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Which generation has been the luckiest?

Ed Monk

Ed Monk - Fidelity Personal Investing

We are used to the gloomy prediction that the world is headed into a period of ‘lower for longer’ - lower interest rates, lower inflation and lower growth.


That encourages an idea that relative wealth - and investment returns - in the future won’t be quite what they have been in the past, with today’s young people unable to benefit from the periods of high growth which previous generations have enjoyed.

That, however, is almost certainly an oversimplification. Comparing the fortunes of different generations is difficult because they depend not only on quantifiable metrics - like the returns from a stock market - but also on things that are far less measurable, like the opportunities created by a better education and wider job opportunities.

And remember - each generation will also experience the conditions of the generations that succeed them. If there were unfortunate effects felt by Generation X, for example, the Baby Boomers will also have felt these. What’s more, there are huge differences within generations.

Nonetheless, what can we decipher about the investing fortunes of each generation?

Baby boomers (Born between 1946-1964) - Investing period: 1971 onwards

The oldest Baby Boomers will have entered a world recovering from the Second World War, with a great deal of social hardship arising from that effort. When they reached adulthood in the 1960s, however, standards of living in the UK had risen, inflation was relatively low and the economy was providing jobs.

We’ll assume the first Baby Boomer investors entered the investing markets around 1971, age 25. Based on returns for the S&P 500, (which will have to stand-in for markets generally) these Boomers will have seen annualised stock returns that seem very healthy to us today, but also with individual years of heavy losses. From 1971 to 1990, the S&P returned more than 12% on an annualised basis - but you will have had to suffer years like 1974 when the market fell almost 27%.

Despite the volatility, anyone investing throughout that whole period will have seen their money grow by eight times. There may have been great one-off opportunities for investors to enter the market via the privatisation of utilities like British Gas and British Telecom.

Remember, though, that a return is only half the story - you need that return to be worth something in real terms after inflation. Inflation in the UK during the 1970 and 80s peaked at levels that would be hair-raising to us today - CPI growth was around 25% in 1975 and was above 10% in eight of 19 years between 1971 and 1989.

Bond markets - as captured by the total return on 10-year US Treasury Bonds - were largely benign in the 1970s and 1980s, suffering only three negative years between 1971 and 1989 and these were more than outweighed by some blockbuster returns at other times.

Generation X (Born between 1965 and 1980) - Investing period: 1990 onwards

The 1990s started badly with a recession during 1991-92 and many homeowners plunged into negative equity as interest rates climbed. That will have hurt not just Generation X, the oldest of whom will have begun investing in the early 1990s, but older people too.

After that, however, economic conditions began to improve as the 90s progressed. There were strong stock market returns in the mid-to-late 1990s, with an annualised return for the S&P 500 above 20% each year from 1995-1999. What followed, of course, was the bust and three years of heavy annualised losses.

In reality, how a Gen X investor experienced those years will have depended in great part on when they entered the market. The annualised return from the S&P 500 from the whole period from 1990 to 2006 (when the first Millennial investors emerged) was above 10% - but had you entered the market immediately prior to the crash you will have lost money overall. One positive for Gen Xers was that Inflation largely came under control in the 1990s, meaning investors kept more of their returns.

A less advantageous feature of the 1990s was the rise of complex, and often very expensive, investment products. With-profits bonds, which were linked to the stock market, often left investors disappointed and in the worst cases - such as those from collapsed insurer Equitable Life - left them seriously out of pocket.

Pension provision for Gen X has arguably suffered compared to the generations immediately before and after it. Fewer of them will enjoy generous Defined Benefit pensions from their employer that many Baby Boomers are now relying on. Meanwhile, they did not benefit from auto-enrolment into pensions during their early working lives which, although not as generous of DB schemes, will make a tremendous difference to Millennials and Gen Z.

Millennials (Born between 1981 and 1996) - Investing period: 2006 onwards

The financial lives of Millennials have been framed in great part by the global financial crisis in 2008. The oldest Millennials would have been ready to invest by around 2006, just a year before the first worrying signs began to emerge in credit markets. In one sense, this is fortunate timing. Yes, any money invested at that point will have lost a lot of value, but it also meant that these Millennials will have had a very low entry point. Even accounting for a disastrous 2008 when the annualised return for the S&P 500 was -37%, the return for the period since 2006 has been above 7% a year, with inflation also low by historical standards. 

The problem, however, was that the 2008 crash was accompanied by a long and painful period of low wage rises. Millennials have had less money to save and invest in the first place, as well as a tough jobs market to contend with and still-elevated house prices.

There have been some small consolations from a general improvement in the landscape for investment products. ISAs offer more generous allowances for tax-free investing than previous generations of wrappers. What’s more, action on fees have improved outcomes, with workplace pension charges now capped, and there are now some very low-cost ways to invest.

Generation Z (Born after 1997) - Investing period: 2022 onwards

It’s doubtful that many members of Gen Z are investing, but they soon will be. What kind of investing world do they face? We’re very used to the mantra that growth (which dictates investment returns in the long run) will be lower for longer in the years ahead.

That may be true in terms of rapid growth as captured by traditional GDP but bear in mind that stock markets in particular are globally connected, so companies in developed markets like the UK and US may not need those economies to grow very quickly to still produce healthy returns.

Clearly the world faces giant environmental challenges, as well as the task of coping with aging populations, which pose a threat to prosperity. Yet they also provide great incentives for enterprises which met these challenges - so there should be no shortage of opportunities.

Five year performance

As at 29 Sept
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
S&P 500 5.8 32.8 14.2 20.2 9.8

Past performance is not a reliable indicator of future returns

Source: FE, as at 29.9.19, in local currency terms with income reinvested 

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment on ISAs depends on individual circumstances and all tax rules may change in the future. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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