There is no doubt that the Millennial generation (born 1975 to 1995) are now facing hardships that the luckier generation of their parents did not have to endure.
Yes it’s been part of the capitalist system since the days of the ‘robber barons’ but it’s now worse than ever. Credit Suisse reported this week that the richest 1% own half the world’s wealth. The sustained bull run in equities has been a factor but so too has tax avoidance by rich individuals and multinationals, as revealed by the recent Panama Papers.
A perfect storm of rising house prices, a shortage of accommodation and tighter mortgage rules have all combined to result in lower home ownership for Millennials compared to Generation X (born 1965 to 1975) or Baby Boomers (born 1945 to 1965) at the same age. The absence of this fundamental base of financial security for so many has serious long term social consequences.
Technological change continues to impact employment (and therefore incomes) massively. Millennials may be more educated than their parents but they have to deal with student loan debt, zero hour contracts and competing with robots for jobs – potentially making them the first generation in history to be worse off than their parents.
The Credit Suisse Global Wealth Report also noted that the Millennial generation have a poorer pension outlook than the generation before. This is a consequence of lower earnings (and hence lower pension contributions), the end of generous defined benefit company pension schemes and lower / later future State pensions as a result of the large and ageing Boomer generation.
It may be that the Millennial generation will driven by the inequality of their socio-economic circumstances to protest many of the government policies than underpin the modern capitalist system, both in Ireland and globally. This might result in sweeping changes to tax and welfare systems and lead to a fairer and less divided society.
Do you think you have free will? How often do you exercise it? You may need to think twice about your answers because every time we make a decision there are powerful behavioural forces hampering our ability to choose.
The dominant force I want to talk about is inertia, our deep psychological resistance to change. In many situations we seek to minimise the effort or cost of thinking. For example, as Nobel Prize winning author Daniel Kahneman points out in “Thinking Fast And Slow”, 12% of Germans are organ donors versus 99% of Austrians. The reason why? Inertia. Germans (like us Irish) have to opt-in but Austrians have to opt-out. It’s easier to do nothing than to do something. Default settings are therefore powerful tools in framing our choices.
Whether it be a pension plan, a privacy setting or a car rental agreement, any change to the default requires effort on our part. This may be a good thing if product providers are acting in our best interests but as Cass Sunstein notes, “Choosing Not To Choose” is often not the right decision. For example, we end up with some unwanted and expensive holiday insurance when all we actually wanted was to book a budget flight online.
In my business I see a lot of people whose pension details are not just buried in a dusty shoebox, they are also stuck in an inappropriate asset class. Because pensions are boring/complicated/opaque, no great effort is made to match asset allocation to the clients’ circumstances. Some surveys show that up to 85% chose the default option – which in my experience is often too conservative for a lifetime investment strategy. Similarly, I know of many instances where fear and loss aversion has driven money into cash after the 2008 crash but inertia has resulted in many years since of low/no performance.
The solution? In the case of pensions, ensure your financial advisor has an ongoing hands-on approach to your pension investments. If you don’t have an advisor you will need to make a little bit of effort to rescue your pension from the doldrums.
More generally we have to hope that governments and corporations take more responsibility so that our pre-wired inertia bias is no longer used against us when it comes to product sales.
In the wake of our exit from the Bailout, it’s a good time to look back and think about key lessons that Irish investors should never make again. The more I think about it, the more I realise that there is really only one key lesson to learn.
Diversification works. Has always worked. Will always work. Because we cannot predict which asset classes will produce the best return in the future, we can reduce the chances of large losses by having a risk targeted portfolio of varying proportions of cash, bonds, commodities, property, equities and so on.
So applying this single lesson further to the Irish experience, we should remember that (and excuse me for being obvious) …
At Money Smart all our clients are guided towards a bespoke globally diversified risk targeted portfolio of various asset classes to be held for the long term. We know where our clients want to get to, we know their true risk tolerance, we don’t pick stocks, we don’t time markets, and we keep it simple with portfolios built for boom and bust.
This lesson sounds obvious but it is still not being learned because we will always hear from some expert or other about the next big thing to pile into. So we all need to keep reminding ourselves about this or else we will be going back to the roulette wheel again and again.