How should a millennial’s balance sheet look?

There has been a considerable amount of discussion lately about the investment habits of Gen Y, aka millennials. Most of the headlines claim that millennials are “scared off of stocks” and are invested much too conservatively for their own good.

My primary issue with this topic is the assumption that all of a young person’s financial assets should be aggressively invested. But as my friend Cullen Roche likes to point out, life isn’t a straight line where you start saving at 22 and retire at 65. In between you buy homes, have a family, take vacations, buy vehicles, start businesses, etc. This UBS survey shows that 30-36 year olds with at least $100,000 in cash and investable assets have roughly half of that amount in cash. Is it totally unreasonable for a 33 year old making $100,000 a year to have $50,000 in cash? There is every chance that 33 year old has an emergency fund, is saving for a house (or a home upgrade), a new car, a vacation or a dozen other things.

So I thought I’d use myself as an example. I think I technically fall into the “old” end of Gen Y although I generally despise generational classifications. If I fell into one of these catch-all surveys, here is what I would report:

Allocation as a % of financial assets:

Cash: 13%

Bonds: 30%

Stocks (US & Foreign): 57%

On the surface this looks very conservative for a 31 year old. But here’s some perspective:

1) This money includes our liquid emergency reserves. Like most people we find it both comforting and reasonable to keep some savings very liquid. We own our home so there is always a good chance we will need cash for repairs and upgrades. We also use this money for large expenses including vacations, cars and other items. The financial press seems eager to forget that people young in their careers may very well be building both liquid reserves and retirement funds, tilting the balance sheet to be initially more conservative. As retirement and other long-term savings grow, this becomes a smaller piece of the overall pie.

2) Less than two years ago our family’s primary breadwinner (that’s me) quit his job to start a new business from scratch. Since I am a planner by nature, we spent considerable time and effort building up liquid savings to act as a financial buffer until the business was supporting us completely. At that time (and still today) we had considerably more of our financial assets in “conservative” investments than many rules-of-thumb would advise. But that planning was right for our situation, regardless of what the rulebook said. Some of this money is in very short-term bonds which is pushing up the bond allocation. Now that the business has moved past the self-sustaining stage we are re-evaluating the best use of these funds for our family.

Today roughly 63% of our total financial assets are in retirement accounts. The remainder is cash and liquid reserves and college funds for our daughters. Of course the 63% in retirement accounts are invested aggressively (roughly 90% stocks). But you can clearly see that the composition of our savings is affected by our own personal goals and financial needs. And that is the point of this conversation – blanket one-size-fits-all assumptions and rules of thumb can be helpful in theory but don’t always work well in real life. Real life is more complicated than simple rules want it to be. Real life involves trade-offs, opportunity cost and personal decisions about money. Unfortunately, that doesn’t make for great headlines for the financial press. The truth is too messy for headlines.

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