Millennials have a gusto for bond ETFs — and that may be bad in the long run

Personal finance

Eva-katalin | E+ | Getty Images

Millennials are holding and buying bond exchange-traded funds with more gusto than older investors — and that’s likely not an ideal strategy, experts said.

Millennial ETF investors — a cohort born between the early 1980s and mid-1990s — have 45% of their investment portfolios allocated to fixed income, on average, according to a recent Charles Schwab survey.

That’s a higher allocation than Generation X and baby boomers, who had respective allocations of 37% and 31%.

Additionally, 51% of millennials plan to invest in fixed income ETFs in the next year, more than the 45% of Gen X and 40% of boomers, the Schwab poll found.

That millennials would opt to hold more bonds — and therefore be more conservative than older investors — doesn’t jibe with their typically longer investment time horizon, said Ted Jenkin, a certified financial planner and CEO and founder of oXYGen Financial, based in Atlanta.

Millennials investing for the long term can afford to (and generally should) take more risk than older investors by allocating relatively heavily to stocks. That’s because stocks typically outperform bonds over decades, said Jenkin, a member of CNBC’s Advisor Council.

“Millennials in their 30s probably shouldn’t have 45% of their allocation in bonds,” Jenkin said.

As a general guideline, he recommends adopting the “Rule of 120”: Subtract your age from 120 to get a rough sense of an appropriate stock allocation. For example, using this rule of thumb, a 35-year-old would hold 85% of their investment portfolio in stocks (and the remaining 15% in fixed income).

Why millennials gravitate toward bonds

There are a few likely reasons for millennials’ more conservative stance, experts said.

For one, they could be letting emotions guide investment choices. Many millennials, for example, had just started investing around the 2008 financial crisis, when the S&P 500 U.S. stock index lost 57% of its value.

The oldest millennials also likely still remember the dot-com boom and bust from their teen years, and graduated high school or college at a time when unemployment was high and finding a job was difficult, said David Botset, head of strategy and product at Schwab Asset Management.

Such experiences have had cascading effects and led millennials to be more conservative investors, Botset said.

Investors have a behavioral bias toward avoiding financial loss, known as “loss aversion bias.” But that impulse can cause financial harm in the long run. Stocks serve as the typical growth engine of an investment portfolio, and holding too few relative to your time horizon may mean losing out on future retirement income, for example.

Millennials may also be taking a more conservative investment stance because of current high interest rates, which mean bonds and cash are paying better rates than they have in years, Jenkin said. A safer fixed income investment paying a 5% annual return may sound like a good proposition versus stocks right now, though bonds have historically underperformed stocks over the long haul, Jenkin said.

Articles You May Like

Reddit will let users buy its IPO, but warns that they could make the stock riskier
Stocks making the biggest moves after hours: Block, Carvana, Booking Holdings and more
People are moving out of cities with poor air quality — but many end up facing other climate risks
Starbucks has a new accessible store design. Take a look inside
Beyond Meat launches new, healthier version of burger in bid to bring back customers