The global financial crisis of 2008-09 has had a scarring effect on millennials, which is demonstrated by their views on long-term investing, according to a survey by UBS Wealth Management Americas.
The survey found that only 12% of investors between the ages of 21 and 36 would invest found money in the financial markets, while only 28% see long-term investing as a way to being successful.
Millennials’ distrust of the market makes sense, says Michael Castellano, an advisor with Bank of Nova Scotia in Woodbridge, Ont.
Most of these clients experienced the Asian financial crisis of 1997-98, the dot-com bubble of 2000 and the financial crisis of six years ago. They may have witnessed parents losing their jobs or tighter household budgets.
“Being a child or a teenager, you experience it first-hand,” Castellano says. “And it affects your day-to-day life.”
You need to reframe the investing conversation when you’re talking to cautious millennials, Castellano says. He shares the following three steps toward educating young clients on the potential of long-term investing:
1. Redefine risk
Although young investors consider risk to mean “losing money,” you must inform them there are other ways to risk their financial futures.
A client not reaching his or her retirement goals is also a risk, Castellano says.
Another potential risk is that your client requires funds but is unable to access them because he or she is locked into a long-term, and low-return guaranteed investment certificate (GIC).
2. Talk to them about the benefits of time
“Let [your clients] know that the biggest commodity to any investor is time,” Castellano says. “That is something young people have a lot of, relative to other generations.”
Show your clients that investing sooner rather than later will help them reach their retirement goals faster and more easily.
For example, the average Canadian income is $48,250, according to Statistics Canada. If your client earns that amount, she will probably need approximately $32,000 for each year in retirement starting at the age of 65.
If your client is 25 years old, she can put aside between 10% and 11% of her monthly income, which is $5,200 per year.
But if she doesn’t start until she’s 45, the amount required shoots up to $11,500, which is 24% of her income.
Explain how compounding interest benefits long-term investments and should help produce greater returns.
Another way in which time works to a millennial’s benefit is that his or her investments can wait for a market recovery if the economy experiences a downturn.
“The same can’t be said for people who are retiring,” says Castellano. “It’ll take years before their investment returns to its previous value [prior to] the market correction.”
3. Make investing relatable
Don’t just tell your clients the name of a fund. Instead, show them which companies will hold some of their money. If your clients know those companies, that’s even better.
“If [your client] is familiar with these types of investments,” Castellano says, “[they’re] more confident and involved in the plan.”
Many of the companies whose goods and services your clients consume are publicly traded. Which cellphone provider does your young client use? Where do they buy their groceries?
If your millennial client recognizes that these companies are successful, Castellano says, he or she will be more inclined to invest in the market than in a GIC that promises a return of 1%.