New Money: Younger Generation Brings New Tactics to Investing

The financial industry is undergoing a revolution of historic proportions. Not only is the sector transitioning out from under the baby boomer generation, which generated billions in wealth, but the generation that’s coming into its own behind them thinks and behaves differently than their parents and grandparents. Throw in a pandemic, and it’s been a time of near-constant transition in the industry for the past decade. Experts say while the ultimate goals of investors don’t change much by era – to grow wealth and lots of it, as quickly as possible – the new investor is a species that’s prone to playing by its own set of rules, towing the industry in its wake. And leading that parade is technology, shaping investment outlook and behaviors alike. “All generations tend to be impacted by what they personally experience growing up,” said Erin Wood, senior vice president, financial planning and advanced solutions with Carson Group. “What is different about this generation is their access to information. “They have grown up with the ability to have any question answered instantly on their phone and with the upswing of podcasts and social media there are plenty of places to get basic investing information for free. This of course can lead to false information, which I consider to be the new version of the watercooler rumor.” Millennials and Gen Z investors’ reliance on technology – including social media – to provide easy answers to much more complex financial questions is an issue that permeates this age demographic. MagnifyMoney.com surveyed the category in 2021 and found almost 60% of investors 40 or younger were members of investment communities or forums, such as Reddit or a group of like-minded investor friends. YouTube was the leading source for the survey sample’s investing information, with more than four out of 10 young investors turning to the site for help in the past month. TikTok, Instagram, Twitter, Facebook groups and Reddit, respectively, all ranked in the double digits as far as younger investors seeking investment advice. “Technology has had the biggest impact on investors within the past 10 to 20 years,” said Jeremy Palensky, Raymond James financial advisor at FNBO. “The news, social media outlets and all the information they’re able to get their hands on makes some investors believe they can do and learn most everything.  “Though the endless amounts of information can be a huge advantage if used correctly, I see many of these information outlets as a disadvantage for a lot of investors. The internet is full of get-rich-quick schemes and hot stock picks. If you’re not educated enough, or you don’t know how to decipher the information, you can get yourself into trouble.”

The New Normal

This new approach to investing has triggered both positive and negative behaviors in the market. While gamification – reducing the complicated process of investing to the equivalent of feeding a slot machine – has caused many in the financial press to sound the alarm, the impact of technology hasn’t been all bad. “It isn’t fair to typecast the whole generation by saying they only invest in meme stocks. It is not indicative of the whole generation; lots of people of all ages got caught up in that hype,” said Matthew Munyon, retirement plan administrator with Swartzbaugh-Farber & Associates, Inc. “[Younger investors] are very adept and comfortable with using technology, so they utilize mobile apps such as Robinhood, Coinbase or Webull, among many others, to handle their investing.” Munyon also said the younger generation tends to get viewed unfairly for being fast adopters of such things as cryptocurrencies and NFTs. He said this has more to do with the different rates at which the generations understand such new concepts than it does with the merit of those opportunities. “I don’t think that, as a whole, they are fundamentally more aggressive than other generations were at that age,” he said. “They are so used to digital transactions I think they have a greater appreciation for blockchain technology and cryptocurrencies. Crypto is a very aggressive investment, and unpredictable, but it does have a lot of interesting proposals and applications for the future.  “I don’t see this as any different than my generation investing in the internet stocks such as Amazon, eBay or PayPal, to name a few, in the late 1990s and early 2000s. It was a new concept, many people didn’t trust its longevity or purpose, and now our lives are dictated by the internet.” In fact, there’s an upside to the younger generation’s view on investing and the tools by which they come into it. That is, this demographic has shown little to no fear of trying something new and this, combined with the low entry barrier of today’s investment apps, has led many to jump into savings and investing.  “I will say that they are more likely to invest at a younger age and that is because of their access to information and the ability to download an app from their phone and start trading within minutes,” Munyon said. “It has never been easier to invest and coupled with the continued growth of workplace retirement plans, they are starting earlier and investing more than the previous generations did simply because it is so much more accessible now.”

Generation Of Savers

Therein lies one of the most interesting contradictions in the common perception of the young investor. For everything that’s new and changed due to technology, the age group appears to be better versed in the most fundamental canon of building wealth – starting early.  “Individuals who grow up during thriving times, that is, strong job markets and strong investment markets, tend to be more accepting of risk,” Wood said. “Those who grow up in weak job markets combined with volatile investments and poor housing markets tend to be more conservative. “Younger individuals are investing in employer plans much sooner than previous generations. They have grown up their whole life hearing about 401(k)s and employer match. Younger individuals are also more likely to search for an adviser, planner or firm that has the exact offering and fee they are looking for.” Another seemingly contradictory trait in the younger generation of investor is an overall aversion to risk, especially compared to other generations. This attitude has put a drag on younger investors growing wealth, Palensky said. “Older investors have seen some very volatile markets but have also been through incredibly prosperous times. At a certain point some of these investors may become more conservative, but many of them are still very willing to take risks,” he said. “Younger investors, however, have seen a lot of volatility, mostly negative news from all social media outlets, and have watched their parents struggle through the early 2000’s recession, ’08 financial crisis and COVID-19. “That doesn’t mean they aren’t saving, but oftentimes when I meet with younger investors, they have saved up way too much money in their savings account and are invested conservatively in their 401(k)s. It takes a lot of education to get them to appropriately invest.”

Advisers Still Important

Given all of these changes, the role of the financial adviser has never been more critical. Palensky said in an environment where everything and anything is open and available, the challenge for many investors lies in thinking strategically.  “The best thing to do for the majority of investors as they build their wealth is to keep the process of investing simple,” he said. “Find an adviser you trust, build out a financial plan to follow, continually add money to your investments on a regular basis and don’t let the short-term distractions deter you from your long-term goals. “It’s easy for most everyone to make money in a bull market, and it gives them confidence that they can manage their own investments. But once the volatility hits, they almost always end up doing the complete opposite of what they should. Having a sound financial adviser to call during those times will help you put things into perspective, calm your fears and keep your mindset focused on your goals, not the news.” Wood agreed, adding that trust has never been more important between the adviser and client, especially when it comes to putting today’s opportunities into proper historical context.  “There will always be ‘new’ trends in investing. Most of them are not new but a recreation of something old,” she said. “Tax codes change often and how you take advantage of the current rules will need to evolve. For example, investing in income-producing properties, normally rental properties, made sense for some individuals in a historically low-interest rate environment. That same approach will be more difficult to achieve in a high-interest rate environment where mortgages will be steeper.” Once this education starts to sink in, younger investors don’t cling to previous habits at all costs any more than their parents did. As Munyon noted, learning from past missteps and lifelong access to information has helped them become astute and strategic in ways their predecessors may have come to more slowly. “You learn by trying, right?” he said. “I have had many conversations with Gen Xers on investing, and I think that they have learned from things and are investing more with a purpose and a long-term time horizon.  “I do feel that this generation is thinking that Social Security may not be there for them or may not exist in the way it does currently. They know that they may have to have more of their own money saved up for their future financial security. That thought, along with the increased accessibility to trading, has them saving more, and starting earlier, than any other generation.”