Recent studies have found that millennials are saving at higher rates than previous generations, but a new survey suggests that they’re largely unaware of how they should allocate their assets.
According to a survey of investors with net worth over $250,000 from Greenwich, Conn.-based AMG funds, many investors between the ages of 18 and 35 misunderstand how risk tolerance is defined and what constitutes a well-diversified portfolio.
Half of the survey’s millennial respondents, 49 percent, reported having an “aggressive” risk tolerance -- yet 65 percent of the millennial respondents said market swings make them uncomfortable.
“They’re self-stating that they’re aggressive investors, but they exhibit behaviors that suggest that they aren’t aggressive at all,” says Bill Finnegan, AMG Funds chief marketing officer. “I attribute that to the lingering affects of what they witnessed going through their formative years during the dot-com crash and the financial crisis, and then looking at their parents who are most likely facing retirement anxieties.”
Millennial respondents were equally likely to rank growth maximization and generating income as their top investment goals.
Many millennials also seem mystified by portfolio diversification: 72 percent of the respondents said that a portfolio was adequately diversified as long as it includes a broad range of stocks.
“They’re not getting the fundamental concepts of allocating, diversifying and rebalancing,” Finnegan says. “Millennials lag in financial education. These folks think a long-term holding is five years. That’s a sign that we should be helping them to segment their assets into short-term and long-term savings and investments.”
Most of the millennial respondents, 70 percent are interested in alternative mutual funds and wish they knew more about alternative investing.
The workforce’s youngest generation also believes in the potential for active management to produce outperformance. More than three-quarters of the survey’s respondents, 78 percent, said that they believe active management provides incremental value.
Millennials are more open to alternative investing than their elders, while 83 percent of millennial respondents are interested in a broader approach to investing, including alternatives, only 52 percent of the respondents over age 55 said the same.
For AMG’s study, alternatives were defined as any investments outside of traditional stocks, bonds or cash.
More than half of the survey’s millennial respondents currently invest in alternative strategies, 69 percent said they wished they knew more about alternatives and 70 percent believe that a liquid alternative mutual fund would benefit their current portfolio.
Similarly, more than half of the millennial respondents, 56 percent, currently own actively managed mutual funds, and most, 94 percent, plan to maintain or increase their current allocations to active funds.
The findings conflict with previous studies that have shown millennials have large allocations to cash.
“Holding cash is an active investment decision, “ Finnegan says. “I believe that a lot of these folks are holding cash because they’re afraid of the potential tail risk that’s out there. At their age, they should be seeing potential market drops as a buying opportunity.”
According to the AMG Funds study, younger workers have an optimistic economic outlook, with 73 percent of the millennial respondents anticipating that the U.S. economy will improve and another 74 percent expecting U.S. equity markets to rise in the near term.
Should they be wrong, 73 percent of millennials said that they felt well-positioned for a market downturn -- yet 30 percent said they would either reduce their equity exposure or exit the market entirely in the event of a 20 percent drawdown.
Most millennial respondents, 86 percent, reported having a long-term outlook on their investments.
Millennials are also willing to pay for financial advice -- 60 percent of the respondents said they would pay more for oversight of their investments.
AMG Funds surveyed approximately 1,000 affluent individual households in its survey, including over 100 millennials ages 18 to 35, in September 2015.