Debt and Skepticism: A Millennial Mindset

Dan WilliamsDan Williams, CFPInvestment Analyst

Having overshot 30 by a couple of years, I have had to come to terms with the many changes that come with my new age group. Some good, such as lower car insurance rates. Some bad, such as feeling that 9:00pm is closer to the departure time rather than arrival time for a social gathering. Some are mixed; being called “sir” with a high consistency and no tone of irony. I am also no longer considered to be part of the “young adult” group that is said to represent the emerging consumers in the economy and, subsequently, more closely studied by market researchers. These new kids on the block, known as the Millennials, had the financial crisis occur just as many were entering college and the workforce and were beginning to make their first big life decisions. Not surprisingly, they now think about money differently than I did at their age, just a brief decade ago. So what is the current financial mindset of this group some seven years later?

Goldman Sachs reported, in a June 2015 study, as shown below, that this group upon receiving a windfall of cash would look to pay down debt more than any other option by a wide margin.

Williams_chart1

Goldman Sachs Research Proprietary Survey

The result is not entirely unsurprising given that a majority of college students graduate with debt and, often, this debt is of a daunting amount. However, the magnitude of this victory reflects an overall conservative outlook on how to manage their financial matters.

The second finding, shown below, is of greater concern as it shows Millennials to be very skeptical of investing in the stock market. When asked whether investing in the stock market was a good idea for them, less than 20% answered that the stock market is the best way to save for the future. Approximately twice this amount claimed ignorance, fear of volatility, or lack of perceived fairness as reasons to avoid the stock market. Clearly, the events of the financial crisis have left scars on this group that have yet to heal.

Williams_chart2

Goldman Sachs Research Proprietary Survey

I am left feeling very conflicted for this group’s future financial health. On one hand, it’s very admirable that, unlike some prior young adult groups, this group has realized early on that debt is not something you simply attempt to defer payment of indefinitely. At least in the case of high interest credit card debt, it is hard to find fault with the pay-down-the-debt option as a sound financial decision. However, an inflexible focus on debt repayment combined with shunning or deferring of investing in the equity markets represents a significant challenge to this group’s ability to save meaningfully for the future.

Quite simply, equity investing has been proven to be one of the best ways to grow purchasing power over time. One advantage the Millennials have is ample time to invest, ride out periods of market volatility and let returns compound. To forego any portion of this advantage has potential to be tragic for future savings. Consider a one-year delay in retirement investing at the start of a career The missed opportunity is more than just the amount of one year’s contribution; rather that one year’s contribution compounded with typically 40+ years of returns until retirement. Over 40 years, a single $5,000 investment compounded at 8% becomes over $100,000. Six consecutive years of $5,000 contributions compounds to over $500,000. This is the potential cost of delaying investing just for “a couple of years.” In other words, earlier contributions are invested longer and can compound to greater amounts. On a per-dollar basis, these are the most impactful retirement contributions.

Contribution at start of year Value of contribution at end of year 40, assuming 8% return per year
Year 1 $5,000 $108,622.61
Year 2 $5,000 $100,576.49
Year 3 $5,000 $93,126.38
Year 4 $5,000 $86,228.13
Year 5 $5,000 $79,840.86
Year 6 $5,000 $73,926.72
Total $542,321.72

Source: Brinker Capital

Albert Einstein said, “Compounding interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” More attention is given by advisors to older clients with more assets and fewer years until retirement. Often this is due to the fact that clients become more tuned into investing matters as they begin to see the light at the end of the tunnel (whether it be the light of retirement or the oncoming train of insufficient savings). However, the greater opportunity for advisors to help a client’s future financial situation occurs earlier on in a client’s investment life. Helping young clients start off with good financial decision making, such as early investing, and letting these good decisions compound, is likely one of the best ways he or she can add value. Each client situation is different as each client has different goals. However a secure retirement is likely a very common dream and as Langston Hughes wrote, “A dream deferred is a dream denied.” Anything that we can do to ensure those dreams are not deferred is truly good work.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

A Tale of Two Currencies

Joe PreisserJoe Preisser, Brinker Capital

As the global marketplace continues to recover from the worst financial crisis since the Great Depression, two of the world’s major currencies, the yen and the euro, have embarked on remarkably different paths of late in a reflection of the efforts of the Central Bank’s, which guard the levers of these economies, to achieve growth and stability. The responses of the nations ‘ respective policy makers has led directly to a steep decline in the value of the Japanese Yen, while the European continent has seen its common medium of exchange rise to heights unreached since 2011. Although the nature of the challenges facing what are two of the largest economies in the world differ significantly, the efficacy of the monetary policies employed to combat them will have a profound effect on markets across the globe.

In Japan, newly elected Prime Minister, Shinzo Abe, has grabbed headlines after only a few weeks in office, through his advocacy of aggressive measures designed to foster growth within a nation that has been mired in stagnation. Dubbed “Abenomics”, the plan is a multifaceted approach to economic stimulus whose centerpiece is a desire to devalue the nation’s currency, in an effort to support its exporters by rendering the goods and services they provide less expensive on the world stage. According to the Wall Street Journal, on February 6th, “Analysts at Goldman Sachs Inc. estimate that for every 10 yen the currency weakens against the dollar, profits of exporters would rise by 7% to 10%.” Mr. Abe has professed his aim to achieve this through a controversial limiting of a measure of the Bank of Japan’s (BOJ) autonomy in an effort to effectively force the reflation of the economy through a program of unlimited monetary easing and large scale stimulus. In addition, the Prime Minister has pledged to fill the recently vacated position at the helm of the BOJ with an appointee who shares his commitment to revitalizing the country’s economy through all available means (The Economist, Jan 26th). The efforts undertaken thus far, combined with Mr. Abe’s emphatically-stated focus on combatting the deflation that has plagued Japan for more than a decade, have resulted in a sharp fall in the value of the yen, and a steep rise in equity prices listed on the nation’s exchange, which should be sustained as long as this endeavor proves successful. “The Nikkei has surged 32% since mid-November…The yen has declined 14% against the dollar over the same period…The gains in Tokyo have made Japan the world’s best-performing major stock market over the past three months ”(The Wall Street Journal, February 6th).2.8.13_Preisser_Currencies

On the Continent, the nearly four-year-old struggle to maintain its union in the face of a perilous debt crisis that threatened the world economy, has led to an unprecedented effort by the European Central Bank (ECB) to support the common currency. The fear of a possible dissolution of this unique collection of countries led directly to the widespread selling of the euro, as well as large scale liquidations of bonds issued by its sovereign members. As the cost of repaying the debt of a host of the European Union’s members rose to unsustainable levels the President of the ECB, Mario Draghi elected to act pledging to do, “whatever it takes to preserve the euro”(Bloomberg News July 26,2012). This statement manifested itself in a series of massive sovereign debt purchases by The Central Bank in September of 2012 which was dubbed, “Outright Monetary Transactions.” Mr. Draghi’s effort brought stability back to the euro-zone, and as a result led to an appreciation of its currency. As investors have become more confident that the worst of the crisis has been averted, the euro has risen further, and is now back to levels untested in two years. The sequence of events on the Continent stands in stark contrast to those in Japan, as Europe’s exporters have seen the cost of their products increase, thus making it more difficult for them to compete in the global marketplace. The threat that this state of affairs poses to the recovery of the region’s economy is such that it was directly and repeatedly addressed by Mr. Draghi this week during a press conference in which he suggested that the Central Bank may take steps to counter the effects of the currency’s rise. The ECB President was quoted by Bloomberg News as saying on Feb 7th, “The exchange rate is not a policy target, but it is important for growth and price stability…We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”

The historic measures undertaken by both the European Central Bank, and the Bank of Japan in the interest of maintaining stability and fostering growth have thus far been largely successful, however it will be the ongoing maintenance of the consequences of this success that will ultimately determine the fate of these economies.