In the midst of tight Covid-19 lockdown restrictions around the world many young people, after exhausting their Netflix library, have discovered the wonders of the share market. Traditionally, investing has been seen as a pastime for the wealthy due to the high financial barriers to entry, but times are changing.
With driving factors such as innovations that reduce barriers to entry, volatile markets that offer high financial upside (hyped by social media) and the Coronavirus pandemic, young people have begun enthusiastically jumping into financial markets.
Let’s discuss these factors further:
While not as prevalent in Australia, trading platforms like
Robinhood, Etoro and Charles Schwab now offer zero commissions on the trading
of most popular financial products like shares and options. This has enticed
many young people who don’t want typical brokerage fees eating at their
Fractional buying allows investors to purchase “shares of a share”, which increases the range of securities available to them. While Amazon shares are over $3000 USD each (august 2020), due to fractional buying, a beginner investor can invest <$3000 USD in amazon – which is a much more obtainable amount. Shares purchased this way retain traditional benefits of share ownership, with NASDAQ explaining that “like whole shares of stock, fractional shareholders receive dividends and can exercise voting rights for the whole share portion of the position”.
Another factor that has driven young people into the market is a
wave of influencers who market day trading and other risky financial products
as an easy, accessible and feel good way to get rich quick (as long as you buy
the influencers program on trading of course!). Unforgiving job markets,
high tuition costs and intelligent advertising have lured many young people to
the share market.
Furthermore, social media has magnified the promises of success, while simultaneously ignoring much of the risks investors and traders take on.
r/WallStreetBets is a popular forum that demonstrates this phenomenon, where traders often boast of their successes, giving many young people the impression that they can earn more in a few months than a 9-5 job would in ten years. In a sense, day trading captures the rebellious spirit of many young people who may have become disenchanted with the prospect of getting an expensive university degree only to work at an office job they hate.
Since late March, we have experienced extremely high volatility in stock markets. This volatility has made trading shares and options very profitable for many, as both profits and losses are magnified the more share prices fluctuate.
Economic intervention by the Federal Reserve in America has also contributed to these erratic market fluctuations. As reported by Business Insider, “Nearly five months after the stock market low of March 23, investors have shrugged off concerns of the sharpest economic contraction since the Great Depression and bid up stocks to new all-time highs”, making it the “fastest bear market in history”.
Is there a generational difference in investing attitude?
Baby Boomers, Generation X, Millennials and Generation Z have each been influenced by different economic events and social factors, which have uniquely shaped their financial attitude and outlook.
Baby Boomers (born between 1946 and 1964) experienced the post-World War II economic boom, the great inflation of the 1970s and the long bull market in the 1980s. The volatility of the market experienced by this generation may have provided the foundation for their higher risk tolerance characterised as a long-term buy-and-hold approach. They are also more attracted to a balanced portfolio with income-generating investments, such as real estate investment trusts and stocks that pay dividends.
Generation X (born between 1965 and 1980) weathered the 1987 market crash and the dot-com bubble. This enabled them to visualise the rise and fall cycle of the market. Additionally, almost half of the generation lost their wealth during the housing and financial collapse in the Great Recession between 2007 and 2010 – with the average net worth dropping by 45%. This may have contributed to their willingness of speculating on riskier assets and investing through instinct and emotion.
Millennials (born between 1981 and 1995), despite currently being the biggest generation in the workforce are the most risk averse. They are also the most hesitant generation to invest in the stock market. According to a 2018 Bankrate survey, only 23% of Millennials believe that the stock market is the best place to put money over the next decade with thirty per cent preferring cash as their favourite long-term investment. Millennials, who do participate in the stock market only invests a small fraction of their liquid assets and favours more conservative portfolios than their generational predecessors.
However, it is seen by the Wall Street Journal that at least three in ten millennials are more loyal to brands that adopt up-to-date technology and seem to have growing faith in Robo-advisors over human ones. Growing up with technology, millennials are more opportunistic and are more likely to be aware of a great IPO opportunity of trending companies and products.
Appetite for Risk
For Generation Z (born between 1996 and 2012), investing in the share market not only provides the opportunity to grow their savings at a higher rate than a term deposit and provides some passive income, but also introduces the young investor to financial concepts.
Despite changes in time, the uncertainty and excitement associated with any investment never changes. This is why young investors today may find “high risk, high reward” investment choices to be exhilarating. Yet, accompanying the rush of blood gushing through the veins, is a price. A price, some find, too high to pay.
The rise in using contracts for difference (CFDs) have led regulators, such as the Australian Securities and Investments Commission (ASIC) to become increasingly worried. The financial product allows traders to magnify bets made on certain trades. For instance, allowing up to 500 to 1 leverage on an investment. This means that with a starting investment of $1,000, a CFD position could expose $500,000 in losses for investors.
On June 12, 2020, a twenty- year old Illinois student, assigned almost a million dollars’ worth of leverage and trading using CFDs, threw himself under a train due to confusion over an apparent negative balance of $730,000 on his Robinhood account. The cash deficit shown only reflected one side of the trade. The other side of the trade that was yet to settle would have capped his losses. This tragedy may highlight the benefit of putting some thought into two questions before diving into an investment:
1. How affordable is this investment to me?
2. How controllable is this investment to me?
It is important to know your limit. As we live in a fast-paced world, surrounded by new technology and the influence of society, we tend to believe that everything will just turn out fine in the end. However, when things do not turn out as intended, our lack of preparation can often send our whole world crashing down.
The platform the young man was using to trade was a millennial-focused trading app, something that Baby Boomers could only dream of using when they started investing. Nowadays, there are also Facebook groups where Generation Z and millennial members share ideas and opinions regarding stocks and discuss trades by using emojis like rockets of spaceships to indicate a favoured stock. Utilising technology to discover, monitor and interact with investments has now become a key method all generations have adopted. This is demonstrated with around 54% of Generation X and 56% of Millennials reporting to be digitally savvy and two-thirds of those aged 65 years and older are going online.
So, what are young investors actually investing in?
With an established appetite for risk in millennials, a new phenomenon in investing has crept in, with the hope of ensnaring this largely untapped demographic.
A testament to this rise is Robo-advisor application Raiz, which has amassed $394.6 million in managed funds and a growth of over 50 percent in 2019. Much of this growth is driven by millennial investors.
The concept is simple. With a flat fee of $2.50 per month, Raiz rounds up your retail purchases and invests the excess in portfolios that are constructed based on exchange traded funds within the ASX. Performance of such robo advisors aren’t too bad either, with popular Robo-advisor apps like Stockspot and Six Park reporting 2019 returns at 5.8% to 11.9%. With an intuitive app interface that even lets you pick the level of aggression you want to invest with, it is no wonder the app is a hit with young people.
With the low fees and low balances required to invest on such apps, millennials are increasingly disregarding traditional financial advisors in preference of such apps. While these apps may seem like the future, with even banks and superannuation funds turning to Robo-based solutions, millenials need to ensure they aren’t imagining Robo-advisors to be all sunshine and rainbows.
For one, a Robo-advisor doesn’t offer the level of customization an investor may require, unlike traditional ASX or ETF trading which allows the investor to freely specify their desired levels of diversification and risk profile. There isn’t anything in Robo advisors for investors interested in cash flow, budgeting, planning of estates etc. As millennials start getting jobs, thinking about starting a family and general long-term life planning, many may start to move away from Robo-advisors and to a more traditional financial advisor. This can possibly be attributed to a diminishing risk appetite as investors mature in age and/or experience.
Besides the low fees and balances, technology plays an inevitable role in the attraction millennials have towards Robo-advisors. Unlike older investors, younger ones have more trust in technology making financial decisions for them. In a testament to the reliance young investors have on technology, Nasdaq reports that the average age of RobinHood (a popular US financial services app) users is 28-41 and most make their first ever stock purchase on the app. This should be no surprise when considering the fact that this is a generation that has been exposed to technology since the day they were born.
Essentially, Robo-advisors deliver a portfolio that is fairly comprehensive and encompassing. These portfolios are highly attractive to the demographic of younger investors due to their high accessibility, ease of use and low costs. While there are certainly gaps in the investment spectrum that Robo-advisors don’t fulfil, their many advantages tick several of the checkboxes that young investors are interested in. Especially given their comparatively higher appetite for bearing risk.
Eventually, younger investors may graduate to traditional financial advisory for longer term financial planning but for now, Robo-advisors are here to stay.
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
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