
Generational investing context
Investing has never been a one-size-fits-all journey, and for the new generation of investors, the path looks significantly different. A key takeaway is the contrast in market conditions experienced by different generations, emphasizing how past strategies may no longer yield the same results.
The challenge of lower expected returns
The golden era of investing from 1981 to 2021, with annualized real returns of 7.4% for global shares and 6.3% for bonds, is a distant memory. Today, young investors should temper their expectations. The Economist points out a sobering reality: market returns might revert to the long-run averages of 5% for stocks and 1.7% for bonds. These figures mean a dramatic shift from the past, where $1 invested in stocks over 40 years could grow to $17.38; now, the expectation should be more modest at around $7.04. This recalibration in expectations is a key challenge for young investors, who might be basing their strategies on historical highs rather than present-day realities.
Confronting a different market
The investment landscape has significantly changed in recent times. A notable example is the reversal of the long decline in bond yields that began in the 1980s. This shift signals that the strategies that once drove high returns are no longer as effective for young investors. Furthermore, contemporary investment choices come with their own set of challenges. For example, holding excessive cash has become risky, as evidenced by Vanguard's finding that Generation Z's portfolios consisted of 29% cash. This trend, combined with a hesitancy to invest in bonds despite their now higher yields and the temptation of thematic ETFs, complicates investment decision-making. That's why young investors need to be more strategic, balancing the allure of modern investment fads with the reality of the current market dynamics.
Generational investing insights
While The Economist's article provides a thorough overview of the challenges young investors face, it stops short of offering practical, actionable solutions. Generational investing impacts Millennials, Gen Z, and Gen X, and the data speaks volumes about their unique financial challenges and the gap in available, digestible, and actionable investment advice tailored to their needs and wants.
Investment challenges across generations
Each generation faces its distinct set of investment hurdles, shaped by their unique experiences with financial and technological changes. Gen Xers, having experienced the stock market turmoil of the 1980s, show a tendency towards conservative investment strategies, often resulting in low-risk, low-return portfolios. This approach might be inadequate for their retirement needs, especially considering the late start many had in retirement savings. Millennials, marked by the Great Recession, often lean towards overly cautious investments. With two-thirds reportedly having no retirement savings, their financial future appears precarious. Gen Z, raised in the post-smartphone era and influenced by social media, often makes investment decisions without proper guidance, leading to regret in 57% of cases in 2022.
