The Perils of Youth

2/27/2023

A new report from FINRA (Investors in the United States: The Changing Landscape) has put a spotlight on the riskier investment behaviors of many younger investors. Moreover, younger investors, and those with limited investment experience, have higher confidence that they will outperform the market. This higher risk, more confident behavior in younger investors is combined with lower reliance on financial professionals and higher use of social media as a source of investment advice. If you have a teenage or young adult investor in your life, now is the time to make sure they have the tools to spot the red flags!

Here are some illuminating statistics from the report, for those aged 18-34:

• Source of investing information:
  • 60% use social media as a source of investment information, compared with 8% of those 55 or older.
  • 56% use YouTube, and 41% use Reddit, as a source of information on investing.
• Riskier investing behaviors:
  • 62% reported considering cryptocurrencies. 53% were already invested.
  • 36% have traded options.
  • 23% reported making investment purchases on margin.
  • 39% reported trading shares of GameStop, AMC, or Blackberry (popular “meme stocks”) in 2021.
    • Among those who traded these “meme stocks,” 71% cited entertainment, and 61% social activity, as the reason for investing.
• High confidence/expectations:
  • 37% thought they would outperform the S&P 500.
  • 24% were willing to “take substantial financial risks expecting to earn substantial returns.”
  • While 96% stated the reason for investing was “to make money in the long-term,” 86% also stated it was “to make money in the short-term.”

The respondents were also asked to take a ten-question multiple-choice quiz on a variety of investment topics. The results were worrying. 76% of those that reported buying investments on margin answered the margin question incorrectly. Investors who reported trading options were 62% more likely than all survey respondents to answer questions incorrectly. Younger investors did worse on the quiz.

Unfortunately, the financial risks being taken by younger investors do not end with investment behavior. Federal Trade Commission data shows that younger Americans are just as likely to be victims of identity theft. 18% of the reports submitted in the third quarter of 2022 came from those aged 20 -29. Sometimes, being more comfortable with technology equals a false sense of safety. Reading less and clicking more means we all may be more susceptible to things like phishing emails and other sneaky digital scams.

If we have friends or family members we think may be at risk, there are some simple tips we can share.

• Recognize any ‘get rich quick’ scheme for what it is. Long-term financial success comes from employing strategy and discipline, not chasing the momentum in the markets.
• Find objective third-party resources.
• Know what fees you are paying and check your statements.
• Set up multi-factor authentication.
• Limit the personal information you share online.
• Monitor your credit and your credit card transactions.

Take care out there!

Whitney Butler