Millennials: Risk and opportunity

When you’re thinking of places to dine out, do the same three restaurants always come to mind? Or maybe you even go as far as choosing the same three menu items over and over again. You may not realize it, but it’s likely that you perceive a new restaurant as a risk because of the uncertainty about the ambiance, the quality of the food, and the outcome of the evening. In the same way that we tend to prefer more predictable dining experiences, many millennial investors perceive market uncertainty and volatility as tantamount to a plague on their financial futures. Although this can be concerning for your millennial clients, it also can be a great opportunity for us as advisors to tap into a new set and style of client relationships.

Contrary to conventional wisdom, more millennials are saving for emergencies, retirement, healthcare, and college, compared to generations before them,1 but they are participating less often in equity markets.2 Their preferences for cash and secure investments tell us that they appear to have a lower propensity for risk. Part of their reservation with equities may stem from their immediate access to view their accounts online and therefore watch their account balances vacillate during times of market stress. Most of them are in defined contribution plans, with the ability to select their own investments but also with the transparency to see their account balances go up and down. In past generations with the more traditional and opaque defined benefit plans, there would not have been that kind of visibility to see their plan accounts change during market fluctuations. But what is really behind millennials’ high levels of risk aversion? It may be the presence of myopic loss aversion, or a lack of financial sophistication, or the misunderstanding of investor appetite for risk.

Myopic loss aversion

As financial advisors, we have seen clients who are saving for retirement express a greater willingness toward investment risk.3

On the other hand, millennials participating in defined contribution plans are generally more willing to save and are more confident that saving for retirement could help attain their goal compared to older generations, but are less willing to participate in the equity markets.

Between 2011 and 2014, millennials demonstrated only a 9% increase in the number of respondents who responded positively to the phrase “saving from every paycheck makes me less worried about the stock market’s performance,” compared to a 21% increase in respondents who were 65 or older.4 This means that we have a higher hurdle to clear to help millennial clients overcome market uncertainty.

In theory, investors are more fearful of losing money than they are happy about experiencing gains. The weight of this fear can trigger what we call “myopic loss aversion” — the idea that as investors view their account balances more frequently, they see market volatility, and subsequently their level of loss aversion rises. Defined benefit plan participants have less of an incentive to inquire about their plans because their employer assumes the investment, longevity, and market participation risks. These same risks are transferred to the employee in a defined contribution plan. The risk management responsibility of defined contribution participants, combined with a lack of financial sophistication (which we will discuss next) creates a perfect storm for millennials to make irrational decisions. However, it gives us an even greater opportunity to demonstrate our value to a generation that is expected to inherit a plethora of wealth and, at the same time, a significant amount of distrust toward financial advisors.

Financial sophistication

Millennials, compared with other generations, are challenged with a different set of financial hurdles. A recent study found that millennials are the least financially sophisticated — only 24% showed competency in basic financial knowledge, and a shockingly small 8% were classified as highly literate.5 Therefore, it’s important that we play dual roles as advisors and educators when we manage millennial relationships. Doing so may help reduce the ever increasing disjointedness between millennials’ financial responsibilities and abilities.

One easy way to incorporate education into a client relationship is to show the client the difference in outcomes between multiple options. For example, after determining the amount needed for a specific high priority financial goal — such as retirement or college — we can provide millennial clients with comparable outcomes when taking on different levels of risk. In turn, this will demonstrate that higher levels of risk aversion may require larger contributions, resulting in reduced current consumption, and potentially a lower probability of goal attainment.

With a rising need to educate younger generations of clients, advisors can reduce this burden by incorporating more client education content into their practices through newsletters, blogs, social media, and client educational seminars.

Appetite for risk

Millennials may not recognize their true appetite for risk — in other words, their risk tolerance may not match their risk perception. Perception is the way we think about things, based on how we understand them. Tolerance is a measurement of willingness. Millennials’ perception of the equity markets has been handicapped by the global financial crisis, but evidence shows that millennials are indifferent to risk tolerance, compared to the Gen X-ers and baby boomers. This means that millennials need our help in narrowing the gap.

Intuition tells us that the risk tolerance of millennials, who value retirement planning more than baby boomers, might be more “normal” than we think. But because of the greater influence of social media, the shift from defined benefit to defined contribution, and market volatility, the perception of risk has heightened their propensity toward conservative investments.

Nathan Harness, Ph.D., CFP® is the TD Ameritrade Director of Financial Planning at Texas A&M University.

Sallie Mae. (2015). How America Saves for College: Sallie Mae’s National Study of Parents with Children Under Age 18.

Gallup. “Just over Half Americans Own Stocks, Matching Record Low.“ Available at

3 Investment Company Institute. (2012). America’s Commitment to Retirement Security.

4 Investment Company Institute. (2015). America’s Commitment to Retirement Security.

PwC. (2016). “Millennials & Financial Literacy — The Struggle with Personal Finance.” Available at

This content is for informational purposes only and is not an endorsement of any app, service, or publicly traded company. It is also not a recommendation to buy or sell a particular security.

The views expressed are those of Nathan Harness and have been adapted, with his permission, for the use of Delaware Investments and its employees.

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