As I have mentioned in previous articles, the pandemic has ushered in a host of investing related conversations, not only amongst my adult sons, but also from the young adult children of baby boomer clients. A number of young investors have reached out to me over the past 3 months. In fact, I have had more conversations with Gen Y investors in the second quarter of 2020 than I have had in my entire professional career. Evidently, the bottoming of the market, then followed by V-shaped recovery led to a rapid interest in investing….particularly online investing. What was going on there? What spurred such an interest in investing for a 19-25-year-old? Did they have more time on their hands? Were they bored? Why the sudden interest in investing? I see 3 reasons for this:
The demise of sports betting
The cancellation of March Madness, then professional baseball and basketball, and soccer et al…. gave us a period of several months when the ONLY sport available to the wagering public was Korean Baseball. I found it stunning that my 24-year-old son was suddenly smitten by Korean professional baseball. Really? He was following it on his ESPN app, with alerts set to awaken him when his wagers were “in the money”. With a dearth of sporting events to capture the interest of young adults, many turned to the stock market and online trading platforms to replace the thrills and highs of sports betting. The stock market, with its rapid rise, seemingly became a reliable source of “easy” money for the young adults looking for a sure bet. Platforms like RobinHood, Webull, E--trade, Scottrade, eToro, scratched the itch formerly occupied by sports betting. As sports gradually came back into play, I noticed my inquiries from young adults lessened. Coincidence? I think not.
The rise of smartphone-enabled trading tools
These online trading platforms are extremely easy to use and have a high-end user interface that is VERY user friendly. Is it too easy? These tools carry risks, experts agree, that seem invisible to young investors.
In a Wall Street Journal article penned by Michael Wursthorn and Euirim Choi on August 20, they write that “Robinhood’s minimal interface has proved to a draw for younger investors. The Silicon Valley company has turned the complex process of trading stocks into a simple, free swipe across a screen.” However, “some behavioral researchers contend that simplicity is turning investing into a game, and nudging inexperienced investors to take bigger risks.”
I have seen this with several of my sons’ friends, one of whom racked up over 1000% gains by investing in a handful of high-risk individual stocks during the recovery of the pandemic. He made so much money that he bought a new $80,000 car with the proceeds from his online trading. He didn’t believe me when I told him that his success is luck, and why should he? I am not certain that I would have believed “me” now when I was 19.
The rise of “low” or “no” cost trading
In the fall of 2019 Charles Schwab, the largest US brokerage firm with over $3 trillion of client assets, announced a “zero commission” trading platform. This ushered in a “race to zero”, as other online trading platforms announced “zero commission” trading, including TD Ameritrade, E-Trade, Ally Invest, Fidelity, Robinhood, and Vanguard among others. Since none of these firms are non-profit entities….it is clear that these financial services firms have other revenue sources that more than make up for the lack of revenue from trading fees. These include, but aren’t limited to 401k and retirement services, cash management services, advisory fee-based revenue, and fees for financial planning services. Financial services firms have changed their business models, such that the trading fees are no longer the fuel that drives the profit engine.
That said, getting young investors interested in, and accustomed to saving is a good thing.
I still remember one of my College professors at Oklahoma State University who instilled the discipline of saving into my young impressionable mind. He told our Government accounting class on the first day: “Next time we meet, I am going to tell you the secret to becoming a millionaire.”
To a 20-year-old accounting student, those were powerful words that held my attention.
On our next day of class, he revealed his secret: “ Live off half your take-home income, and save the other half.” He then went on to explain that living beyond your means is a trap many young graduates fall into. He explained the rationale for saving as much of your income as possible, and that if you do this, you will wake up a millionaire, regardless of your income level. The power of compound investing has the potential to turn any saver into a millionaire given enough time, he indicated.
Now, of course, we all know that there are a lot of variables that go into this statement, but the concept never escaped me, and to this day, I still save a pretty good percentage of my income, and I teach my sons, and young investors this as well.
In summary, please know that I am not indicating you will become a millionaire, but if you do, give me holler! This is because, it is not my job to make you a rich…it is, however, my job to keep you there once you make it!