Millennials are now the largest generation, giving them the power in numbers to influence how older and younger generations adopt investing habits and behaviors.
As more investors in this generational cohort strip away their fear of investing in the stock market, their influence could become even stronger.
Millennials tend to be hands-on investors. They grew up during a time where resources and tools were freely accessible, allowing them to search for answers on-demand. They conduct research and analysis to make sure they’re making the right investment decisions. This fluid process allows millennials to take ownership of their investments and find opportunities that fit their preferences.
In our conversation with Kevin O’Leary, Beanstox chairman and co-owner and “Shark Tank” investor, and Daniel Egan, managing director of behavioral finance and investing at Betterment, we discuss tips to improve millennial investing habits:
— How millennials can embrace fintech.
— Millennials’ love affair with stock-picking.
— ESG investing.
How Millennials Can Embrace Fintech
The digitization of money management has enabled easy and low-cost access to investing and trading, resulting in a new wave of millennials rushing into the markets.
In recent weeks, many millennials were eagerly hovering over popular Reddit stocks like GameStop (ticker: GME) and AMC Entertainment ( AMC). An online group of traders saw an opportunity to make some profits by driving up the price of these stocks, all while Wall Street hedge funds were betting against the companies through short selling.
As retail investors fueled demand for these stocks, their market values surged to extraordinary levels, which did not necessarily align with the stocks’ intrinsic value. This resulted in some brokers limiting trades on certain stocks, angering investors who lost money.
An event like this shows that when there is a lot of excitement in the stock market, people tend to pile on to be a part of the enthusiasm. This, however, could lead to bad market behaviors for new investors coming in who may not have a strategy for these trades or are unaware of how to navigate the volatility.
“(Self-directed investors) are going to learn that the best way to play this game is to not play it on the terms of Wall Street,” Egan says.
He explains the advantages retail investors have is their ability to monitor cost, the ability to put money in and to let it grow over the years.
The silver lining coming out of the GameStop mania is that millennial investors may have observed that some of the best ways to benefit from the stock market are through the traditional methods of investing — like diversifying your investments rather than gambling on one particular stock, and learning that time in the market can prevail over timing the market.
Millennials with disposable income who want to self-start with investing, one way to begin is by using a robo advisor platform that can automate and manage your investments. This on-demand money manager can help users make more calculated decisions around their holdings.
Millennials’ Love Affair With Stock-Picking
While retirement is part of millennials’ long-term investing plan, their attention is also turned to picking individual stocks.
As stimulus dollars trickled in to boost the economy from pandemic woes in 2020, many millennials used that extra cash to purchase whole or fractional shares of trending stocks. Some of the most popular among this generational cohort were the “FAANG” stocks — a group of tech giants that includes Facebook ( FB), Amazon.com ( AMZN), Apple ( AAPL), Netflix ( NFLX) and Alphabet ( GOOG, GOOGL) — along with other pandemic favorites like Tesla ( TSLA) that saw an unprecedented rise in market value last year.
By millennials buying into these volatile stocks, it could be that they’re trying to generate quick returns as they try to outperform the broader market. This inevitably can carry market risk as traders try to catch short-term gains.
The idea of having a short-term mindset, however, may not necessarily be a concern if the aim is to learn how the markets work.
“It’s great that millions of people are out there trading stocks and learning about it,” O’Leary says.
“But my advice is very simple,” O’Leary continues, “take 10% of your winnings every time you do a successful trade on whatever stock it is you’re trading.”
By safeguarding some of your returns, you can hedge risk by not investing too much while having your money work for you by securing it over the long term.
Investors don’t need to engage in day trading individual stocks to get a piece of the action around hot stocks. That would require a lot of effort for people to look constantly at market activity on individual securities, and it ultimately doesn’t align with long-term investing principles.
New investors might want to consider index investing or making use of a robo advisor.
Index investing is a strategy that imitates the performance of an index. For example, by the holding SPDR S&P 500 ETF Trust ( SPY), which tracks the S&P 500 as its benchmark, you own a basket of individual stocks listed on that index without piling on too much risk. This is one strategy that can be helpful for millennials who don’t want to take on the concentrated risk that comes with owning individual stocks.
“The days of managing individual securities is really hard because you have to track all of those individual companies, whereas a lot of people want to have it maintained by somebody else without taking on hundreds of thousands of individual positions,” Egan explains.
Intraday trading activity tends to be done by only a portion of millennials, whereas many users focus on long-term investing or have yet to even tap into investing.
“We’re trying to solve for the hundred million people that don’t have an investment account and their No. 1 mandate is not to day trade stocks. What we’re trying to solve for is to allow them to get a broadly diverse portfolio personalized for them,” O’Leary explains.
ESG Investing Strategy
Many millennials are increasing their awareness of investing in a company or service that follows a mission or a cause. This kind of investing is called ESG, short for the environmental, social and corporate governance. It draws millennials’ attention since they want to put their money somewhere that aligns with their values.
“There’s an entire generation of individuals that care about sustainability, the environment and a lot of things that mean something to them and will for the rest of their lives,” O’Leary says.
This investing theme, he says, will be reflected in the indices being built and in all robo advisors.
Being a socially responsible investor, Egan says, is about “the values that you as an individual investor bring to the table and allowing you to put them into your portfolio.”
According to him, “people who are proud of their portfolios are more likely to be better investors.”
If you are passionate about incorporating an ESG strategy in your investments, you may want to review a company’s policies or initiatives to see if it focuses on causes you’re concerned about. You can also look at a fund’s prospectus to view its investment strategy and ensure its securities meet your ESG standards.
More from U.S. News