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Why Aren't Millennials Investing? Fear Isn't the Only Factor

Danielle Maddox

Most analysis of Generation Y's relationship with the stock market focuses on millennials' reaction to the recession, but fear is not the only reason young adults don't invest in the stock market. According to recent research, they have substantial financial obstacles as well, mostly in the form of student loans. In January, financial services firm UBS surveyed over 1,000 adults ages 21 to 29, and found that millennials devote less than one-third (28 percent) of their portfolio to stocks and over half (52 percent) to cash while non-millennials keep almost half of their portfolio (46 percent) in stocks and less than a quarter (23 percent) in cash.

Today's recent graduates witnessed one of the most turbulent market cycles in recent U.S. history. They watched their parents struggle through the recession, and many of them suffered unemployment in the wake of it. Analysts have even compared millennials' conservative money habits to the investment behavior of young adults during the Great Depression.

"If we look at what was happening in the world when they were growing up, we can understand how this makes sense," says Betsy Flanagan, president of WorkStrengths, a California company that helps people find work and assists businesses in employee engagement, and former wealth manager. "Millennials grew up during the Internet crash, the financial crisis of 2008, the housing bust, and watched while their parents' financial assets and security got crushed repeatedly, and they worried about how they would ever be able to retire."

[See: 7 Tips to Help Millennials Save for Retirement.]

Danny Groner, a 31-year-old marketing professional in New York, graduated from college in 2005 and was derailed early in his career by the recession. His primary concern, given the state of the economy, was to pay his monthly bills, and he did not begin thinking about saving or establishing a 401(k) until about five years into his career. "The idea of saving definitely wasn't on my mind," Groner says. "I built up some momentum and worked on a monthly publication ... [I] figured around 2008 I would move to the big city and get my feet wet, but unfortunately the recession set forth."

Such experiences have led to an emotionally driven financial approach for many millennials who perceive the stock market, and most investments, as a risk not worth taking. A Wells Fargo study released in May 2013 that surveyed more than 1,400 millennials reported that more than half are "not very confident" or "not at all confident" in the stock market. Marlene Morris Towns, marketing professor at Georgetown University, attributes this mistrust in large part to media coverage of Wall Street. "I think that Wall Street has been vilified a lot recently, so they looked at financial professionals with mistrust," Towns says. "When people say, 'We want to put together a portfolio that works best for you,' they don't necessarily believe that these professionals are looking out for their best interest."

[Read: How the 'Sandwich Generation' Can Build a Better Budget.]

Consequently, many of those who consider investing in stocks see the market as a short-term investment. According to a MFS Investment Management report released in February that surveyed more than 200 adults under age 34, 40 percent of those investors said they think five years in the stock market is a long-term investment. Almost a third of those surveyed consider themselves short-term investors. This approach, however, works against investors because short-term stock investments are subject to a higher rate of volatility.

Meanwhile, the rise of student loan debt also presents a blockade for young adults looking to invest. "Millennials have also have taken on more student loan debt than any previous generation, and have suffered a prolonged challenging job market with high unemployment," Flanagan says. "Many remain significantly unemployed and underemployed and thus have little disposable income." Furthermore, the Wells Fargo study reported that student loan debt is Generation Y's primary financial concern.

According to that study, 29 percent of baby boomers said they took out loans to pay for education, but more than double that percentage of millennials said they financed school with loans. Meta Brown, senior economist at the Federal Reserve Bank of New York, wrote in a May blog post that the average student loan debt has doubled in the last decade, rising from about $11,000 in 2003 to about $21,000 in 2013. This substantial rise in loans leaves little income to invest.

[See: 7 Ways to Pay Less for Your Investments.]

Wells Fargo also reported a record-breaking tally of millennials living with their parents, and debt is one major reason. The average household debt of 28- to 32-year-olds, according to the study, rose by nearly $7,000 between 2001 and 2010. In addition, a Pew Research poll released in October 2013 reported that for the second year in a row, a record number of millennials remain in their parents' homes. Over a third of 18- to 31-year-olds (21.6 million) lived with their parents in 2012 and 2013.

Many people may wonder why today's young adults can't become financially independent, but the job market for millennials still has not returned to 2009 employment levels and remains well below prerecession standards. The above surveys show that Generation Y's lack of enthusiasm for the stock market stems from financial setbacks as well as emotional reservations.

In Groner's case, he eventually decided to consult a financial advisor in 2011 and has since invested aggressively to make up for time lost. He experienced a slow start, though. "There were many months where I took multiple part-time jobs and was spending more than I was bringing in," Groner says. "It took years longer than I expected to before I was able to say I made it."

Though recent history has changed millennials' view of the financial industry, economic obstacles have also limited young adults' ability to invest. "I think that in a sense, those are two different reasons, two big reasons, but they touch on different aspects of their decision-making process," Towns says. "Being burdened by things like student loans definitely affects how much cash you have to save ... I think the rest of it is more of a psychology of investing, so it's more of people's deep-seated fears and mistrust. When they have money, they wouldn't feel comfortable necessarily relinquishing it to an advisor or to the stock market in general."

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