The great recession of 2008 resulted in many well-known repercussions, such as retirement funds being decimated and unemployment skyrocketing. One impact of the aggressive bear market of 2008 that is seldom discussed is how it shaped Millennials’ perception of not only the financial markets, but also the entire concept of investing.
The timing of the recession coincided with the coming of age of many Millennials, and images of plummeting equities being imprinted into the minds of people who had just begun their adult lives. Without a doubt, this would have tainted Millennials’ outlook on traditional investment activities and lead to them either holding a much lower risk threshold than their parents – in some cases completely avoiding investing – or having differing investment strategies and preferences. Millennials do have one of the largest advantages in relation to investing: the possibility of utilising compounding interest to its fullest extent. However, due to a lack of financial education, or ignorance (if you were to take a more cynical view), this advantage is being left squandered in low-interest bank accounts.
Why Aren’t Millennials Investing?
According to a BlackRock study, nearly half of all Millennials refrain from investing and describe it as being “too risky”. This perception of excessive risk is understandable: not only have the majority of them seen or experienced the crippling impact that the 2008 recession had, but the older section of them may have also witnessed the bursting of the dotcom bubble. Fear and distrust of the stock market seem to be substantial barriers which are preventing many Millennials from investing.
There is a common misconception amongst young people who have not engaged in much financial education that buying a few shares and attempting to “play” the stock market is the only way to invest. Images of sleepless nights spent watching prices and charts fluctuating on a screen whilst carefully planning entry and exit points using technical analysis may be the reality for some, but a much more passive and less risky approach can also yield returns much greater than those gained by simply saving your money in a bank account.
Apart from the exposure to two of the worst bear markets in the past century, there are other socio-economic factors which have deterred Millennials from investing- including high household costs, depressed wages, and the major issue of student loans. The summer of 2017 saw the total amount of student debt in the UK soar to above £100bn, meaning that many Millennials are burdened with large amounts of student debt, with the average debt of graduates in the UK expected to be just shy of £51,000 after interest rates on student loans are raised to 6.1%.
Millennials are clearly experiencing problems with having sufficient capital to invest- about 40% of Millennials claim that they are unable to invest as they believe that they do not have sufficient capital to do so, according to a financial literacy survey held by the financial app Stash. This claim may very well be true, as reported by an American survey by GOBankingRates. It found that 72% of “young millennials” aged between 18 and 24 have less than $1,000 in savings while those aged 25 to 34, which are known as “older millennials”, are not fairing much better with 67% having less than $1,000 in savings. However, some of this issue has been self-inflicted as this comes at the same time that a study held by Fidelity Investment found that 44% of Millennials described themselves as spenders when asked to describe their approaches to finances, while only 9% described themselves as investors.
What are the Priorities of Millennial Investors?
According to the research by the Morgan Stanley Institute for Sustainable Investing, 86% of Millennial investors are interested in “sustainable investing”, while another study by Morgan Stanley shows that 59% of Millennials believe that there is a trade-off between financial returns and social impact, leading to many referring to them as “not natural capitalists”. The priorities held by those Millennials who do decide to invest are far from those held by generation X or the baby- boomer generation. No longer is the act of investing only for financial returns; a lot greater emphasis has been put on socially responsible investments.
Millennials now choose to engage in “sustainable investments” and place their capital in corporations which protect the environment, lessen poverty, or encourage economic growth and human rights worldwide. The morality of investing in certain corporations, and profiting from the distribution of goods and/or services which may be detrimental to one’s wellbeing, is being questioned like never before. Examples include corporations who operate in the “sin industries” and create products such as tobacco and alcohol, as well as gambling institutions. There has also been a recent surge in the interest in corporations that produce renewable energy and those are viewed as being beneficial to society.
Source: Visiual Capitalist
Green bonds, like normal bonds, are debt instruments which are issued to fund environmentally friendly projects undertaken by firms specialising in the production of renewable energy. Having been first introduced in 2007 by an investment bank in Luxemburg, the recent trend in the issue of these specific type of bonds clearly shows the shift in demand towards “sustainable investing“. Demand has increased to such an extent that now several countries are also issuing
Demand has increased to such an extent that now several countries are also issuing green bonds. Poland was the first to issue sovereign green bonds in December 2015, and the country was closely followed by France and Argentina. The total issuance of green bonds almost doubled from 2015 to 2016 to reach approximately $80bn. With $19bn of green bonds issued during the first two months of 2017, it is expected that the total issuance in 2017 will substantially increase from its 2016 level. Moody’s Investor Services projects it to reach $120bn by the end of the year.
Source: Climate Bonds Initiative
The Impact Millennials Will Have on the Future of Finance
Although Millennials currently fail to match the investing rates of older generations, those who do engage in it will ultimately change its future. According to Goldman Sachs, the Millennial generation is the largest in history and, as a result, will have a much greater influence in the shaping of economic trends than the Baby Boomers did. An estimated £30trn in assets is expected to be passed from the Baby Boomer generation to Millennials in the coming years, so it is inevitable that financial industries and corporations will have to make stark changes to be able to cater for this.
Certain trends in how Millennials invest are clear- many prefer access to ownership, experiences over possessions and have little brand loyalty. Some of these are part of the reason for the success of Airbnb and Uber at the cost of more traditional firms in the travelling and transportation industries over recent times. Many traditional procedures, such as business loans being granted by banks, are now being questioned and are instead being replaced by innovative alternatives such as peer-to-peer lending. Millennials also prioritize their time much more than their elders and therefore show a much greater demand for goods and services which are convenient and allow for greater free time.
As a result of this, it can be said that that actively managing investment portfolios is not high up on young peoples’ agenda. This may lead to an increase in passive investments such as ETFs (funds which track and attempt to emulate the performance of a certain index, commodity etc.). In addition to this, due to a lack of confidence in traditional investing practices and those responsible for managing them, it could be ascertained that portfolios managed by AI and ones which receive signals from algorithms will boom in popularity in the near future.
Due to their youth, the returns on many sustainable investments are relatively unknown, and only time will tell whether they turn out to be financially viable. One thing, however, is for sure: firms must place the utmost importance on their procedures and public image, because long gone are the times when impressive financial returns could excuse questionable corporate morality.
Venezuelan Digital Currency Backed by Oil
Venezuela has announced plans to launch a digital currency, “the petro”, backed by the country’s oil and mineral reserves. The petro aims to help ease the country’s monetary crisis but sceptics claim the proposal has no credibility and will not help those in extreme need.
Why It’s Important
Hyperinflation has eroded the Venezuelan bolivia’s value by 97% this year, making imports incredibly expensive and causing many to abandon trust in the currency. The country’s oil reserves made up 95% of its exports in 2016, while oil and gas extraction accounted for 25% of GDP. Rich supplies of resources provide some initial credibility to the proposal, but President Maduro’s questionable track record when it comes to monetary policy is making many sceptical about the proposal. His currency controls and money printing have only added to the monetary crisis. Maduro has not announced when the digital currency would come into use or any details regarding how the country would create such a system.
Opposition leaders argue the country’s shortages of food and medication are far more pressing and that the digital currency will not address this. The digital currency may provide a more trusted medium of exchange, but it is unlikely to help those in excessive poverty.
Venezuela’s Inflation Is at 4000%. Here’s Why
Venezuela’s currency, the bolivar, has lost 96% of its value this year. As the currency becomes near worthless, imported food and medicine are in short supply. A humanitarian crisis is unfolding.
The government and state-owned oil company, PDVSA, owe bondholders $60bn alone and have recently defaulted on debt repayments. More defaults could mean investors seizing their stake in Venezuela’s oil.
Why Is Venezuela in Debt?
Acting upon the country endowment of natural resources made it an economic success in the mid-2000s.
Yet, while the price of oil skyrocketed during the late-2000s, former President Hugo Chávez matched this with Venezuelan public debt.
Once the price of oil dived in June 2008, lenders stopped extending credit to the country.
Defaults on government bonds are largely to blame for this inflation.
In 2016, OPEC found that oil reserves accounted for 95% of the country’s exports, while the oil and gas extraction combined made up 25% of its GDP.
Venezuela’s overdependence on oil and lack of saving during its heyday are the leading causes of the current crisis.
The Psychology Behind Saving
The idea that the poor do not save enough money just because they are simply “too poor to save” is wrong.
Gambian farmers have in the past saved in cash (wooden lockboxes with savings were smashed open in an emergency or once the savings goal was reached), stored crops, and consumer durables. Saving in livestock and jewellery enabled other farmers to convert cash into less liquid assets to prevent unwarranted and frivolous spending. A detailed household survey conducted in 13 countries found that for many people in the developing world saving may be counter-intuitive. The poor and the extremely poor, those living on less than $2 a day and on less than $1 a day, respectively, do have a significant amount of choice in regards how to spend their money.
The Developing World
The poor do not use all of their income to buy calories, but only allocate between 56% to 78% to food. Spending on tobacco and alcohol (considered non-essential and nonfood items), and festivals (weddings, funerals or religious events) plays a significant role in household budgeting. For example, the poor in rural areas of Mexico spent slightly less than half the budget on food, and 8.1% on alcohol and cigarettes. The poor and the extremely poor spend about the same on food, which suggests that the extremely poor feel no extra compulsion to purchase more calories. Instead, the remaining income is often saved across a variety of informal saving groups, including peer-to-peer banking and peer-to-peer lending.
It is often the poor, women and the rural communities who are the least banked (those without an access to formal banking services). Not surprisingly, without an access to savings accounts or other formal financial services, it is difficult for families to manage unexpected risks, like illnesses, or plan children’s education. But the desire to save and engage with financial services is still there, as shown by a large uptake in the savings plans in Kenya despite high-interest costs, high withdrawal fees, and close to negative interest rates.
Yet, inchoate financial infrastructure in the developing world cannot on its own explain undersaving. Behavioural economists argue that the poor are no different to the rich in their saving habits: both groups are subject to cognitive biases and inherent human irrationalities and face self-control problems. When it comes to saving, “present bias” (or procrastination, proverbially) occurs when people give stronger weight/preference to an earlier option or purchase that provides instant gratification, rather than setting some funds aside for emergency use. Due to income uncertainties, however, the consequences of this “live for today” behaviour are far more detrimental to the poor than on the rich.
The Developed World
Undersaving is not exclusive to the developing world. Household saving rates, the difference between disposable income and consumption, vary greatly across the world. In 2017, Switzerland and Luxembourg, closely followed by Sweden, are the three countries with the highest savings rates. However, a higher GDP per capita does not necessarily equate to a higher savings rate.
In other words, people with higher income in the developed world countries do not always save more. Consider the US with GDP per capita $57,466 and savings rate of 5.3% and the Czech Republic, GDP per capita $35,127 and a savings rate of 6.7%. Similarly, with GDP per capita of over $43,000, the UK’s household savings rate was 3.3% in 2016, the lowest level since 1963, while in Hungary ($27,008 GDP per capita) the savings rate has been on average 4.5% in the past three years.
Is it possible to fully comprehend the monetary hurdles of low-income families? Undoubtedly, consuming today might be a rational choice and a necessity to survive. But, biases deserve context. For many in the developing world saving at home still remains hard. Technological innovation in finance and growth of electronic wallets have already alleviated some of the hurdles of saving money, but technology is not the silver bullet that will address undersaving. An active and conscious commitment to saving and awareness of biases could have a strong beneficial impact on the lives of the poor.
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