IT’S LIKE DÉJÀ VU ALL OVER AGAIN

By Craig Erwin, Ph.D.

It appears that Generation Z invests differently than other generations. Generation Z spans the years 1997 to 2012. Gen Z-ers are more comfortable taking risks; some would call them reckless. Although some Gen Z-ers have been successful at investing, it’s way too soon to gauge their long-term performance. During the pandemic, many of them bought stocks on the cheap during the 2020 market crash at the same time that professionals were selling. That worked out well for many Gen Z-ers because the market bounced back quickly. Unfortunately, their early successes may have given Gen Z-ers false confidence, leading them to believe that they are shrewd, not lucky, investors. What’s worrisome is that they might continue to use risky approaches that could eventually be very costly. That’s especially troubling because Gen Z-ers tend to be more likely to select stocks based on social media tips than on analysis.

Unlike baby boomers, Gen Z-ers, called Robinhood traders (after the brokerage), tend not to buy and hold. A Barclays survey found that, rather than use dollar-cost averaging and accumulate stocks over time, Gen Z-ers prefer to take advantage of market opportunities such as market selloffs. They also aim to get rich rather than to accumulate enough wealth to retire comfortably, as most investors do. Barclays found that Gen Z-ers “trade often, take bigger risks, and track their portfolios closely”. That’s a surefire recipe for poor returns.

In addition to tips on social media, Gen Z-ers invest based on advice from finance influencers or ‘finfluencers’, young people providing financial advice on the web, often in TikTok videos. The advice coming from ‘finfluencers’ is, at best, unreliable and may lead Gen Z-ers to take excessive risks.Gen Z-ers tend to take a different approach to investing than baby boomers. Unlike boomers, Gen Z-ers don’t believe they need professional help; they prefer a DIY approach to investing. They shun conventional wisdom and take outsize risks. Instead of using buy and hold and dollar-cost averaging techniques, Gen Z-ers tend to invest aggressively, buying meme stocks and stocks recommended by ‘finfluencers’. One difference is that Gen Z-ers tend to invest in socially responsible companies more than boomers.

Although Gen Z-ers may appear to be unique at first glance, they may just be young, reckless, and inexperienced. When you are young, you tend to take more risks, and you often learn important lessons the hard way. As you age, you learn which approaches work, how to avoid excessive risks, and how to avoid losing money. Much like today’s Gen Z-ers, young investors in the 1990’s wanted to get rich. They bought stocks based on hot tips from journalists, friends, the internet, and investing TV shows. Many of those investors were baby boomers who have since become much more conservative after painful lessons.

I suspect that Gen Z-ers will also learn painful lessons as did I and many others in the early 2000’s when the 90’s boom ended explosively. I also suspect that, in a decade or two, Gen Z-ers will abandon their reckless ways and follow the advice of professional advisors. They will even decide that accumulating enough wealth to retire comfortably, instead of getting rich, sounds like a pretty good idea.

Are you investing to get rich or to be able to retire comfortably? How much risk are you willing to take when you invest?

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