Generation Y: Don’t Let the “Financial Crisis of 2008” Prevent You from Becoming a Millionaire

The Financial Crisis that started in late 2007 and ended in early 2009 resulted in a decline in the stock market of more than 50 percent over an 18-month time period. This was the worst economic downturn since the Great Depression of the 1930s. And if you’re still feeling a little shell-shocked, you’re not alone. Many Generation Y investors (18 – 34) experienced substantial losses during the financial crisis. And various surveys, five years later, suggest that many still have an aversion to risky assets such as common stocks. Not only that, a number of recent research studies maintain that financial episodes and economic shocks have had a more profound impact on Generation Y investors than older investors simply because younger people haven’t experienced first hand the cyclical nature of the market. Its ups, its downs and its long-term growth.

If this fear of the market persists throughout your lifetime, your aversion to equities in favor of safer, lower yielding investment vehicles will very likely prevent you from reaching your long-term financial goals. An important fact that should provide some reassurances to Gen Y investors, though, is that nearly six years later since the stock market low in March 2009, stock market indices have recovered to all time new highs.

So, generally speaking, what behaviors have we seen in Generation Y that affects your own propensity for risk-taking since the financial crisis of 2008? And which might be keeping you from investing in a way that will help you reach your own financial goals?

Worry. Worry feeds off of our recollections of past experience and conjures visions of future events that change our daily and long-term decisions about our finances. In 2010, I conducted an online survey with more than 1,700 responses in which more than 70% associated the term “worry” with stocks over bonds (Ten percent of the sample associated “worry” with bonds.) Not surprisingly, the more we worry about an asset such as a stock, the greater we perceive its risk, lowering our level of risk tolerance and decreasing the likelihood that we’ll invest in it. What’s more, “worry” gets passed from one generation to the next. If your parents lost substantial money during the financial crisis, it could easily taint your idea of investing in the market as well. For many individuals in their 20s and 30s today, this negative emotional experience also serves as an “anchor” for not moving forward.

Anchoring. Anchoring is a bias that may cause you to hold on to a belief or previous event, and then apply it as a reference point for making future decisions. And many young investors still anchor on the negative returns of 40 to 50 percent during the 2008-2009 financial crisis. Anchoring, combined with worry heightens their aversion to risk, resulting in many Gen Y investors under-investing in the stock market. Or not investing in it at all. But with investment horizons often more than 30 years out, that is a mistake. The market may be volatile from week to week. But over a 30-year span it has been reassuringly predictable.

Status quo bias. As rebellious or unconventional as we may like to think we are, human nature often inclines us to be pretty consistent with our decision making, and to accept the current situation as it is. It takes substantial motivation to change the status quo. And since the days of the financial crisis, many investors in their 20s and 30s have moved their assets into safer (or less risky) securities such as bonds, turning bonds into the status quo. At this stage of your life that’s what you should be rebelling against.

Generation Y investors have to overcome these emotional issues and misperceptions toward investing. It is important to start early in life to invest money in the stock market to reach a financial objective to become a millionaire.

Procrastination. In college, students put off studying for exams or writing a term paper. Likewise, when they join the work force, they also delay saving for retirement or postpone opening a company retirement account. Considering how far off retirement seems, it becomes a low priority for them. But keep this in mind. If you begin investing for retirement at age 22 and save $3,000 each year for the next 40 years and achieve a conservative 9 percent return, investing in a diversified mutual fund portfolio (including stocks, bonds, and real estate), by the time you turned 62 you would have a net worth in excess of a million dollars.

Regardless of your age, however, you should invest in a traditional 401(k) company plan or contribute to an Individual Retirement (IRA) account, at least $60 per week or the equivalent of $3,000 per year. Starting now.

How to become an “Investing Millionaire”?

Kudos to those who win the lottery, a game show, or pitch a winning idea on Shark Tank and become millionaires. As I tell my students, most Americans including myself are not that lucky, smart or entrepreneurial to take these three paths to riches. The easiest way to become a millionaire during your lifetime is by investing money in the stock market and real estate assets over the long-term.

Start investing early, and before you realize, you’ll find yourself steaming toward your financial goal. And building wealth is the way to financial independence and maintaining your standard of living throughout your retirement years.

One final note. At the same time as money is going into your investment accounts, you have to pay attention to the money going out, controlling spending, and limiting credit card debt. Including reining in student loan debt. You have to allot money for having fun now, of course. Just be mindful that blowing everything on “living for today” makes it impossible to save for tomorrow.

So the major lessons from this article are to understand the influence of the financial crisis of 2008 on your own risk-taking behavior, diagnosis your behavioral finance issues, and apply the correct investment strategy as a means of becoming an “Investing Millionaire.”

Victor Ricciardi is a Finance Professor at Goucher College in Baltimore, Maryland and co-editor of the new book with Kent Baker Investor Behavior: The Psychology of Financial Planning and Investing http://www.amazon.com/dp/1118492986/ref=cm_sw_r_tw_dp_HT3-sb1ZXAJAJ

The book has 30 chapters with 45 contributors on emerging research in behavioral finance. This book has many behavioral finance topics that apply to client behavior and will provide financial planners additional knowledge in solving these issues.

This article appears in the January 2015 issue of Mindful Money Magazine available for Apple users on iTunes at http://bit.ly/MindfulMoneyMag and Android users on Google Playstore at http://bit.ly/mindfulmoneyapp.