Book Review: Millennial Money

Millennial Money: How Young Investors Can Build a Fortune. 2014. Patrick O’Shaughnessy.

Millennials — the generation born from roughly the early 1980s to the late 1990s — have gone through a lot in the last two decades. They experienced recessions in 2001 and 2008, with the latter leading to the global financial crisis (GFC). For most millennials, their chosen careers have been a roller coaster ride, and some have already moved on to second careers, mostly because of the GFC’s severe effects on employers. Millennials have seen the life savings of their parents and others dwindle over a relatively short time. Consequently, they are skeptical about investing their hard-earned money in equity markets. In Millennial Money: How Young Investors Can Build a Fortune, Patrick O’Shaughnessy encourages millennials to overcome their skepticism and benefit from the process of wealth creation.

Millennial Money is an easy read that instills high doses of confidence through its analysis of historical data to explain why investing in risky assets is essential. O’Shaughnessy highlights the fact that the millennials’ greatest advantage is their youth and shows how compounding helps them in the long run. One dollar invested today could be worth $15 by the time a millennial retires in 40 years. If one waited 10 years to start investing, however, that dollar would be worth only $7.50 at the same rate of return. In short, postponing investment has a huge impact on one’s retirement lifestyle.

Although millennials acknowledge that they are worried about retirement security, they hesitate to invest because they lack confidence in the stock market. O’Shaughnessy urges them to revise their thinking for two reasons. First, global stock returns have trumped all other asset classes in wealth creation. Second, millennials need to protect themselves from growing income inequality, rising debt, and the economic impact of an aging population — particularly if they live in the United States.

With respect to income inequality in the United States, the top 1% of earners received a cumulative inflation-adjusted salary increase of 57.5% in the 18 years from 1993 to 2011. For the bottom 99%, it was just 5.8%. During the same period, the stock market appreciated by 162%. The only way the average American can bridge this earnings gap, the author maintains, is by participating in the stock market. This lesson can be extrapolated to most other countries.

With respect to the aging US population, O’Shaughnessy points out two risks for millennials to heed. One risk is that tax rates may escalate to pay for rising government expenditures for the growing retiree population. The other is that those expenditures may get so high that the government will ultimately reduce or eliminate support for retirees. Investing in a global stock portfolio offers protection against both scenarios.

O’Shaughnessy proposes three ingredients for the millennials’ investment recipe:

1. Going global
2. Being different
3. Getting out of one’s own way

As for a global perspective, investors are generally biased toward investing in companies domiciled in their home country, simply out of familiarity. This “portfolio patriotism” leads to missed opportunities in international stocks. The stock market in Japan reached its peak in 1989 and never recovered. Meanwhile, markets elsewhere in the world have delivered impressive returns. The author reasons that Japanese investors would have done much better by investing globally than by restricting their investments to Japanese companies. Going global provides exposure to countries with advantages in several areas, including innovation, growing consumer demand, and natural resources. It also offers a hedge against a weakening home country currency.

On the theme of being different, O’Shaughnessy says that although index funds are a great way to begin investing in the market, millennials should consider smart or alternative indexes, which can beat the averages over time. He adds that buying individual stocks using various strategies can be rewarding. Although such strategies can sometimes underperform, resolve, discipline, and conviction ultimately prevail. Unlike an investment manager or adviser, an individual investor does not face “career risk” and can sustain temporary underperformance.

Getting out of one’s own way includes recognizing that we humans are wired to be emotional investors. Emotions lead to such errors as investing only in home country stocks, chasing performance, wanting instant returns on investments, and not selling losing stocks. The way to check these emotions, according to the author, is to make investments automatic. He recommends setting up an automatic contribution from one’s paycheck to a 401(k) and other investment accounts and letting them grow quietly in the background.

To help readers become better investors, O’Shaughnessy makes effective use of his storytelling skills. Some sections of the book are downright inspirational. For example, he recounts how he took a one-year pledge to avoid certain foods, work out three times a week, and refrain from drinking alcohol. It was difficult, but he managed. After he completed the year and wanted to celebrate with the foods and beverages he had avoided as part of his self-improvement program, he found that he was unable to do so. His perseverance and consistency in changing his behavior had worked. The good habits had become deeply ingrained. So too can investors cultivate the habits that will lead to financial success.

Three kinds of people will benefit from reading this book. First, those who are wary of the stock market will learn that although the market is risky in the short term, it is less so over the long term. In fact, stocks may be the only asset class that is not risky over time. Second, those who are already active in the stock market will discover some potentially rewarding strategies. The final beneficiaries are financial advisers, who regularly deal with investors who resist allocating their principal to equities or become jittery over the slightest market correction. O’Shaughnessy’s analysis of how taking profits or pulling money out in a panic is detrimental to performance can help advisers reassure their clients during market upheavals.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.