WORDS ON WEALTH
At a recent Old Mutual Investment Group media briefing on the launch of its annual Long Term Perspectives report, the discussion turned to young people and how they were investing. The disparity could not be more stark: while the Old Mutual report reflects the traditional view that building wealth is a long, slow process whereby you invest in a basket of growth assets over many years, millennials and younger generations appear to have adopted the “get-rich-quick” approach to investing.
The long-term investment paradigm is at the core of the mainstream financial services industry for good reason: while growth assets such as equities can be volatile in the short term, history has shown that they reliably produce inflation-beating returns over the long term (by which the industry usually means at least 10 years). In other words, volatility risk decreases as your investment horizon increases; therefore, you need lots of time to make decent money, enabled by the magic of compounding.
Not that many years ago, investing directly in the stock market was the domain of an elite, relatively wealthy minority. But technology has left that world far behind. As online platforms have proliferated, trading not only in shares but in cryptocurrencies, derivatives and forex is a click away for anyone with a cellphone.
Young people live and breathe the new technology. This is where they are likely to have their initial investment experiences. And it means that their concept of “investing” is light years away from that of the established financial services industry.
Late last year on IOL we ran a Reuters story, “Young traders are upending traditional ways of stock-market investing”, by John McCrank. It covered the US Security Traders Association annual conference in Washington in October. At an event “better known for rehashing dry decades-old issues, from trading fees and market data to advances in algorithmic trading”, the gathering followed “an extraordinary few months in which millions of young retail traders convening in online forums and trading through low-cost mobile apps have frequently piled into ‘meme stocks’”. (“Meme stocks” are shares that attract a following through memes on social media.)
“While many participants cheered the emergence of a young new investing class, others sounded a note of caution … amid worries young investors are being manipulated into risky trades,” McCrank wrote.
Whether we like it or not – and whether the investors are actually making money or not – share-trading platforms like Robinhood (and EasyEquities here in South Africa) are hugely popular among younger age groups, as are the highly risky cryptocurrency and forex trading platforms. The average age of investor on Robinhood is 31 years, according to the Reuters article, and at the middle of last year it boasted 21.3 million active users, of which more than half were first-time investors.
My impression – and it has been forming for a while now – is that the established investment industry is out of sync with the new reality. Young people are playing the markets on their cellphones – often to their detriment, as in the recent crypto crash – and the mainstream industry seems to be turning a blind eye to this high-risk behaviour, with the possible rationalisation that as these young folk mature, marry and settle down, they will become more responsible investors and turn to lower-risk, long-term products.
But will they? Or does the industry face losing a generation of investors to start-ups, many of which operate under the radar of regulation?
I suggest that the established financial services industry – banks, asset managers, life companies and advisory firms – needs to do more to win the hearts and minds of young investors and educate them in the difference between trading and investing. They need to know that it’s okay to engage in short-term trading, but only if:
- They are fully aware of the risks, which are much, much higher than those of a “high-risk” equity fund;
- They don’t confuse it with, or do it at the expense of, long-term wealth building; and
- They do it only with money they can afford to lose.
Long-term investing is boring, and young people need to grasp that. It’s about putting money into an appropriate long-term vehicle … and forgetting about it.
As American economist Paul Samuelson said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
For more on young peoples’ money issues, read the latest edition of IOL MONEY, our free monthly digital magazine, available here.