Wednesday, September 3, 2014

Job security

Mark posted about a piece by Barry Ritholtz that had some smart things to say about market timing.  However, I think I want to quibble with the end of his piece:

One last thought on this: The demographic group with the longest investing time horizon are the millennials now in their 20s. According to Patrick O’Shaughnessy, author of “Millennial Money: How Young Investors Can Build a Fortune,” despite their long timeline, members of that generation seems to be missing out. They are significantly underinvested relative to how much time they have until retirement.

Given the dramatic financial crisis of 2007-2009, O’Shaughnessy says it is no surprise that millennials as a group “don’t trust Wall Street.” They also rank “all four major banks among most hated brands.”

“The most basic (and important) decision you make as an investor is your allocation between major asset classes — primarily stocks, bonds and cash.” O’Shaughnessy observes that this cohort is wildly underweighted in equities at 28 percent and overweighted in cash at an astounding 52 percent.

Perhaps it is ironic: The group that has the longest potential runway for absorbing market volatility also seems to be the least interested in investing in stocks.

When it’s time to retire, these folks might be surprised that they cannot go back to live in their parents’ basements again.
So I have a couple of basic questions to ask here.  One, people who are honestly at risk of moving back into their parent's basement should have cash investments.  Nothing is worse than having an unexpected cash crisis (car towed, water leak) where you need money fast to prevent a greater disaster.  Isn't this just prudent?

Second, the leading edge of this group is 35 years old.  So they have to presume that the stock market will do well for another 30 years or so, if retirement is the goal.  That might not be a bad gamble, but we are in the era where the baby boomers may switch from net buyers of stock to net sellers.  That could be a long period of sub-optimal returns. 

But really, the first piece is the most important.  We have moved into a era of decreasing employment security: "at will" employment, attacks on tenure, reduction in unions, and so forth.  In aggregate, these factors make it impossible to plan over long time horizons.  And the lesson of 2007 is that major employment dislocations are often paired with stocks plummeting.  Why wouldn't you keep a lot of money in cash?  After all, ending up as a homeless person because you tried to invest for yield seems like a bad outcome. 

I am not sure that I have a solution, except to note that we are in precisely the sort of employment market where a 401(k) or IRA is least likely to make sense.  After all, they are an asset that can be claimed to handle an unexpected disaster. 

So I am not sure that I would make the snarky last comment.  People growing up in economically depressed periods often have a very different view of the world than those who have always had resources. 

1 comment:

  1. To reinforce your point, I think that most financial planners who are not trying to sell a product will tell you that priority number 1 is an emergency fund--enough money in liquid form (cash or cash-equivalents) to cover 6 months (some say a year) of living expenses. After that, you can start to think about retirement savings.

    Given the terrible labor market these millenials have faced, and the low wages they have to accept if they can even get a job, it is very difficult to save up that emergency fund in the first place.