Canadian Millennials Are Taking a Cautious Approach to Investing

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Millennials are a cautious bunch when it comes to their money. It's not surprising given the economic downturn of 2008 is still fresh. For many young Canadians, this market chaos was their first experience with investing. But it's important to let cooler minds prevail: avoiding the markets altogether is not wise, especially with so much time on your side.

The markets have rebounded from their crisis lows. The S&P 500 hit new highs 53 times during 2014 and ended the year with a gain of 13.7 per cent including dividends, in local currency terms. The three year total return to December 31, 2014, was 74.6 per cent. Staying power can pay off. An adviser can help you navigate through turbulent times and avoid knee-jerk reactions to changes in the market or economy.

Studies have shown the goals of young Canadians are often at odds with their behaviour. The 2014 MFS Investing Sentiments Insights Survey finds 60 per cent of Canadian millennials indicate their top priority falls outside of growth, with capital protection and income taking precedence. The study shows that Canadian Gen Ys actually have a more conservative approach than older investors -- even though they describe themselves as risk tolerant and focused on growth. Of all generations, Canadian Gen Ys have the smallest share allocated to equities and hold relatively high levels of cash at 27 per cent -- compared to 22 per cent for Gen X, 25 per cent for Boomers and 24 per cent in the Silent Generation (those over 69 years of age). Nearly one third of young Canadians surveyed defined a "long-term" investment as less than five years. In reality, these millennials have over three decades until retirement.

With such a volatile first experience with investing, young people equate growth with risk. But there's also risk associated with playing it safe. If you're invested too conservatively over time, you might not reach your goals. Sitting in cash or other risk-averse investments might not help you stay ahead of taxes or inflation; in fact, if you factor this in, you may actually be losing money. The opportunity cost of not being invested can be significant.

Things to Remember:

•Focus on the end game. Start with your goals. What are your short-term goals? Vacation, car purchase? Is buying a house on the radar as a mid-term goal? What about long-term goals: retirement at age 60 or 65? Develop a plan with an adviser to help you address different priorities. Along with your risk tolerance, answers to these questions should drive your investment decisions.

•Retirement is long on the horizon. The best years of your working life are still ahead of you! It's a good reminder that when retirement is 30 years away, you can afford to be more aggressive than someone who is closer to the end of their career. You can afford to ride through market downturns and reap the benefit in the long term. In addition, the earlier you start, the more time you have to grow your portfolio.

•There's no one size fits all. Every financial plan is different. No two people are the same - we all have different goals and risk tolerances. You may also have unique work-related benefits that can help you reach your goals. For example, your job may give you access to a defined benefit pension plan, a defined contribution pension plan, a deferred profit sharing plan or employee share purchase plan. These should all be factored into your overall financial plan.

It starts with a bit of soul-searching: what are you trying to achieve? How much can you afford to put away and what's your tolerance for risk? A lot of people say they're risk takers until they go through a market down turn and realize they may be more conservative than they originally thought. An adviser can sit down with you and have an open discussion about your goals, dreams and concerns. What's on your horizon? Is there a career change in the cards? An adviser can help you put together a sound investment plan that's in line with your goals and helps you sleep at night.

This article is provided for general informational purposes only and should not be considered specific financial advice. For advice specific to your circumstances, please speak to the appropriate tax, investment or insurance adviser.

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4 Money Habits to Steal from the Very Wealthy

Just Because You Can Pay For It, Doesn't Mean You Should(01 of04)

When Paul Sullivan, who writes The New York Times' Wealth Matters column, was doing research for his new book The Thin Green Line: The Money Secrets of the Super Wealthy, he and Brad Klontz, PsyD, a clinical psychologist at Kansas State University, examined the differences between people in the top five-to-10 percent income bracket and those in the top one percent. Both groups spent about the same percentage of their incomes on food, housing and other areas, with a few surprising exceptions. The most notable: Those in the top one percent spent 30 percent less of their money eating out at restaurants. Sullivan noticed similar restraint in many of his interviews with very wealthy people who, for instance, chose an Audi over the BMW, "If you're driving a 10-year-old beater, this may not seem like a huge sacrifice, but considering the price difference -- which can be anywhere from $2,000 to $20,000, depending on the model -- it suggests they don't spend quite as cavalierly as you might think." (credit:shironosov/iStock/Getty Images Plus)

Stick to a Budget -- But for a Less Obvious Reason(02 of04)

Just as diets aren't helpful only for people who need to lose weight, budgets aren't important just for those who need to save money. Allocating your funds into different categories can be useful, no matter your income. Sullivan writes about the University of Chicago economist Richard Thaler, who was surprised to find in his research that the "money in jars" approach (i.e., put your income into fictitious buckets designated for particular expenses -- rent, food, savings, travel -- instead of thinking about it as one lump sum to be spent) is also comforting to a person "with a hundred million dollars." He defines wealthy as "having enough money that you don't have to worry about money," so bucketing, because it helps assuage those worries, can be a psychological tool to achieve that state. (credit:Shutterstock / Cheryl Savan)

Accept That Bad Things Happen(03 of04)

Another thing Sullivan and Klontz found in their research was that people in the top one percent income bracket had a greater "internal locus of control" -- a psychology term that translates to seeing your life outcome as being determined by your own actions. Lower earners had an "external locus of control," believing their outcomes were unrelated to their behaviors, or the result of chance or luck (often bad). Sullivan says he sees this in situations like getting fired to getting divorced -- the very wealthy tend not to let such setbacks deter them from their professional and financial goals. (You can find out where you fall by taking this quiz.) (credit:PeopleImages.com/Digital Vision/Getty Images)

Share It(04 of04)

Here's something you may already have in common with the very wealthy, at least if you're among those earning less than $100,000 who recently increased the percentage of income donated to charity: Self-made billionaires are generous, too, outdonating people who married into or inherited wealth. Maybe they're more inclined to help others who are in situations they were once in themselves (education tops the list of causes they support). Or perhaps they've realized what self-made billionaire and "extreme philanthropist" Chuck Feeney would say: "You'll get more satisfaction from [giving to charity] than having houses you'll never live in, or yachts that you can't spend your time on."

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Canadian Millennials Are Taking a Cautious Approach to Investing

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