Generation Y investors are the most conservative generation of investors since the great depression, despite their long-term time horizon, according to the 2011 MFS Investing Sentiment Survey. The survey provides an in-depth look into the investing habits of Generation Y, the next large wave of investors that encompasses approximately 77 million Americans between the ages of 18 and 30 with nearly $1 trillion in spending power.

I believe that Gen Y-ers are spending their 20’s and early 30’s being emotionally affected by all the financial doom and gloom in the world and are not investing much money or investing wisely for their financial future. Gen Y-ers are being squeezed between mounting college debts and wide-spread unemployment, with many of them moving back home with their parents to weather the economic storm. 

While Gen Y-ers provide significant purchasing power for such things as I-pads, Starbuck’s, designer clothes and other goods and services, the majority of them may not have enough of a financial education or the motivation and confidence to understand how to invest for their own retirement. This generation has spent half of their lives sandwiched between the dot com crash and real estate crash and are very wary of Wall Street. 

Four red flags noted in the MFS Investing Sentiment survey:

  • 40 percent of Gen Y agreed with the statement "I will never feel comfortable investing in the stock market.” 
  • Gen Y investors agreed that they are likely to feel overwhelmed by all the choices they have (54 percent), put off investment decisions (47 percent), and consider themselves to be savers more than investors (59 percent). 
  • 30 percent of Gen Y said that their primary investment objective was protecting principal/not losing money, only marginally smaller than those who said their primary goal was growing assets (34 percent). 
  • Gen Y has allocated more money to cash than other age groups, at 30 percent on average — nearly as much as they have allocated to U.S. stocks/stock funds (33 percent).

This generation seems to lack financial literacy or direction needed to survive through today’s volatile market and unique economic environment. Their financial planning influences are generally limited to their baby boomer parents that may have lost their jobs, their house and a good portion of their retirement funds just in the past couple of years.  

Below are five tips that I encourage Gen Y-ers to do differently with their finances than past generations.

  1. Create an annual budget of fixed and variable expenses — and be aware with each paycheck where their dollars are going. Learn to be very self-sufficient and build up a full year (or two) worth of cash reserves in case of unemployment or emergency. 

    This would help take the fear of liquidity off the table in case of emergency and provide less need to have to take an early distribution or loan from their 401(k) or a need to borrow money from their parents. A pre 59 ½ early distribution from a retirement account could cost them a 10 percent IRS penalty plus any applicable Federal and State Taxes which could be a very costly withdrawal and put a significant dent in reaching their future goals. 
  2. Once they have suitable cash reserves, they should begin saving to their employer (pre-tax) 401(k) at a minimum to get their ‘free’ company match which is typically up to three percent of their salary. Through enrolling into their company retirement plan, they may develop a disciplined savings habit over time.
  3. After saving to their company retirement plan, they should save their next (available) $5K (based on current IRS contribution limits) to a Roth Individual Retirement Account (Roth IRA) if they qualify. The Roth IRA principal contributions can be withdrawn without penalty in case of a short-term emergency, but can still be invested for their retirement based on their risk tolerance and long-term investment goals. 
  4. Next, Gen Y-ers should work with a financial adviser to learn some basic tips, strategies and techniques on investing and building a portfolio based on their risk tolerance and goals. They should take a more educated and unemotional approach to investing than their parents. In today’s globalized (new) economy, Gen Y-ers definitely need to be more aware of the potential need to diversify among stocks, bonds and global investments than prior generations.   
  5. Finally, Gen Y-ers need to understand the power of time and compounding which is clearly on their side. Instead of being focused on the value of their 401(k) losses (or gains) in the short term, focus instead on the year they may retire. With 45+ years still to go in the work force, many may not retire until the year 2056.  

In summary, the one advantage this generation has over everyone else — is time. Time to stay invested for the long term through many economic cycles and many future bull and bear markets. Gen Y’ers should seek financial education and encourage discussion on retirement planning and investing with their parents in order to share ideas and learn from each other’s experiences.  

FPA member Jon W. Ulin, CFP®, is Managing Principal of Ulin Financial Group in Boca Raton, Fla. Jon Ulin is a registered representative with, and securities offered through, LPL Financial, Member FINRA/SIPC.  Investment advice offered through Independent Financial Partners, a Registered Investment Advisor and separate entity from LPL Financial. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser prior to investing.


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