When it comes to millennials and stocks, study after study paints the 20-ish to 30-ish set as risk-averse cash hoarders. Yet many younger workers probably have most of their retirement savings in stocks.?
As more employers automatically enroll new employees in 401(k) plans, they are increasingly putting them in target-date funds, also called lifestyle funds. Some of these funds start out with equity weightings as high as 90 percent.
A big weighting in stocks when you’re young makes sense, because you have decades to ride out market cycles. But younger workers can?t count on a defined benefit pension plan, are more likely to lose their jobs than are older workers, and tend to use 401(k)s as rainy day funds to tap between jobs. That makes holding a lot in equities riskier for them than for previous generations.
How do millennials feel about that risk? FinaMetrica, an Australian psychometrics firm, ran the data for us on the 25,000 millennials in the U.S., Australia, New Zealand, and the United Kingdom who have taken its risk assessment. It found that an 80 percent or 90 percent weighting in equities is way above the risk tolerance of millennials.
In the U.S.1, the average risk tolerance score for people born from 1980 to 2000 was 52.3 out of 100, FinaMetrica found, meaning they are comfortable having 43 percent to 63 percent of their portfolios in equities2. The ?too much risk? zone in which ?clients will definitely be discomfited and will likely panic in a downturn,? is 72 percent, Paul Resnik, the firm’s co-founder, says. FinaMetrica’s data show that an equity component of 90 percent is going to be too risky emotionally for 96.1 percent of millennials. That breaks down into marginally risky for 10.4 percent of them and way too risky for 85.7 percent of them.
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