Millennial/Gen Z Rookie Investor Mistakes
By datatrekresearch in Blog
DataTrek co-founder Jessica Rabe discusses the 7 rookie investment mistakes she sees her millennial peers or younger cohorts making in our latest YouTube video. She covers everything from investing in stocks, virtual currencies and options to debunking myths like needing lots of money to invest or feeling like you missed out on investment opportunities from seeing peers brag about it on social media.
Watch it here, and please hit the like and subscribe button if you enjoy the video! Feel free to share it with anyone you think it may help.
Transcript:
Hi, DataTrek co-founder Jessica Rabe here, and for today’s video I’m going to discuss 7 key rookie investment mistakes that I see my millennial peers or younger cohorts like Gen Z making. For the record, I’m 29, but I’ve been working on Wall Street since I was 19 because I graduated both high school and college early. So while I may look young, I do have a decade of experience analyzing and writing about capital markets, and I even published an investment book with Wiley Finance in my early twenties. Of course, I don’t profess to have all the answers, but my age and experience give me a unique perspective to discuss how to go about investing with millennials and gen z. As you might guess, I get investment questions from my peers all the time so I figured it would be helpful to address some of them here. Even if you’re not a younger investor, this may give you another perspective on how to speak to us about investing. If you are a millennial or gen z, I hope this helps and please feel free to share this video with colleagues, friends, and family.
Now, the way I’m going to lay out this video is by identifying 7 investment errors I see my peers making with some counterbalancing insight that may help.
Let’s start with a question I’m often asked by friends or acquaintances my age as the first investment rookie mistake, which is “which stock should I buy?” Now, I’m not advocating against investing in individual stocks, I myself do, but it requires a lot of fundamental research and behavioral discipline to be consistently successful. Before thinking about individual stocks, I always encourage my friends to take a step back and start by investing in low cost, diversified products like exchange traded funds, otherwise known as ETFs, that track the S&P 500 like SPY and IVV or the Nasdaq like QQQ or ONEQ for tech exposure. Those are strong bases for the core of any long term portfolio.
What most people don’t realize is that although individual stocks can make money over the short term, most don’t even beat low risk US Treasury bill returns over the long run. In fact, just 2.4% of stocks around the world are responsible for all the gains in global equities from 1990 to 2020. That’s why index-based investing beats most alternatives. To match index performance like the S&P 500 over time, stock pickers need to at least market-weight the few stocks that drive performance. Your odds of finding one of those gems is just over 2 percent, so better the let the market do it for you. The market may not always be right over the near term, but over the long term its very good at finding the big winners.
So my bottom line here is that there’s no guarantee single stocks will recover losses, but broad-based indices like the S&P 500 or Nasdaq Composite always come back at some point and create real wealth over the long-term. Just pull up a chart of the S&P, for example, and you’ll see that the long-run price trend is up and to the right despite many geopolitical or economic setbacks.
Let’s move on to millennial and gen z rookie investment mistake number 2, which is that many young adults think investing is the same as gambling. This is a very misleading and quite frankly dangerous comparison as it can discourage young adults from investing in capital markets, which they need for their long run financial security. Gambling is a game of chance where the house almost always wins in the end. Investing in a basket of American stocks is the opportunity to own a small piece of some of the best businesses anywhere in the world. Yes, investing still involves risk, but most investors make money if they stick to major US stock indices for at least several years.
Now, I know, many of us are concerned about investing having lived through many major market crashes like the bursting of the dot com bubble, 9/11 terror attacks and Gulf war 2 in the early 2000s, to the bursting of the US housing bubble and 2008 financial crisis in the late 2000s, to the pandemic crisis in 2020 and most recently, the interest rate spike and rampant inflation that derailed equities last year. All these events hurt our families and left a lasting mark on how we think about investing.
However, It’s important to remember that despite all the macroeconomic and geopolitical shocks over the last 2 decades, the S&P 500 is close to an all-time high right now.
Why is that? The answer is pretty simple. The companies of the S&P 500 had record profits in Q3 2023, and earnings drive stock prices. When you own these businesses as a shareholder, those profits belong to you. That’s why investing and gambling have nothing in common. The next crisis will eventually come just like the ones before it, so we need to look beyond the volatility and invest for the long term.
Moving on now to young adults’ rookie investment mistake #3 which is that many of us don’t think we have enough money to invest. I get it, our demographic has been battling high interest rates and inflation on top of a ton of student loan debt. My first recommendation would be to build up an emergency fund to cover 3 months of expenses. Money stress is horrible. Take as long as you need to, but getting that 3 months of savings should be your first goal.
Once you do that, you can still invest small amounts by buying fractional shares in a brokerage account. A lot of people think they have to buy at least one share are of an ETF like SPY or IVV, which trade for over $400 each, but most brokers will let you buy a fraction of a share, so it’s no problem buying $50 or $100 worth any time you want to invest.
Consistently purchasing fractional shares is a totally viable strategy and beats doing nothing. Dollar cost averaging even small amounts each month can go a long way over several decades. Remember to approach investing with long-term goals in mind. We’re playing for 30 to 50 years from now. Think about it this way, if you start a brokerage account today with $100 in a broadline diversified fund like the iShares Core S&P 500 ETF (symbol IVV) and contribute even just $50 a month for 30 years, you’ll end up with over $100k at the end of that time frame if the S&P earns its typical 10 percent annual rate of return. Everything counts, so even just small contributions add up to larger amounts than you’d think over time because of the power of compounding.
Now onto rookie investment mistake number 4, which is that many of my peers only want to invest in companies that they believe in. This could be anything from feeling an ethical responsibility when allocating their capital to getting emotionally attached to an investment idea because it supports a cause they back, such as clean energy or legal marijuana. That’s totally fine, but it’s important to understand two things:
Number one is feel free to invest in whatever you believe in, but just know that they may not be money-making ideas. For example, the most popular clean energy ETF, called the iShares Global Clean Energy ETF or symbol ICLN, is down 26.5% year-to-date versus the S&P up 20%. Likewise, the most popular marijuana ETF, called the Advisor Shares Pure US Cannabis ETF is down 1% YTD. The upshot here is that investing in certain themes because you believe in them may mean you’ll need to both save more and invest in other areas more aggressively in order to reach your financial goals. Again, that’s absolutely fine if you feel strongly about the cause. Just be aware of the hidden costs of your support.
2) Be careful when investing in theme-related funds. You need to analyze their actual holdings. For example, there are products classified as “ESG” that are supposed to take environmental, social and governance factors into account. But many invest in energy stocks and most are heavily concentrated in Big Tech companies. This may not fit your idea of what ESG investing should look like, so it is an important consideration.
Now let’s go over rookie investment mistake number 5, which is letting big gains cloud your judgement. When investing, always keep risk management in mind. It’s easy to develop a higher risk tolerance after making a large gain. Take this as an example:
Any sports fan has likely seen this scenario play out in a game: one team is up big, so they grow more comfortable making risky plays. The other team exploits this sloppiness and quickly ties the score. The team that lost their advantage panics, contributing to further sloppiness as they try to regain their lead before the game ends.
The same situation often happens when investing. Many people made a lot of money trading crypto or stocks in 2020 and 2021.This can gave them a false sense of security and confidence, which fueled subsequent risky investments and pushed prices even higher. You know how that story ended. A lot of those people held on too long or implemented dicey strategies to try to recover their losses.
Younger investors need to understand that newly earned money in digital currencies or stocks is still “yours” and that future investment decisions should be made independent of your prior experience. Just like athletes need to remain patient and use their teammates productively until the right opportunity presents itself, millennials and gen z should diversify their investments in not just digital currencies, but also the stock market.
This leads to rookie investment mistake number 6, which is that many young adults saw some of their peers on social media make life-changing money trading cryptocurrencies during the Pandemic Crisis. They then internalized these outcomes as a missed opportunity and now have a fear of missing out on the next potential boon. This perception is misguided, however, in that most of these people got extremely lucky under very unique circumstances. It’s therefore not a fair comparison from which to benchmark your own investment success or make decisions about your finances.
Cryptocurrencies are ultimately highly volatile and speculative, so we always advise caution in this space. Our general rule of thumb is to invest the most amount of money you’d be comfortable spending on a nice lunch or dinner date. We as millennials or gen z are generally more trusting of technology than traditional financial services having lived through major market crashes, so decentralized tech-based investments like Bitcoin naturally appeal to us. But as much as we at DataTrek appreciate that cryptocurrencies leverage human ingenuity and disruptive innovation similar to equities, they lack the regulatory structures that make US equity markets such solid long-term investments. So if you want to invest in cryptos that’s totally fine, but again we should also diversify our investments in not just cryptocurrencies, but also the US stock market.
Now another question I get from my peers is “should I invest in options”, which is rookie investment mistake number 7. I’ve even gotten this question from friends who have yet to open a brokerage account. Again, they see peers on tiktok or Instagram discussing how they’ve made money with these strategies and want in on the action.
But inexperienced investors need to understand that most equity-linked options end up being worthless, so they are essentially the same as buying a lottery ticket. I actually think playing options is especially bad for younger investors even if they’re only risking a few hundred dollars at a time because all that money will likely disappear. You may say “So what? It’s not much money…” But, when taking the power of compounding into account, it absolutely is. If the S&P 500 compounds at 10 percent for the next 40 years, as it has over the last 40 years, $1,000 today will become $45,000 in 4 decades’ time. That would be hugely beneficial for your retirement, especially as people are increasingly living longer.
So those are the most common 7 rookie mistakes I see my millennial peers or younger cohorts like gen z making when it comes to investing. The more you keep your investment approach simple, consistent, and take advantage of the many market pullbacks to come as buying opportunities, the more wealth you’ll likely create in the long run.
Thank you very much for taking the time to watch this video, again please share it with anyone you think may find it useful, and as always please like and subscribe to our YouTube channel if you enjoyed it. And be sure to check out our website datatrekresearch.com for a free trial to our daily reports on markets, data and disruption. There’s no credit card or personal information required, just drop your email in.
Thanks again for watching and we hope you have a great day!
