One of the most important ways to help millennials save is through education. As Baby Boomers enter the retirement-distribution phase and younger generations continue to lag in savings, the time to bring millennials up to speed is now. We can promote education through social media and online, but some responsibility falls on employers who can provide valuable information to their millennial employees.
Employers should help their employees save for retirement through 401(k) education and ideally should start making 401(k)s mandatory. That will certainly get millennials more involved. Advisors can help by educating local employers through employee seminars and by providing more personalized advice when desired.
Keeping Up With Social Evolution
The ESG (Environment Social Governance) movement is in the infancy stages, but it has started to pick up investment interest. One reason is that social investing as a strategy has evolved in recent years.
Traditional values-based investing, SRI (Socially Responsible Investing), dates back decades. Clients typically associate it with screening out (excluding) negatively viewed companies, such as tobacco, weapon manufacturers, and some oil companies. Alternatively, the newly evolved ESG approach focuses on including investments (as opposed to excluding) that are viewed positively — companies that are benefiting society.
This new-school approach resonates more with millennials. Although older generations were also focused on social issues, millennials have zeroed in on global climate change, gender equality, and companies that are helping make the world a better place.
Keeping Up With Risk Evolution
As millennials, we’re still fairly young, but as mentioned previously, we’ve been through two major bear markets: the tech bubble in 2000 and the financial crisis in 2008. Both events made us distrust the markets. Market fear may have something to do with the lack of money millennials are investing, so it is important to highlight to millennials the importance of risk management. At CLS, we focus first and foremost on managing risk in client accounts.
What the financial crisis taught us is the traditional view of risk management, a stock-to-bond approach, isn’t the best way to manage risk. There are many factors it doesn’t capture, mainly the different risks within asset classes. Large-cap stocks have different risks from small-cap stocks, and high-yield bonds or corporate bonds have very different risks from Treasuries, which are a safe-haven asset issued by the U.S. government. So, it’s really important to assign specific risk at the individual asset-class level before aggregating it up to a risk target.
At CLS, we call this process Risk Budgeting and it is the baseline of our portfolio management philosophy. We’ve found it works well with new, younger clients. We have developed a Risk Budget calculator on our website that evaluates both ability and willingness to take on risk and suggests the market risk level an investor would be most comfortable with. In the event of another market crash, pullback, or spike-up, it is key for investors to be comfortable with their returns. Our goal is to keep clients invested for the long term as this gives them the best chance of achieving their retirement goals.
Kostya Etus, CFA, is the Portfolio Manager at CLS Investments, a participant in the ETF Strategist Channel.
3300-CLS-12/18/2017.