Young investors are learning as they go and might be picking up bad habits along the way, says a new study from the Finra Investor Education Foundation.
“They are younger, so they can afford to take more risk, but there seems to be more going on here,” says Gary Mottola, director of research of the Finra foundation, which is associated with the financial-regulatory agency.
The report, “Investors in the United States: The Changing Landscape,” surveyed 2,824 respondents who were 18 or older between July and December 2021.
What exactly are they doing that’s so risky? Trading options, buying on margin, speculating on meme stocks, dabbling in crypto and doing it in large part for short-term gain or for fun. And all the while, they’re using YouTube as a main source of investing education.
It’s no wonder that on the survey’s 10-question investing-knowledge quiz, those 18 to 34 only got four questions correct on average. A sample question: True or false: The past performance of an investment is a good indicator of future results.
Half got it wrong. About 10% said they didn’t know. (See below for the answer.)
Here’s how some of the data show red flags:
Overall, only one in five investors reported having traded options, which are contracts to buy and sell stocks, and not actual stocks themselves. That number was heavily skewed by the 18- to 34-year-old crowd, of which 36% had participated, compared to only 8% of those 55-plus.
But the key number in this reporting is that a quarter of those trading options were doing so with less than two years of investing experience. In fact, many of the survey participants said they had just started investing at all during the Covid-19 pandemic, or had only just started to ramp up their investing activity during this time.
Options trading is not great entry-level behavior. It’s highly speculative and risky, and only gets more so as volatility rises — and that’s not to mention that fees are generally more expensive than regular trading.
FINRA Foundation NFCS
Trading on margin
Combine options with trading on margin, which is basically the “buy now, pay later” version of stock trading, and you’ve got a potentially disastrous combination, especially in young investors with little investing experience.
Borrowing to buy stock in a volatile market can leave you stuck paying off a big bet if the price drops. Yet, young investors were far more likely than their older counterparts to have made margin purchases.
We’re not talking about a small amount here, either. The sweet spot for margin trading was for nonretirement accounts with $50,000 to $250,000 in investible assets.
FINRA Foundation NFCS
Meme stocks and crypto
It’s almost cliché at this point to talk about young investors having more interest in crypto than their older counterparts. It’s no surprise, then, that 53% of young investors said they had invested in crypto, compared to 33% of those 35 to 54, and 7% of those 55 and older. Less than half of the younger cohort also considered crypto to be risky. (Ask them again next year, and the answers might be different.)
Young people are also trading more often and paying more in fees (and not paying attention to those fees) than their older counterparts. In the long run, fees can eat up a huge portion of your investment return. One hope for the future is that this is a live-and-learn situation. If you dive in headfirst and then realize that you’re paying a mountain in fees, perhaps you’ll change your investing behavior down the line.
Investor education channels
But changing young investor behavior means reaching them with education at some point. Yet one other red flag is that most young investors are getting their portfolio advice from YouTube. Reddit, Facebook
Twitter and Instagram are also high on the list.
FINRA Foundation NFCS
Where should they be getting their information? For starters, from investment research and tools provided by their brokerages. But the survey found only 26% relied on those a great deal. Same with business articles, advice from professionals who advise you directly and trusted friends and family.
The major conclusion of the report was that those concerned about financial education for the next generation should think less about how to get them to come to traditional channels and more on how to take the message to where they are now.
“There’s clearly an educational opportunity here, but that’s something that, quite frankly, we’re still trying to understand,” the Finra foundation’s Mottola says. “There’s still some work to be done.”
So get ready for some really snazzy educational videos about options.
(Quiz answer: False)
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