David (00:24):

For our second episode of Market Movers, we're going to talk about the next generation of investors, diving deep into how this younger demographic is shaping the investment environment and driving key themes in the markets today. Joining me for this conversation today is my colleague Jack Manley, global market strategist for JP Morgan Asset Management. Also, if you're listening to the audio version of this podcast, you can now watch along on YouTube by tuning into our JP Morgan Asset Management Channel. Link to the show notes. Now, let's get started. Jack, welcome to Insights Now.

 

Jack Manley (00:54):

Thank you, David.

 

David (00:55):

So let's start by talking about the... what we mean by next generation. I mean, when you talk about Gen Z and millennials, what are the birth years that divide these groups, and how big are they?

 

Jack Manley (01:08):

Yeah. So the first thing that's worth pointing out here, David, is that there is no official definition of these generations, which I think is kind of interesting. They're just very slowly in the general consensus kind of determined over the course of time, right. So it's not like there is an official designation for any of these things. But the generally accepted definition of what makes a millennial is that you were born between the years of 1981 and 1996. And the generally accepted definition of Gen Z is that you were born between the years of 1997 and 2012.

 

(01:40):

Now, to put some numbers around that, there are roughly 72 million millennials out there alive at this moment compared to about 69 million Gen Zs alive at this moment. And what I think is very surprising to a lot of folks is that those generations are now bigger than the baby boom and then Gen X. There are more millennials out there than baby boomers. There are more Gen Zs out there than Gen X. There is another generation after this born after 2012. As of this moment, it's called Generation Alpha. Not really worth spending a lot of time talking about them since the oldest ones are only about 10 years old, but give it 5, 6, 7 years, and they're going to be part of this conversation too.

 

(02:23):

And one other thing I'd just like to point out that I think is kind of amusing is that there is a letter gap between Gen X and Gen Z, right. There should be a Gen Y, and that's what millennials used to be. We got rebranded. I remember when I was in high school, I was still Generation Y, so it wouldn't be a surprise to me if Generation Z, that zoomer title that's been kind of kicking around recently really sticks. It'll be interesting to see what happens with Generation Alpha. But again, kind of loose definitions here of what these groups are, but very, very large and significant in terms of their role in the general population.

 

David (02:56):

It sounds like a good job for somebody, the Census Bureau. They all should just take a week, decide what the dates are, and put out a definition, and say, "Look, we're the Census Bureau. This is what it is."

 

Jack Manley (03:06):

Yeah, I'd love it. It'll lead to a lot more clarity, a lot less squabbling, I think.

 

David (03:10):

Yeah. Okay. So you're millennial.

 

Jack Manley (03:14):

I am.

 

David (03:14):

Okay. So millennials have had... I mean, obviously, older generations have had lots of market cycles. I sort of scratch my beard and then talk about you ain't seen nothing yet. But still, millennials have been through some market cycles also.

 

Jack Manley (03:27):

Yeah.

 

David (03:27):

And so what kind of market cycles and what's it done to their psychology?

 

Jack Manley (03:31):

So we have to take into consideration that for every group, minus Gen Z that we might be talking about today, they have experienced the COVID downturn, right, 2020, and the recession that coincided with that and the financial crisis. But if you are Gen X, if you are a part of the baby boom, you have a lot more years of investing, a lot more years of economic growth that helped to sort of diminish the impact of those individual events. When you're looking at millennials, right, we've maybe been investing or at least some way involved with the workforce for, in some cases, 10 to 15 years. And upwards of 10% of our entire experience has been in very significant, historically bad downturns.

 

(04:16):

And so when you're looking at something like economic growth experienced by each generation, millennials, by far, have had the worst period of economic growth relative to Gen X, relative to baby boomers. And that has translated also into asset performance public asset performance, at least when it comes to stocks and bonds. Of all the generations out there, millennials have had the worst equity returns throughout the course of their investing period, roughly 7% annualized since we started investing. And we've had the second-to-worst bond performance over that same time period. So our 60/40 portfolio looks abysmal.

 

(04:56):

And if you think about what that would do psychologically to an investor where you graduate into the financial crisis and then roughly a decade later, you're in another kind of once-in-a-century economic downturn. But, hey, it's happened two times in my lifetime now. You start to get a little pessimistic. I think there's a little bit of nihilism that comes around. There's sort of a tossing the hands up and saying, "Look, none of this really matters. There's no way I'm going to make money in the market. There's no way I can ever compete with the returns, the performance that my parents had, that my grandparents had." And I think, in some ways, that leads to some decision paralysis, right.

 

(05:34):

People just saying, "Look, the market's not for me. It doesn't work anymore." And so you have a lot of money that's going to be kicking around on the sidelines. Gen Z is the total opposite, which I think is so interesting. Of all the generations, they have had the best equity market performance to the tune of almost 13% annualized. You think about what the market's done over the last few years, with the exception of those downturns. The positive numbers have been very, very encouraging. And so it sort of translates into a different psychology where you've never really experienced a downturn. You don't know what a bear market really feels like.

 

(06:10):

You just think the equity market always goes up into the right, and there are some danger in there too, right. Of course, you don't want to be underinvested, but you don't want to be, I guess, overinvested if that's a way to think about it, right. Heavy exposure to single securities, those sorts of issues could be a big, big problem for Gen Z. And when a downturn happens, the one that we experienced, say, last year in 2022, there is the very real possibility that emotions get in the way that you pull the plug on investing. And as we know, that is one of the worst things you can do as a long-term investor.

 

David (06:42):

Well, yeah, and listening to that, of course, I feel a little bit of baby boomer guilt. I feel I've had lots of great decades-

 

Jack Manley (06:49):

Mm-hmm.

 

David (06:49):

... for both investing and the economy. But so, let's focus in on millennials here. So they're now acquiring and accumulating a fair amount of wealth, but how has their investment experience, how is that affecting their actual behaviors when it comes to investing and in general?

 

Jack Manley (07:07):

So we are lucky in that we have access to some really interesting Chase data where we can track outflows from bank accounts to investment accounts. And we don't know what investment accounts, and we don't know what you're investing in, right, but we can see when money is moving out of a checking or savings account into some sort of brokerage account. And on a relative basis, those of us under the age of 40, which would include millennials and Gen Z, have had a significant uptick in interest in investing relative to older generations. And you really see this spike start to happen around 2020 around COVID.

 

(07:42):

And to me, it's kind of like the perfect storm for empowering a group like this. What's happening in 2020? Well, there's a ton of stimulus out there. There are checks that are getting mailed out by the government. There's supplemental unemployment insurance, and of course anybody can access those things if you fall within certain parameters. But generally speaking, younger individuals are going to be the lower earners. And so there are more likely to have access to this free money. You have interest rates that are essentially at zero. So borrowing costs, basically nothing. You have the rise of online brokerage platforms, frictionless, right. There are no fees, fractional shares. It's easy to be an investor.

 

(08:22):

And then the real dangerous one is all the downtime because we're just sitting on our couches because there is nothing else to do because 2020 and the whole world's shut down. So you take all these things. You put them together, and it's no surprise that people start to invest more. So we love to invest, and Gen Z loves to invest. But the way that we do it, I think that's where some of the complications happen, right. Because we are using a lot of these online brokerage platforms, which means there isn't a whole lot of supervision. There probably should be, but there isn't. And when we are investing, we are not buying well-diversified mutual funds or ETFs. We are buying single securities with a heavy exposure to stocks, which is fine. I think if you're a young investor, that probably makes sense.

 

(09:06):

But also a heavy exposure to cryptocurrency, which is not as fine, especially if that is going to be where you place all the eggs and a heavy exposure to options, which I personally think is terrifying. I can't imagine being 24 years old trading options on my cell phone. That just seems kind of insane and a great way to set yourself up for financial failure. So we love to invest, but the way that we go about investing, I think, is a little bit frightening. And when you look at these instances of overexposure to certain parts of the market, if you do see downturns like, again, what we saw last year, these groups are going to be particularly hard hit.

 

David (09:43):

And I think, particularly, when I think about the great financial crisis, the problem was that it wasn't just... it was a crisis in the economy. But it also really pulled the rug from under any fate that people had in the financial establishment.

 

Jack Manley (09:56):

Mm-hmm.

 

David (09:56):

And younger people have always been a little bit more anti-establishment than older people, but I think that was particularly the case for millennials. And so the dangers of sort of pouring money into crypto or various rather weird online ways of buying things, I think, comes to some extent from a rejection of traditional investment models.

 

Jack Manley (10:16):

Yeah.

 

David (10:18):

But that brings us to sort of one of the key long-term goals, which is everybody's supposed to be investing for retirement. And are millennials going about that in the right way?

 

Jack Manley (10:30):

It's hard to say, but I would say, generally speaking, not if your exposures are so heavily concentrated in extremely risky assets. I would never tell anybody to not invest in cryptocurrency. There are certain pockets of it that I think may actually be kind of interesting. But if that's the only thing you are investing in, and if that's the thing that you are betting on taking you across the finish line, you could be in for a lot of pain.

 

(10:53):

And that is exactly what we would've seen happen last year when certain major cryptocurrencies or tokens sold off significantly as the Federal Reserve started raising interest rates. When we think about investing, of course, retirement is kind of the end goal, right, but there are a lot of things that happen between now and retirement. And so it's not just about planning for what's going to happen 40, 50 years from now. It's about planning for what's going to happen over the next 5, 10, 15 years. Maybe, eventually, you want to get married and have children.

 

(11:23):

Maybe, eventually, you want to own a home. You want to take vacations. You want to have some money to pass on down to the next generation. There are a lot of different reasons to invest outside of retirement. And again, I think it's encouraging that younger individuals are interested in investing. But these boom-bust cycles that they're setting themselves up for, I think, are problematic for that long-term kind of financial stability, which is ultimately, I think, what all of us are looking for.

 

David (11:51):

Yeah. And I think on the retirement question when you talk to a young person about what they're going to do when they're 65, and that seems so far away.

 

Jack Manley (11:57):

Mm-hmm.

 

David (11:58):

But I've always thought that building a solid nest egg for retirement is really also building a nest egg, which gives you the freedom to do stuff. I mean, there will come a day when there will come a day where you don't really have to worry about money that much.

 

Jack Manley (12:10):

Yeah.

 

David (12:11):

And I think accumulating wealth is really absolutely key for that. So it's not just about retirement. It's all the steps of comfort and freedom that you're going to achieve along that path. So it's really not just waiting until you're 65.

 

Jack Manley (12:25):

And 65, by the way, if you're lucky. At this point, we're probably going to be retired when we're 70, so you got a long way to go.

 

David (12:32):

Or unlucky. I don't know what my wife would do if I actually did retire or what I would do. So I have no intention of retiring anytime soon. But let's get back to the problems of younger people like-

 

Jack Manley (12:45):

Uh-huh.

 

David (12:45):

... yourself and those younger than you. Education expenses has obviously risen. We've had a huge whole generations getting third-level education that's been rising. The number of educated [inaudible 00:13:00] are getting third-level education has risen over time. But also, there's been a huge accumulation of debt, and the government wanted to make sure everybody could go to college, and so did a lot of cheap financing. And now people have accumulated a huge amount of student debt. And is this weighing down, particularly on millennials and Gen Zers? And is it also... What other real hurdles they face in terms of their economic obstacles?

 

Jack Manley (13:27):

Right. I would say that millennials and Gen Z, to your point, David, are the most educated demographics in this country, at least if you count some sort of advanced degree, right. A bachelor's degree or higher, millennials own more of those as a percentage of their population than Gen X did, than either portion of the baby boom did either early boomers or late boomers. And that's generally a good thing, right, because there is a very strong correlation between your educational attainment and your lifetime earnings. The more you [inaudible 00:14:01], the more skills that you have, the more skills that you have, the more valuable you are in the workforce.

 

(14:05):

But also to your point, David, that education comes with a cost, and that cost has translated into this student debt problem. And I think the student debt conversation can get very contentious because it is oftentimes framed as a black or white kind of binary situation where student debt is unique to millennials or unique to Gen Z, and no one's ever experienced this before. I mean, that's not the case. As long as you've had to pay money to go to school, people have been taking out loans to pay money to go to school. Student debt has existed for a very, very long time, but the magnitude of that student debt is very significant for millennials compared to Gen X compared to baby boomers.

 

(14:48):

About 40% of all millennial households have some form of student debt. When the baby boom was our age, that number was closer to 20%. So as a percentage of our population, it's 2x relative to what maybe our parents would've experienced. And that burden of the student debt, the debt to income ratio is again about 40% for millennials. That's four times what the baby boom would've experienced when they were our age. And so that's going to lead to a lot of different problems. One of them is you're going to have a lot of money waiting on the sidelines, right, because people don't realize that it is possible to pay down debt and invest at the same time.

 

(15:30):

So what you're going to be doing is spending 10, 15 years chipping away at that debt level, and by the time you're finally free of that debt, you're no longer in your early twenties. Now you're in your early to mid-30s. You feel like maybe you've missed the boat entirely, and you decide not really to start investing in the way that you probably should. It's also going to lead to some other kind of psychological issues out there where it's just one other burden that we face that leads us to have this more almost nihilistic approach to investing, right. Might as well put it all into crypto. "I've got to get rich quick. Otherwise, there's no way to deal with this student debt burden."

 

(16:06):

So it is very significant, and it is one of the greatest problems that the millennial and Generation Z demographics generations are facing. But there are some other things that we can talk about as it relates to our overall financial well-being. And one that comes up a lot in conversations is the concept of homeownership. Now, I was doing a little bit of research on this, and I was shocked by some of these statistics and shocked in a good way. The Census Bureau puts out all sorts of homeownership information, and did you know, I did not know this, that about 25% of all Americans under the age of 25 own a home. I thought that was shocking to me, and I think that's going to be very regionally focused.

 

David (16:06):

Yep.

 

Jack Manley (16:49):

Right. It's certainly not going to be here in New York City, where when I was 25, I wouldn't dream of owning a home. I mean, I'm 32, and I still can't really dream of owning a home, but you do have fairly significant homeownership amongst very young individuals. We're also looking at millennials. About 40% of us own a home. That's pretty good, and that number has been ticking up higher.

 

(17:08):

But what's really interesting here is when you compare our experiences over time to, again, what Generation X would've experienced, what the baby boom would have experienced, our homeownership numbers are pretty good, but they're not as good as they would've been if we were born 40 years back. So when baby boomers were our age, when our parents were our age, their rate of homeownership was higher than our own. So some people may be surprised to hear that 40 to 50% of all millennials own homes.

 

(17:36):

I don't think that's necessarily the narrative that you hear out there. But when you compare to what previous generations have experienced, you can tell that there is a sort of decline in financial well-being. It is harder to own a home today, especially if you are a younger individual than it would've been 20, 30, 40 years ago.

 

David (17:53):

I mean, it really sounds like millennials need more financial advice than baby boomers ever did because you've got to figure out how are you going to save to buy a home. How are you going to deal with student debt? And how are you going to get going, building a nest egg, both for your retirement and for your life? And that's a complicated discussion.

 

Jack Manley (18:10):

Absolutely.

 

David (18:12):

So given all of that, what is the main piece of advice that you would give to younger Americans investing today?

 

Jack Manley (18:17):

Yeah, I try to keep this one brief. I think that you have to remember, sort of per my cheeky comment a couple of minutes ago, that you're probably going to have a much longer runway for investing than you think that you will. Not only are you likely going to work beyond this sort of traditional retirement age of 65 or thereabouts, you're also probably going to live for a long time. And that means that you have a very long runway for investing. And if you're 25 or even 35 or even 45, right, you may have another 40 years of investing before you start to meaningfully draw down.

 

(18:52):

And 40 years is a whole lot of time for the power of compounding to take your portfolio from a relatively small value to a very significant value. I ran some very basic math a little while ago that showed that if you maxed out your 401(k) contribution every single year over the course of 40 years, that contribution over the course of 40 years would roughly equal about $4 million if markets generate six, 6.5% annualized, which feels like a somewhat reasonable return. You can take what seems like not big contributions and turn them into an enormous amount of money. But the other thing that I would say here, and this has to go... this has to do, I think, a little bit with that student debt conversation that we were having is that it's never too late to start investing, right.

 

(19:39):

It's always better to start early because the power of compounding is that much more powerful if you have a longer runway. But do not think just because it took you 15 years to pay down student debt and now you are just turning your attention to investing, that the ship has sailed, that this thing is behind you, that you should have started 15 years ago and now there is no way to catch up. That is not true. It's harder if you start investing later in life. You have to put more in if you want to achieve the same end goal, but it is never too late to start investing. I think that's really, really important for these younger generations to realize.

 

David (20:14):

And I think also as I talk to investors, one of the things that annoys me is just how many people sort of sit in cash or else they take a complete flyer. I mean, there is a middle ground between cash and crypto.

 

Jack Manley (20:25):

Mm-hmm.

 

David (20:26):

And is that middle ground that you should be concentrating on if you're actually trying to invest to grow wealth over time?

 

Jack Manley (20:32):

Exactly.

 

David (20:34):

So, okay, I think that's good advice for millennials. What would you advise the people who are advising millennials? What would you say to financial advisors who are talking to younger investors today?

 

Jack Manley (20:44):

Well, I would say that having those conversations with younger investors, younger prospects, the children, grandchildren of your existing clients is critical for the long-term health of your business. I'm not a big hockey guy, but I think it's Wayne Gretzky who said, "You want to skate to where the puck is going." And the puck is clearly going towards this next generation of wealth. At the moment, millennials control the... excuse me, baby boomers control the overwhelming majority of wealth in this country, but the rate of growth of millennial wealth, of Gen Z, wealth is double digits.

 

(21:18):

It is significantly higher than that of our parents because they're starting to crest in terms of their earnings potential and in terms of what's happening with their overall wealth. We know there is, at a global level, a $10 trillion wealth transfer that's going to be happening over the next 10 years. And as that happens, the money is going to be flowing towards these younger individuals. And if you don't have a relationship with these people now, then you're not going to have that relationship with them in 10 years. It's easier to hook a younger individual, provide that value at the moment. All those issues that we were talking about, why these young people need financial advice, that's how you can demonstrate some of that value.

 

(21:58):

But I'd also say that going about managing those relationships is going to feel a little bit different than how you manage relationships with their parents or their grandparents. I did a lot of work looking at communication preferences of younger individuals, and certainly, for me, I think a lot of these things resonated. I can't tell you the last time I picked up the phone if it wasn't my mom calling or you calling, I guess. Those are really the two people that I'll pick the phone up for. Otherwise, it's going straight to voicemail. And if I don't know the number, not a chance. So it cannot be a voice-first communication, right. It can't be the old-fashioned door-knocking, cold calling. This has to be done via a text format. That does not mean sending an SMS, right.

 

(22:40):

What that means is an email, I think, would be preferable for first contact, at least over a phone call. And when you do communicate, some of the data that we've seen out there suggests that our attention spends are a lot shorter. Maybe that's because we're working really hard and we don't have time to read through really long, lengthy, comprehensive emails. So whatever it is that you're going to send to us, send to us as quickly, and as pithily, and as impactfully as possible. And then, finally, there has to be an emphasis on digital-first communication, right. That is how we interact with information today. It is overwhelmingly on our smartphones. It is to some extent on our computers. But if you're not tapping into some sort of digital form of communication, you are going to have a very hard time interacting with these folks.

 

David (23:28):

So as a supervisor of millennials and Gen Zers, I should just give up on trying to get them to pick up the phone.

 

Jack Manley (23:34):

Start texting [inaudible 00:23:35].

 

David (23:36):

Maybe. All right. Listen, Jack, one last question. This has been fascinating. But what resources does JP Morgan Asset Management have to help, either with younger investors or those who are advising younger investors?

 

Jack Manley (23:50):

So I would reach out to either your financial advisor or reach out to your JP Morgan representative. There is a lot of material that we've put together on exactly this sort of stuff. There is a principles for successful long-term investing, kind of a high-level evergreen principles of what it means to be an investor over the long term. There is a whole next-generation presentation that I've put together talking about all the things that we've just discussed and then some, right.

 

(24:18):

Looking at how you can think about strategies of paying down debt while investing. How to think about retirement and maxing out contributions and traditional versus Roth vehicles, a whole lot of good information on there as well. There's just a wealth of knowledge out there, I think, for individuals that are more interested in learning about this sort of thing. And so reaching out to that representative, I think, will be very helpful.

 

David (24:40):

Well, thank you, Jack, for your insights today. For those interested, we've also linked the resources Jack mentioned in our show notes. On our next episode of this summer series, we'll dive into the long-term trends and opportunities in real estate. So please stay tuned for more. And thank you all for listening. Speak with you soon.