It’s Millennial day here at Greater Fool! Free Vespas, face stubble, tats and Urban Outfitter gift cards for everyone. After all, you’re special.
You’re also in better financial shape than your wrinkly parents, or so says a new BeeMo report. Economist Sal Guatieri (who’s at least 45) claims Millennials make about 2% more than their parents did at the same age, with young families doing even better – earning about double what the last generation did in 1984.
The bad news? When it comes to real estate, the M-people are seriously pooched. More than 85% carry mortgage debt (compared with 79% for their parents at that age), with the average house now costing about 12 times the median family income. That multiple was just 5 in Michael Jackson times.
So, Millennials who choose to invest their money instead of trying to turn into their parents are probably geniuses. After all, housing is destined to correct, mortgages suck (no matter how cheap the rate), real estate hurts mobility, and the last thing any hipster needs is a condo you can’t dump.
But as I detailed yesterday, most Millennials are wusses. They’re insanely fearful of risk and loss, tend to exaggerate financial swings (inexperience is a powerful thing), extrapolate recent events into long-term truths (thank you, Google), are functionally innumerate and therefore easy prey for [email protected] So, it’s turned into the savings account-and-GIC crowd who have no idea that there is anything in the world between houses (safe) and stocks (zombie apocalypse).
The kids seem to agonize that another 2008 will occur, even though few suffered any losses. They’re duped by media coverage of financial news which focuses on short-term swings and always portrays investing as gambling (in terms of ‘winning’ or ‘losing’ assets and strategies). They lust after houses sitting at all-time price levels, but run screaming from equity markets at the same point. Like most people, Millennials have no long-term focus and end up buying high and selling low.
So here are some tenets of the Millennium Portfolio.
First, understand that balance defeats volatility and saves your butt. For example, a balanced portfolio of 40% safe stuff and 60% growth assets has averaged 7.3% over the last 10 years, despite the 2008-9 correction. When the Dow shed 55% in 2008, the balanced portfolio lost 20% – then regained it all in 2009. It took the stock market seven years to recover. Over the last four years, this portfolio has returned more than 10% annually.
Second, no individual stocks and no mutual funds. Stocks are too volatile and funds too expensive. The best choice are ETFs – exchange-traded funds – which are cheap, liquid and mirror indices, giving you tons of diversification with less risk. Third, if you have a substantial amount of money (over $150,000) then hire somebody to manage it. A fee-based advisor should cost no more than 1% of what you hand over to manage (paid in dribs, monthly), and it’s tax-deductible. That’s far less than owning an equity mutual fund at the bank, plus you get a personalized portfolio, free hand-holding and a guy to yell at.
Fourth, wait a little. We’re at a time when most financial assets are too expensive. Normally stock and bond prices move in the opposite direction (called ‘non-correlation’) but these days everything has been goosed (just like houses). Strikes me a good buying point for equity-based investments (ETFs holding all the companies in the TSX 60 or the S&P 500, for example) would be 10-15% below current levels.
Of course, that will take guts. I can assure you when the market sheds 15% this blog will be brimming with dour dinks telling you 2008 is just around the corner and stocks are on their way to zero. But it won’t happen. There’s no crash rerun coming, no financial crisis, no bank failures, no bond default, no reason to hide in cash. If you believe otherwise, I don’t expect you to buy a house or have children.
Finally, what should a Millennial invest in for a period of four or five years while waiting for the housing gasbag to erupt and prices to moderate, so you have a fatter down payment and some diversification?
Here are the asset types, and the weightings. Don’t ask me to spell out individual ETFs, as it would be improper to do so. I am not in the business of promoting, or selling, any individual securities.
Canadian bond index ETF
Preferred share index ETF
Canadian equity index (large cap) ETF
US equity index (large cap) ETF
International equity index (large cap) ETF
REIT index (Canadian) ETF
Of course, once you set this portfolio up, careful to buy assets at attractive prices, you must routinely rebalance it. That means selling off the excess amounts of those assets which increase in value and spreading it among the poorer performers.
Yeah, I know it’s counter-intuitive and contrarian. It’s not what Mom would do. And that’s the point.