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STA Weekly Report – Millennial Investment: Parental Guidance Can Lead to Optimal Financial Outcomes

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Millennial Investment: Parental Guidance Can Lead to Optimal Financial Outcomes
Weekly Technical Comment
What to Do When Clients Obsess Over Beating the Market
401k Plan Manager


Millennials, or Americans who were born in the 1980-2000 period, is a large and diverse population.

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As the largest demographic cohort, Millennials offset retiring baby boomers to sustain growth in the U.S. working age population and provide an important tailwind to GDP growth.

The spending behavior of Millennials has huge implications for investment. Millennials account for 75 million consumers (approximately 25% of total consumers). This younger generation is highly educated and technologically savvy. They are also key drivers of the sharing economy that encourages a new business model of consumer-to-consumer transactions.

Moreover, Millennials face financial situations different from their parents. On average, Millennials earn less than prior generations at the same age, have low savings rates, and carry heavy student loan burdens, but they may potentially inherit the wealth of their baby boomer parents.

As baby boomers and Generation X phase into the later years of careers and begin long-awaited retirement plans, Millennials have just entered the early stages of adulthood and professional development. With retirement seemingly far away, only about a third of Millennials own retirement accounts, according to the 2013 Survey on Consumer Finances. [1]

While this individual statistic may not seem to be a cause for concern, it is important to consider the differences among the demographic groups’ tendencies in saving for retirement as well as the future of America’s Social Security system.

Essentially, there are four behavioral tendencies that differentiate Millennials from their parents and grandparents.

  1. Millennials are significantly less tolerant of risk than elder generations

According to cohort theory, tragic events such as the 9/11 terrorist attacks and the Great Recession in 2008 have sharply turned Millennials away from the uncertain and the ambiguous. [2] In a study done by Dr. Larson, Dr. Eastman, and Dr. Bock, Millennials overwhelmingly demonstrated an affinity for bond investment strategies, as they appreciated the guaranteed income. [3] Unfortunately, by strictly investing in U.S Treasuries (bills, notes, and bonds), Millennials could miss large opportunities in the equity and alternative investment markets.

[1] Rui Yao and Guopeng Cheng, Millennials’ Retirement Saving Behavior: Account Ownership and Balance, American Association of Family and Consumer Sciences, Dec 2017. [1] Lindsay Larson, Jacqueline Eastman, and Dora Bock, A Multi-Method Exploration of the Relationship between Knowledge and Risk: The Impact on Millennials’ Retirement Investment Decisions, Journal of Marketing Theory and Practice, 2016.

         2. Millennials have little understanding of basic financial concepts

Although Millennials exude strong confidence in their ability to adequately prepare for retirement, they have little confidence in their understanding of finance. [1] This is evidenced by another study conducted by Larson, Eastman, and Bock, in which participants were asked simple questions about inflation, diversification, and interest rates. [2] Only a mere 27% understood all three basic concepts enough to correctly answer the questions.          3. Millennials heavily depend on their parents for consumer-related behavioral norms

Cohort theory also suggests that Millennials, in general, have been over-coddled by their parents throughout childhood, resulting in individuals who are dependent on parental guidance for investment decisions. [1] Dr. Lusardi, Mitchell, and Curto also showed that parents are the best medium for Millennials to gain financial literacy and an appreciation for the value-added by financial advisors.

        4. Millennials take more responsibilities to make right investment decisions.

Baby Boomer and a large portion of Generation X have benefited from diverse and stable sources of retirement income, including social security and pensions. However, given the long-term challenges faced by the Social Security system and the shift from defined-benefit plans (pensions) to defined-contribution plans (401k), Millennials will likely be responsible for their own financial safety through smartly saving their salary and making prudent investment decisions.

Overall, Millennials, an over-confident, risk-averse, financially-illiterate cohort, is precariously positioned at the beginnings of a rocky road for American retirement safety nets. But all hope is not lost. Parents and grandparents have the opportunity to guide Millennials toward a financially-stable future.

First, by instilling in them from a young age how investing in the market may be beneficial as compared to sitting on cash and cash-equivalent securities. When asked about the single most powerful factor behind his investing success, Warren Buffett responded, “compound interest”. Understanding such concepts will allow Millennials to capitalize on their most valuable asset – time.

Second, by bringing your children with you to your meetings with financial advisors, you can normalize the practice of seeking out professional financial counsel, giving your Millennial a sense of security in the case they ever need help.





S&P 500 Nears Test of January High

The most important chart of the day may belong to the S&P 500. Chart 1 shows the SPX nearing a test of its January intra-day high at 2872.

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That’s a very important test for it and rest of the market. Back in May, the SPX broke through the upper trendline in a bullish symmetrical triangle. That bullish breakout set the stage for a retest of its old high formed at the start of the year. And it’s nearly there. What the SPX does when it gets there will tell us something about the staying power of the current uptrend.

Financials SPDR Breaks Out

Recent rebounds in foreign developed and emerging markets set the tone for higher trading in the states. The strongest sectors are energy, financials, industrials, and materials. The only ones in the red are staples, utilities, and REITS. Chart 2 shows the Financial Sector SPDR (XLF) rising above its May high to achieve an upside breakout. A rebound in bond yields may be helping. Industrials may be next. Chart 3 shows the Industrial Sector SPDR (XLI) moving up to challenge its late-July peak. The XLI managed to clear its June high near the end of July before pulling back. It may be getting ready to restore that upside breakout. Chart 4 shows the Materials Sector SPDR (XLB) climbing back over its 50- and 200-day moving averages.

Weekly Snapshot of Global Asset Class Performance

If you have any questions, please feel free to email me at


STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Mike Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)




What to Do When Clients Obsess Over Beating the Market?
By: Scott Bishop

Scott Bishop is executive vice president of financial planning at STA Wealth Management in Houston. Voices is an occasional feature of edited excerpts in which wealth managers address issues of interest to the advisory community. As told to Jacob Meade.

Mr. Bishop on information: Clients today are influenced by an abundance of market data, advice and information—but information is cheap.

Clients are inundated with advertisements and media about the financial markets that can color their view of their portfolios, leading them to think they will succeed only if they outperform the S&P 500 or another outside benchmark. But as financial professionals know, it’s almost impossible to beat the market. And when people try to do so, they can end up taking too much risk, micromanaging assets and failing to let long-term strategies run their course.

In my experience, the best way to remedy a client’s preoccupation with a benchmark is to ask targeted questions. When a client says to me, “I need to beat the S&P 500,” I first ask “Why do you need to beat the market? Why is that your goal?” I then ask, more broadly, “Is money your only objective? What about money is important to you?” I also inquire about their view on a hypothetical scenario to illustrate the risk in trying to beat the market, asking: “If the market lost 30% and your portfolio lost just 28%, you’d still be ‘beating the market,’ but would you OK with that type of loss?”

To the last question, clients will usually nod their heads as they start to register the risk of investing too aggressively. They will admit that they don’t want to lose that much. This realization then sets the stage for a broader discussion of appropriate risk, asset allocation and the long-term strategy they already have in place. Most importantly, the questions signal to the client how returns are merely the means to reach a goal—and pursuit of returns should never overshadow that goal.

After putting these questions to my clients, I’ll then bring the conversation back to their financial plan and a more realistic return needed to reach their goals. This helps reset the focus on the personal return they are aiming for and away from the return of an arbitrary and volatile market index they had been reading or hearing about.

Clients today are influenced, both positively and negatively, by an abundance of market data, advice and information—but information is cheap. Expert consultation on a long-term strategy—and the encouragement to stick to it—is what they should be paying you for.



Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice



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