Rich Grad, Poor Grad: Gaining Financial Foothold in a Millennial Economy

Reviewing millennial investment ideas and sharing my thoughts on the growing importance of accumulating capital.

Disclaimer: This post covers some of my observations relating to financial trends and asset allocation. The views and opinions expressed in this post are wholly mine and do not necessarily reflect the views of my employer. Assumptions made in the analysis are not reflective of the position of any entity other than my own – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold me to them in perpetuity. While every caution has been taken to provide readers with most accurate information and honest analysis, please use your discretion before making any decisions based on the information on this blog.

The roots of capitalism can be traced back to the Agrarian Age.

From the moment our distant ancestors cultivated the first patch of agricultural land, every civilization that followed was built on top of disposable capital. The ownership of arable land spawned enterprise giving rise to trade, employment, and collateral. Those with access to the resources were able to rent out the asset or provide loans to the borrowers in exchange for income and taxes. A domino effect followed as wealth was passed along generations creating factions within society across the entire history of mankind. Hence capital founded the platform for the evolution of barons, dukes, resource magnates and industrial age bankers at different points across the industrial revolution.

Capital creates capital. Through the hoarding of wealth across the ages a division was formed between the elite (owners of capital) and the middle and working classes (Those who rely on the elite’s capital for income to supplement livelihood).  With the highly affluent having prominent political influence and control over resources, years of favorable government policy has led to the wealth gap widening with the rich getting richer at the expense of the majority.

With that bit of exposition out of the way (Apologies for starting off with an introduction that sets up an Illuminati conspiracy theory ), I am of the opinion that even with its flaws, capitalism and enterprise have led to the betterment of society as a whole. Entrepreneurs have innovated and the desire to create has produced the two biggest achievements of our time in the form of globalization and the internet. Even if we consider the intentions of the innovators to be primarily selfish, the by-product of such ventures seeks to cater to our changing needs as a fledgling society. We need pioneers to guide our future.

As a new generation enters the workforce in the information age with enviable opportunity and access to more information than ever before, they stand at risk to suffer the consequences of economic mistakes of the previous generation that (without financial education) could see them experience a significantly lower quality of life and the gaps between social classes to grow even wider.

As mentioned in my previous blog, I highlighted that it was important for individuals to consider investing and saving from a younger age to acquire capital and avoid the potholes of a fractured economy. This post expresses my opinions on asset classes and investment ideas suitable for millennials.

Here are my thoughts on the following investment options-

Cash (Savings)
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Accumulating wealth through cash is a savings technique that has lived through the ages. In a world that seems to have less trust in it’s leaders than ever before, cash is widely considered as the safest haven for wealth accumulation.

The temptation to seek returns through making a deposit in a savings account would seem more appealing in countries which have a higher interest rate (the 6.5% rate in India seems far more appetizing than the 0.5-2% return one would receive having put away cash in the United Kingdom). Since compound interest is a force of nature, an initial investment would continuously compound across several years and eventually accumulate into a healthy sum in later years.

Local Governments may also provide incentives and schemes to encourage cash savings. For example, in the UK, the government provides the ISA (Individual Savings Account) which allows individuals an avenue to obtain cash growth which is exempt from tax.

As mentioned in my previous blog the impact of quantitative easing (government-led money printing) is not trivial. Cash tomorrow will be worth a lot less than cash today due to inflation. Frightening levels of consumer debt in Europe and Northern America prevents the respective governments making any brash interest rate policy changes which are likely to lead to more QE to stimulate demand in the future.

My personal opinion for someone who is relatively early in their career, and hence earning a low salary would be to use cash savings towards a deposit for real estate rather than a company pension scheme. Your money could be used in securing an asset that is almost guaranteed to appreciate in value over the long term regardless of the market situation (when observed historically, more on that later). A pension contribution would be more worthwhile when earning a higher salary in later years of career development.

With cash, it is easy to get the basics right. Learn to Budget. Limit credit card spending. Study the tax laws. Try to have other sources of income rather than placing reliance on salary alone. Living well within your means is obviously a key element in achieving financial freedom.

Real  Estate

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The immediate default wealth accumulation option for the traditional investor. After the hassle of assessing locations, sifting through online ads, arranging viewings, dealing with estate agents and paying intermediary fees, a house or a commercial property has the potential to provide a rental yield in the form of passive income over the course of several years and gain capital appreciation at the same time.(This process would vastly vary per country and the individual real estate and inheritance tax  laws involved)

Even though it may take a few years (depending on spending habit), acquiring a house gives the opportunity to attain equity and access to rental income. Larger properties provide the prospect to rent out rooms and attain income which can aid in paying off your property mortgage. Buy-to-let laws in certain countries would allow the individual to acquire entire properties which can be rented out to tenants (albeit at a higher interest rate). Rental properties periodically generate cash flow which is the fundamental trait of an asset while appreciating in value over the holding period.

Location is key. The key indicators of success for a  property would be it’s proximity to value drivers. These include large employer hubs, industrial centers, schools and access to major transport links e.g train/bus stations which would create a demand for tenancy and cause property value to appreciate. From a simple cash flow perspective, it is essential to have a constant demand from tenants to rent to.

Depending on the country of residence, it may be a wise move for young people to rent where they live and own a property in a region where they would like to invest (preferably with high rental yields and expected capital appreciation). The burden of home ownership has the potential to impact career choices in an age where millennials desire the flexibility to exploit job opportunities or spontaneous enterprise ventures. Such an option enables wealth creation and autonomy for the individual.

Additionally, there are property crowdfunding platforms available in certain countries which allow Investors to jointly own housing equity in the form of shares. This allows investors to gain exposure to property appreciation and the associated rental income through a smaller sized investment without committing large deposits or having to deal with intermediary costs. Due to the novelty of these financial products, the yield and risk trends relating to ownership over time are yet to be documented.

Equities

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Although current markets have a tendency to overvalue equity, there is still very good value to be found in stocks particularly within the small and mid-cap markets. These markets comprise of smaller companies seeking growth and investment. However with what we observed during the financial crisis, It is easy to understand why people would be hesitant to invest in an asset that is exposed to volatility ( In years gone by I have had my fair share of demo accounts. Watching in horror, mortified as my imaginary $1000 fell drastically to $930 over the course of a week).

To start off, thorough research would need to be performed on the sector that you are interested in investing. My research method, in line with the strategy mentioned in Star Principle by Richard Koch, would be to focus and study high growth future industries rather than studying a particular stock with high growth potential. High growth industries/niches have the power to leverage and sustain itself over a longer time frame. Whereas the high potential stock could have the future potential priced in (reflecting a higher share purchase price) and the risk of the company being exposed to one-off adverse extraordinary events. (Think back to Volkswagen in September 2015)

The research would initially summarize by analyzing the industry (specifically the particular trends that would lead the industry to grow). Ways to achieve this knowledge include reading financial news, reviewing financial statements to assess future growth prospects and reviewing online discussion platforms in the industry to observe community sentiment. For individuals who are foreign to financial statements, I recommend reading /familiarizing the following key sections for a company ;

  • Director’s report- This section highlight’s the management’s commentary on the year’s progress and discusses key drivers for the events pertaining to the entity in the current year and mentions future developments & important events since the end of the Financial Year.
  • Statement of Cash Flows – For a company, generating a positive cash flow and generating a profit for the year are two fundamentally different things. Even in dire financial straits, a company has the ability to soften the bleak financial outlook for investors by tailoring accounting standards and manipulating the profit figure.The cash flow statement is immune to tinkering. Assessing the cash position is the litmus test for identifying a company with astute trade practices and robust financial strategy. Years of negative cash flow for a mature company (early-stage companies are expected to hemorrhage cash during its initial years) should be a red flag that should alert investor’s to question management’s practices.
  • Notes to the financial statements- These sections describe the drivers of progress/failure in further detail by exploring Balance sheet and Income Statement components on a line by line basis. The Revenue & Cost of Sales notes within the PL help assess the factors for financial performance. Reviewing the Assets and Liabilities notes on the balance sheet would help assess the companies financial position and investment strategies.

This should give a brief insight into company valuations. I  will examine stock valuation methods for beginners in a future blog post.

Implementing some of these investment suggestions can be tricky in a globalized world where consumption is encouraged relentlessly through social media and Instagram culture. The process of building wealth takes time. Continuous learning is key to keep pace with new emerging opportunities.

On a positive note, capital does not solely refer to financial resources. With the rise of the internet, there is more opportunity than ever before to build social capital through personal branding and taking advantage of the growing influencer economy, an opportunity for millennials which I would like to share an opinion on sometime in the future.

As always, thank you for reading.

Until next time.

Yours truly,

Sree

 

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Rich Grad, Poor Grad: An honest observation on Millennial financial health

A brief review of recent financial developments affecting millennials and its impact on future economic and social landscapes.

 

Disclaimer: This post covers some of my observations relating to financial trends and asset allocation. The views and opinions expressed in this post are wholly mine and do not necessarily reflect the views of my employer. Assumptions made in the analysis are not reflective of the position of any entity other than my own – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold me to them in perpetuity. While every caution has been taken to provide readers with most accurate information and honest analysis, please use your discretion before making any decisions based on the information in this blog.

Contrary to the media narrative that labels us as lazy and entitled freeloaders, millennials have it tough. Having lived through the Nineties and the Noughties, we have witnessed real wages decline, property prices propel and felt the burden of inheriting a broken financial system.

The modern-day cost of further education leaves the average student dazed and bruised well before they enter the ring to compete in the bloodbath that is the job market. With a higher proportion of young people opting for a university degree, employers are favoring candidates with concrete work experience as they sift through homogeneous honor rolls and degree certificates.

This trend which has been observed globally  has led students to pursue further education in a bid to improve their CVs to appeal to their potential future employers. The pursuit of academic accreditation has led millennials to compromise income and workplace skills for the promise of enhanced earning capacity in later years. This leaves the average young person with little to no savings during the early part of adulthood.

Education is the most powerful tool on earth. In the information age in which we are currently living in, it’s of the utmost importance that millennials are continuously learning and developing new skills to keep ahead of the wave of technological and social developments coming our way.

In a world of cut-throat competition, individuals who do not prescribe to this way of thinking put themselves at risk of being unable to create value, subsequently swept aside by employers and clients  as a result of skill obsolescence and knowledge stagnation. Change is afoot.

While I am immensely supportive of further education, and perpetual learning, prevailing economic fault lines and a lack of financial education could pose a serious threat to our generation of a similar magnitude to that of the 1930’s Great Depression. Below, I have highlighted a few general economic patterns, and the associated impact on millennial financial health (For this blog, the commentary below reflects trends  observed in Europe and North America)

Asset ownership

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Young people have faced financial difficulty since time immemorial; most of us have juggled college, social commitments and part-time jobs at some point in our younger years. There are some romance and nostalgia in the process of growing up and having to awkwardly navigate adulthood with accomplices through pot noodles, borrowed Netflix passwords and unpaid TV licenses. There is beauty in the struggle.

Although the halcyon days of university and early adulthood account for memories with incredible replay value, there are some harsh truths waiting to be laid bare.

More of us are owning less.

Property prices have significantly outpaced income growth in big cities ( the hotbed of graduate employment) as a result of high demand driven by corporate interest, infrastructure development, and economic growth. Those seeking jobs in these regions are priced out of the housing market during their peak years of career growth. Millennials are left with no option but to rent and put off housing commitments till future years giving rise to a “rent culture.”

Our parents earned comparatively lower (inflation-adjusted) wages during the early part of their careers. However, they were able to benefit from acquiring assets at lower prices relative to their income. (I acknowledge that at a much higher interest rate and lower disposable earnings in the decades gone by, there is a valid argument for a higher relative cost of acquisition for the previous generation ). Wages have risen over the years, but the cost of living has (so far) overtaken that growth as middle-class goods and services have soared in price.

In the UK, a graduate who deposits £1000 in a savings account can expect a total around the range of £1015-£1030 (subject to rates offered) by the end of the year. To put this in some perspective, In London, an average cost of a happy hour pint of beer is £6.50. By the law of opportunity cost, none can blame millennials for opting to spend the money immediately rather than investing it to earn paltry returns. This brings about another challenge in the form of mustering an adequate deposit amount for a property.

Besides, as mentioned later on in this blog, the government’s continued persistence with quantitative easing (printing money to promote economic growth) will mean the precious cash saved up by millennials could have far less spending power in future retirement years.

The lack of capacity to purchase assets and an inability to get onto the property ladder till later in life would lead to a far-reaching strain on disposable income (for the individual and/or the family) wading through the middle age and trickling through to the current retirement age. Not owning a property would limit retirement funding options and inheritance planning.

Overall this trend risks to inhibit the quality of life, cause wealth inequality to widen and place further reliance on the government to prevent large-scale relative poverty.

Great Expectations 

The economy is not the only reason millennials are saving less.

Living in a hyper-connected society has also led to a change in consumption patterns for the average young person. With social media platforms such as Instagram and Facebook being used as marketing platforms for brands and influencers, users are bombarded with images and posts of latest fads and products tailored specifically to the individual through algorithms during each minute spent online.

With pressures to maintain and document a particular image repeatedly promoted by models, athletes, and entrepreneurs who have embraced the internet (and internet money), young people are inclined to give into the hype and spend funds that they scarcely have.  Money is spent on products and services we don’t need to impress people we don’t like. (Champagne flair on a  lemonade budget)

Time is precious. You are only young for a handful of summers. The tourism industry has thrived through social media with images and videos of exotic holiday locations across the globe taking over display screens instilling a (justified) fear of missing out among millennials. Savings balances are depleted through seeking these new experiences for leisure and self-development purposes.

Investing in experiences is never a bad idea, however casting a cautious eye to what one can afford with regards to leisure is advisable in an era where corporations are spending millions on ad revenue and artificial intelligence to distract us and make us give into our temptations.(Handy Tip: If you can’t buy 5 of product/service X with your total bank savings, you can’t afford 1 of product/service X!)

Diminishing Returns 

'Why are we labeling a bunch of insulated self-indulgent whiny cry babies 'millennials'?'

I remember it very well. Everyone in our generation was either directly or indirectly affected by the 2008 recession. If we thought the financial crisis of 2008 was bad, I sadly feel that it was just a precursor to the imminent pension fund bailouts that await us in the coming decades.

This comes at a time when the existing pension systems in many countries are not yielding an adequate level of assets to pay out future pension liabilities to employees. This is primarily due to years of historically low-interest rates in an environment where medical advancement is allowing people to live far longer than what was previously conceivable by actuarial models. It is reasonable to expect some form of government intervention in the future.

Without getting too technical, across Europe and Northern America there are two types of pension schemes, one where your employer guarantees a steady income throughout your retirement years; Defined Benefit, and a scheme in which your employer matches your annual contribution to by a set contribution percentage of your income across your working years with no employer liability during the employee’s retirement; Defined Contribution.

DB schemes are being slowly phased out due to increased concern by corporations over future liabilities. As you would expect, the majority of the current millennial workforce is enlisted on DC schemes where the individual is solely responsible for funding their lifestyle during retirement.

The potential future bailouts of DB schemes (a scenario where a government provides assets to Pension companies to fund the retirements of individuals to whom corporate employers were initially liable to) could also require the government to print more money as part of the funding process. A scenario where the public loses out further due to money supply led inflation, and future spending cuts can be envisioned causing income inequality to widen as the lower and middle classes bear the brunt of the changing landscape.

Once the implications are factored, to have sufficient resources to cover costs and living expenses during later years,  millennial workers (largely DC holders) will be required to work longer, spend less and set lower expectations for retirement. (a far cry from the visions of spending your summers in Monaco, sailing into the sunset in your  yacht)

I hope most of that made sense to you, dear reader.

To prevent the narrative of this blog from being the most depressing story ever told, I would like to suggest that it is not all bad news. Due to the economic growth that we have observed over the previous years, millennials would seem to gain significantly through the greatest wealth transfer in history from an inheritance perspective. Acquiring estates (houses, shares, cash reserves) which have grown in value over decades gone by will soften the blow of an uncertain economic future for those individuals who had the blessing of being born to asset-rich parents.

Ultimately I believe it is paramount that young people actively look to invest and save from an earlier age to achieve some level of autonomy and leverage over their financial situation in future years. As millennials approach prime consumption and spending years, consumption and investment patterns can have a significant impact on the economy. In my next blog, I will look to list a few ways in which millennials can go about taking the first steps into investing.

Once again, thank you for reading my blog. This topic has been playing on my mind since I took my first accounting classes back in 2012. The process of writing this article has been beneficial to me as I have attained more knowledge on the areas expressed above (Always in appreciation of  the process). It was bothering me that the majority of my generation was blissfully unaware of certain worrying emerging trends  which led to the  inspiration behind this piece.(Through no fault of their own, blame the lack of financial education being taught in schools/universities).

As always, I would sincerely appreciate and value all your thoughts and comments.

Till next time.

Yours Truly,

Sree Nair

 

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