How Do Millennials Approach Investing?

Who are millennials anyways, and what makes us so different? 

Millennials are the roughly 80 million Americans born between the years 1980 and 2000 (ages 15-35). Our world views, attitudes and tendencies have been shaped by two decades of dramatic changes in technology and communication as well as the worst financial crisis our country has seen since the great depression of 1929. We are the trailblazers of social media and mobile communication. There is no doubt we communicate and gather information differently than our parents’ generation. Therefore, it comes as no surprise that millennials approach investing differently than generations in the past.

Scarred by the Great Recession 

We’ve all heard stories of grandparents who lived through the great depression and keep cash or gold tucked away under their beds out of distrust for banks and the financial system. While 2008 wasn’t as severe as the great depression it still caused similar fears among the generation that grew up seeing family or friends foreclose on their homes, or  loose their jobs and retirement savings. A Money Pulse survey shows that only 26% of adults under the age of 30 own stocks,  compared to 58% of investors 50 years and older. In addition a U.S. Trust report found that 51% of high net worth Millennials fear they will lose money in the stock market while 64% said they were more comfortable investing in physical assets rather than stocks. In addition the financial crisis crippled the labor market for young people, making it harder for young people to find well-paying jobs and invest.

Leveraging Online Tools

For millennials who are willing and able to invest in stocks, their approach is unique due to their familiarity with technology and the internet. We have grown up in an Information Age where the answer to any query is right at our finger tips. “Just Google it” and the answer is just a click, swipe or tap away. The internet has made information more accessible then ever thus making it easier for individuals to make more informed investment decisions. Millennials leverage the power of social media to find stock picks, and gain investment insights. Platforms like StockTwits and Twitter have made ideas and information flow more efficiently in the markets and young people understand how to take advantage of these platforms. Apps like RobinHood, allow clients to trade stocks completely commission free. The average user of RobinHood is about 27 years old as opposed to a more traditional online broker like Charles Schwab whose average client is in their 50’s. The chart below shows that millennials surveyed are significantly more likely than their elders to use online tools for investing.

Screen Shot 2015-10-29 at 12.18.07 PM

(Source: Etrade)

Impact Investing

Millennials want to be invested in companies that have a positive impact on society. Impact investing refers to investments made in companies that put capital to work in a socially responsible and sustainable manner. Stocks like SolarCity (SCTY), Tesla (TSLA) and Whole Foods (WFM) are appealing to younger generations because investing in those companies is a way to make a difference while gaining financial returns. The chart below shows that Millennials are more willing than other generations to take on more risk and less return in companies that reflect positive values. Screen Shot 2015-10-29 at 11.25.13 AM

(Source: Motif Investing)

Rather than simply donating to a charitable foundation, millennials see impact investing as a way to profit from companies that have a positive impact on society or the environment. While impact investing is not exclusively for young people, many experts believe millennials will be the ones to bring this trend mainstream.

While it’s clear that not all Millennials are fully willing and able to participate in the stock market, those that are are able to invest, go about it in a unique way. Our familiarity with technology allows us to utilize online resources and mobile apps when making financial decisions and investing. When making specific investments we tend to gravitate toward companies that have a positive impact on society and the environment. Fintech startups and financial advisors look to better understand these trends to be able to adapt and serve the needs of this new bread of investors.

An Introduction to Seasonality & Stock Market Cyclicality

Seasonality is a term that refers to the recurring tendency of the stock market’s performance to behave in a pattern according to the time of year, day of the month or other cyclical occurrences such as presidential cycles. Understanding seasonal patterns and cycles that influence the markets can allow you to increase your odds of success. Take for example the old adage “Sell in May and Go Away”, not only does it roll right off the tongue, it is a time tested strategy based on the stock market’s monthly performance averaged over many years. In addition to this strategy I will be discussing some other influential seasonality patterns and how to profit from them.

It’s important for me to note that history doesn’t repeat itself exactly. Skeptics will point out that markets do not conform to these patterns 100% of the time, however historical data shows us that market fluctuations very frequently do follow predictable patterns. It is pretty hard to argue with statistics.

“Sell in May & Go Away” (Best 6 months switching strategy)

This is a well known strategy based on monthly historical data revealing the tendency for the market to perform stronger on average between the months of  November and April and weaker between May and October. The strategy therefore would be to either be underweight or completely out of equities during the “worst 6 months” and overweight or fully invested in the “best 6 months.” Academics largely ignore this strategy as it goes against the efficient-market hypothesis. However, when you back test this strategy, it is hard to ignore that it is quite profitable.

The chart below is from Stock Trader's Almanac, the bible for seasonality. It shows that if you were to invest $10,000 in the Dow Jones during only the "worst 6 months" beginning in 1950 you would now have lost $6,500 as opposed to investing during the "best 6 months" in which case you would have a current total of $2.3 million. Even when compared to the simple buy & hold strategy, the returns that result from the "best 6 months" strategy are undeniably better.

The chart below is from Stock Trader’s Almanac, the bible for seasonality. It shows that if you were to invest $10,000 in the Dow Jones during only the “worst 6 months” beginning in 1950 you would now have lost $6,500 as opposed to investing during the “best 6 months” in which case you would have a current total of $2.3 million. Even when compared to the simple buy & hold strategy, the returns that result from the “best 6 months” strategy are undeniably better.

January Indicators

There are several key indicators to watch for in January that really set the stage for the rest of the year. 

The January Effect 

Investment banker, Sidney Wachtel, coined this phrase “January Effect” to describe the tendency of small cap stocks to outperform large cap stocks in the first month of the year. This effect is likely due to end of the year tax-selling that drives down the price of small-cap stocks making them cheap and undervalued at the beginning of the new year. The “Free Lunch” strategy is used to capitalize on this tendency. In this strategy you buy beaten down small cap stocks at the end of December and sell in February, taking advantage of the January effect. 

The January Barometer

The January Barometer describes the predictive nature of the month of January. The belief is that January’s return (positive or negative) is a good indication of the rest of the year’s performance. Since 1950 this indicator has accurately predicted the direction of the market 88.9% of the time. For example, if January is positive there is a strong chance that the rest of the year will also be positive. This tendency has largely been attributed to congress reconvening in the first week in January including the newly elected members of congress. In addition the President gives the state of the union address outlining goals and laying out the annual budget.

Santa Claus Rally 

The Santa Clause Rally is the tendency for stocks to rally between Christmas and the New Year. There are plenty of theories that try and explain this phenomenon, including people buying to take advantage of the lift of the “January effect.” The absence of a Santa Claus Rally can be a warning flag for the year to come. For example at the end of 2007 the Santa Claus rally period had a negative return of -2.5% What followed in 2008 was the worst stock market decline since the great depression. Furthermore, in 1999 the market had a negative return of -4% during the Santa Claus period. This was followed by the burst of the tech bubble in the next year which sent stocks tumbling.

Screen Shot 2015-10-13 at 4.50.36 PM

(Chart Source: Humble Student of the Markets)

Presidential Cycles

The presidential election cycle has a statistically significant influence on the market. Take a look at the two charts below and you will notice that the 3rd year of a president’s term has historically been the best performing year. In the third year the market has returned an average of 18% and has been positive 94% of the time since 1946! To take advantage of this pattern it would be advisable to be overweight equities in the third year and underweight in the weaker years of the presidential cycle.

Screen Shot 2015-10-13 at 5.35.47 PM(Chart source: GoBankingRates

One of the explanations for this tendency is that the third year is also the pre-election year, in which a president will go to great lengths to get re-elected. While in office a sitting president will try and manage the economy in a manner that will set the stage for good economic times leading up to the election.

While these patterns and cycles are averages and won’t always play out exactly as they did in previous years, over the long run taking advantage of these seasonal and cyclical market anomalies may help you to reduce risk and profit from uncertain markets.