Are Millennial Investors Making a Big Mistake? Young Hold More Cash Than The Old

Speaking as part of a panel of experts debating the investment outlook for 2019 for FT Money Show podcast, Moira O’Neill, head of personal finance at Interactive Investor, the investment platform, revealed millennial investors currently hold more cash than those approaching retirement. The statistical surprise flies in the face of the accepted investment wisdom that says young investors with a long term outlook have nothing much to fear from market downturns and should be fully invested, safe in the knowledge they don’t have to lock in losses before a recovery.

On the other hand, older investors approaching retirement are advised to hold more cash to avoid having to cash in investments at a loss if markets crash or hit a rough patch at the point they have to start drawing down an income from their investment portfolio. So are millennial investors currently making a significant mistake by holding more of their portfolios in cash than the average across demographics?

Moira O’Neill says that the current average percentage held in cash across all of the investment portfolios held on the Interactive Investor platform, the UK’s second largest investment platform by market share, is 18%. However, that rises to 24% for the under 35s. The platform’s head of personal finance revealed several other interesting insights into the investment patterns of millennial investors. They are much more likely to be invested in tracker funds than individual stocks and are less active investors than over-65s, who own more individual stocks and look to ‘buy the dips’. The portfolios of millennial investors also have a much more global outlook than the more UK-centric older investors and they are more likely to buy stocks on non-UK stock exchanges, particularly tech stocks.

There are two main theories around why millennial investors are currently holding so much cash. The first is that they are anticipating further stock market falls over the next couple of years and hope to boost their portfolios by buying at or near the market’s bottom. The other interpretation is that they simply don’t know what to buy in currently volatile markets and are worried about sustaining paper losses if markets continue to fall.

The first scenario shows joined up thinking but is risky. For young investors market downturns can be considered a positive as returns are heavily influenced by the value of an investment’s initial price. The closer to the bottom of a downturn investments are made the better for their long term returns. However, it is also generally never a good idea to try to time the market. It’s very difficult and a much better approach for millennial investors would be to drip feed cash into their portfolio month-on-month. That way there is a guarantee a good portion will be invested at or near the optimal point.

The second approach is not one young investors should take. With many years ahead of them before they need to cash in on their investments, sticking to their usual investment principles is the best approach. It doesn’t really matter if the paper value of their portfolios takes a temporary loss as it will subsequently recover as markets do. So if you are a young investor, ignore the fear of losing money and stick to your usual, long term investment principles.