Incoming college students may encounter advice-offering family members who attended college 15-20 years ago, preaching their antiquated conventional wisdom inside a brave new world that has radically changed since their own graduation. These parents think, “Conventional wisdom worked for me. Why can’t it work for my child?” Abraham Maslow was correct in saying, “He that is good with a hammer tends to think everything is a nail.”
Regrettably, today’s parents, having experienced the fruits of college throughout the past two decades, wield college as a hammer to be used against every career question high school and college students face. Unbeknownst to older parents, the issues of today’s world have changed, which means that the hammer must also change. Unfortunately, our parents are still swinging away with the same hammer.
Why are our parents hopelessly blinded to the realities of the new economy despite the abundance of evidence indicating that college was not what it once was? First, the financial and economic landscape has radically shifted. Yesterday’s employee-friendly defined benefit pension plan has been replaced by today’s employer-friendly defined contribution pension plan. That means gone are the days where you were able to slowly accumulate a retirement nest egg by staying at one employer for most of your professional life. Today’s pension plans are simply not as juicy as they once were. Indeed, research shows that employees who stay in companies longer than two years earn less than 50% over the course of a lifetime versus serial job switchers. When was the last time you heard a 40+-year old encourage younger folks to leave a job every 24 months? Exactly. Instead, these 40+-year olds encourage young professionals to “climb the ladder” at one employer in order to accumulate a pension plan that no longer exists.
Furthermore, our parents have lived through two extraordinary investment bonanzas in history, including the 80’s and 90’s. With respect to the 90’s bonanza, from 1995 to 1999, the S&P 500 returned 27, 21, 22, 25, and 12%. The probability of observing 4 consecutive years above a 20% return is .4%. In other words, these titanic-sized investment returns that flowed into homes throughout the 90’s virtually never happen.
For those students with a bit older parents, the 1980s experienced a similar boom. From 1982 to 1986, the S&P 500 returned 22, 14, 4, 19, and 26%. To illustrate this extraordinary growth in wealth, $10,000 invested on January 1, 1982 became $21,200 by December, 31, 1986. In other words, whatever you invested in 1982 more than doubled by 1986. Undoubtedly, our parents have lived through an exceedingly rare era where oversized market returns were commonplace for households throughout America. It is no surprise then that parents force-feed their children conventional wisdom, an approach that assumes similarly steady and lucrative stock market returns of the 80’s and 90’s.
However, markets do not go up indefinitely. Ask any one of my classmates. We lived through both the bursting of the 2000 tech bubble and the bursting of the 2007-08 housing bubble. When the tech bubble burst in March of 2000, over $7 trillion of market value evaporated in nearly two and one-half years. Then, when the housing bubble burst in 2007-08, by mid-2009, house prices had declined over one-third from their peak. Is it any surprise then that my generation, that is, Millennials, are skeptical about investing in anything? In fact, 93% of Millennials say that they distrust markets. How then can my generation as well as the next achieve the same sort of financial security enjoyed by our parent’s generation when we fear yet another market implosion?