Future Focus: The wealth-building playbook has changed
The rules we’ve inherited may not work for us now.
The formula that shaped the financial decisions of previous generations is becoming increasingly difficult to apply to today’s environment. This is not an article that argues that one generation had it ‘harder.’ Instead, it is an acknowledgment that conditions have changed and that many of the assumptions millennials make about building wealth deserve another look.
Millennials entered adulthood during a period of major financial change. Some started their careers during the Global Financial Crisis (GFC) and faced slower wage growth. As the first millennials considered or purchased homes, interest rates rose in response to post-pandemic inflation.
In a changing environment, following assumptions that no longer reflect reality can be costly. Some were inherited from previous generations. Others have emerged more recently. Both can lead to missed opportunities to build wealth.
Assumption 1: Property is the only reliable path to wealth
Alan Kohler recently declared that property is now a bad investment, adding ‘It has to … housing has to stop being the way that people build wealth, and (be) just a place to live. [sic]’
Nothing I can tell you about housing will be breaking news. For many Australians, property has been the foundation of wealth creation.
The experience of previous generations was shaped by a unique combination of circumstances: decades of falling interest rates, strong population growth, rising household incomes and a period where property values grew faster than many people expected.
For younger investors, repeating that experience may be more difficult.
Access to credit also evolved significantly over time. While earlier generations often faced much lower borrowing limits relative to their incomes, households gradually gained the ability to borrow substantially more as lending practices changed. This increased purchasing power helped support rising property prices, creating a very different environment from the one investors and homebuyers face today.
Source: The Guardian, Greg Jericho
Given this backdrop it isn’t surprising that housing has become less affordable. This new environment should change the equation when it comes to the opportunity cost of a home.
Assuming that buying a property automatically solves the wealth-building equation may leave people disappointed. Buying property might mean giving up the chance to build diversified wealth in exchange for accumulating one large asset with a mortgage attached.
A person with a $1.5 million home and limited investments may look wealthy on paper, but their financial flexibility may differ from someone with a diversified portfolio of shares, property and cash.
I used to work in a financial advice firm. The rule was always a Principal Place of Residence (PPR) + at least $1 million (this amount has likely changed since I left the industry!) as a starting point for a comfortable retirement. Housing was mandatory in this equation. There are a few reasons why it’s not anymore.
The first is the cost. The cost of a PPR and its maintenance is significantly higher today. That makes the opportunity cost higher as these expenses could be placed in assets that produce income and capital growth during the individual’s lifetime.
The second is that depending on the state that you’re living in, rental protections have improved relative to previous generations, meaning stability is less of an issue.
Lastly, if most of your wealth is concentrated in one asset that needs to be sold to realise that wealth, your lifestyle is going to look very different than your net worth on paper would indicate.
Source: OECD
Previous generations faced a different environment. Assuming the same outcome from the same pathway isn’t realistic. The price of property, the impact on lifestyle through lower discretionary income and the increased financial stress from more debt are all different to previous eras.
This doesn’t mean home ownership is a bad path to follow. A home offers a sense of security. It is a place to raise a family. It is a source of stability in an uncertain rental market. It is however, not the only or ‘mandatory’ pathway to build wealth.
I speak about maximising outcomes over wealth here.
Assumption 2: You need to wait until you are wealthy before investing
One of the biggest shifts in investing over the past decade has been the increased accessibility of markets. Technology has made it easier than ever to invest small amounts while accessing diversified portfolios across global markets.
Research from Canstar and Sharesight show how broker fees have trended down consistently over time. Even in the recent past, trading costs have dropped drastically, especially for smaller trades.
Source: Canstar
Source: Sharesight
This trend continues with brokerage effectively free in some cases.
A common perceived mental barrier to investing is it is only for the wealthy, or an endeavour to undertake only once you are ‘financially established’ – something that is an arbitrary point in time that may never be reached. This can be a costly assumption.
Investing has never been cheaper and required less capital. Young investors with proper foundations in place can use time to their advantage to build wealth.
Superannuation is an investment vehicle where small efforts early in life can make a significant difference to retirement outcomes in the future.
Investing is not an all or nothing decision. A regular investment plan, even with modest amounts, can create habits and build confidence. If circumstances allow, increasing contributions as income grows can be a powerful wealth-building strategy.
Assumption 3: Successful portfolios need to be exciting
Investing culture has changed dramatically. Social media has created a constant stream of market commentary, stock ideas and stories about investors making extraordinary returns. ASIC finds that nearly half of Australians rely on social media for financial guidance. Even more members of younger generations turn to social media.
It is easy to assume that building wealth means constantly finding the next big winner. For millennials, many of whom grew up with instant access to information, that temptation can be particularly strong.
Successful investing is often less exciting than people expect. A diversified portfolio of low-cost investments may not provide a compelling story to tell at a dinner party (and I know, because I’ve been told by many dining companions). It doesn’t need to outperform every year. It may not benefit from every market trend. However, a boring portfolio has helped investors reliably build wealth over time. There is some excitement to that.
Investing is not about finding the most interesting idea like a social media algorithm. Markets reward patience, discipline and staying invested. These qualities are difficult to practise when every headline suggests there is a better opportunity elsewhere.
Assumption 4: More information automatically leads to better investment decisions
When I worked at an active fund manager, the mantra was fund managers had an advantage over regular investors. The professionals have hordes of analysts to analyse swaths of data. They’re reviewing GPS images of shopping complexes to understand how many cars are there during busy periods. They use water usage data to understand how many swimming pools are in each suburb. This information gave them an informational advantage and an edge to make better decisions.
The access to this information is now democratised. Millennials have grown up with unprecedented access to financial information. It is easy to assume that having more information naturally leads to better decisions. In reality, the opposite can often be true.
Investors are constantly exposed to opinions about what they should buy, when they should sell and which markets are about to outperform.
A study from Oracle found that huge quantities of information leave individuals overwhelmed. The study found that 93% of Australians thought the volume of available data had made their personal and professional lives more complex. 72% of respondents also found that the volume of data had stopped them from making a decision at all.
This is analysis paralysis or choice overload. It often means that investors end up defaulting to the easiest option even if it isn’t the best for them.
There are approximately 56,000 companies and 12,000 ETFs listed globally. There are 3,700 managed funds in Australia. The US market alone has 500,000 corporate bonds. Then there’s private markets and more exotic investments.
Investors have a lot of choice about where to put their money.
A common place for analysis paralysis is with superannuation. A large proportion of Aussies stick with their default funds. Many people find it overwhelming to change a superfund. The fees, performance, fund options, and sheer number of superannuation providers all contribute to the reluctance to change funds. And that’s assuming that all of this information is easily accessible and not filled with jargon. It isn’t hard to see why people don’t engage with their superannuation or change it.
I’ve written an article before about why it’s important to engage early and take your super seriously.
Morningstar research from 2019 (Bigger is Better, Blanchett & Finke) looked at the US market but the results are relevant to Aussies as well. The study authors explored 500 defined contribution retirement plans with over 500,000 participants. When the core menu of options grew from 10 to 30 funds, the percentage of members that stuck with the default option leapt from 74% to 84%. People are simply overwhelmed by choice.
Yes, we have more information than we have ever had. Yes, this technically should make markets more efficient than in the past. However, it can cause more people to hold back from a decision to make an investment or invest in the first place.
Wade through the noise by understanding what your financial goals are, what you’re trying to achieve and what investments work for your personal situation. This can eliminate choices and make it easier to find a clearer path forward.
The new investing playbook
Millennials face a different financial environment from previous generations. Housing affordability challenges, changing employment patterns and greater economic uncertainty mean that many long-held assumptions about building wealth deserve to be questioned.
What has remained timeless is the foundation of successful investing. Create a surplus, invest regularly, keep costs low and avoid emotional decisions. Use time and compounding to your advantage.
The biggest shift may be recognising there is no single blueprint for building wealth. Rather than relying on assumptions that no longer fit today’s environment, build a strategy around your own goals and circumstances.
For millennials, wealth creation may look different from previous generations and involve a combination of investments, superannuation, property, career growth and flexibility.
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