Investing: A New National Pastime?

More people are investing today than ever before, with 61% of Americans owning stocks, the highest level since 2008. The COVID-19 pandemic played a role in this, giving people extra cash in the form of stimulus checks and more time to explore new ways to invest. The market also made a stunning comeback following its brief crash in March 2020, with the S&P 500 gaining more than 18% for the year. Millennials and Gen Z are a driving force behind this trend, with 31% of millennials starting to invest before turning 21, compared to only 9% of baby boomers. These younger generations are also more likely to invest in sustainable and socially responsible ventures, with 95% of millennials saying they want to use their financial capital for good.

Young people are investing in ESG (environmental, social and governance) causes

Young people are increasingly investing in ESG (environmental, social and governance) causes. This trend is being driven by millennials and Gen Z, who have more economic power than any generation before them. They are earning more, saving more, and investing earlier and at a higher rate than previous generations.

Millennials, in particular, have been credited with spurring the growth of sustainable investing throughout the 2010s. In 2020, investors contributed $51.1 billion to sustainable funds, compared with less than $5 billion five years earlier. Now, all generations are interested in ESG options.

Young investors are motivated by a desire to use their capital for socially responsible investing and to sell stocks when they believe a company is not serving the best interests of society or the planet. They are also willing to sacrifice returns on investments to support causes they care about. According to a survey by U.S. Bank, nearly two-thirds of Gen Z investors want to allocate their portfolios to support causes they care about, compared to 59% of millennials, 45% of Gen X, and 30% of boomers.

Young people's passion for ESG investing has helped drive the 10x growth in ESG inflows in just two years. They are investing in companies that support renewable energy sources, published sustainability reports, ethical supply chains, and corporate transparency.

The financial sector is recognizing that it must adapt to the changing priorities of young investors or risk being left behind.

Millennials and Gen Z are investing earlier than previous generations

Gen Z, in particular, has grown up online, in a world where money is often digital (e.g. Venmo and PayPal) and investing can be done through an app. As such, they are more comfortable with investing via apps compared to previous generations. Additionally, more than a quarter of Gen Zers report that they were taught about investing in school, which is significantly more than older generations. This early financial education is a key factor in their confidence about investing.

Another reason for the early investing habits of these generations is their financial outlook. Many millennials and Gen Zers have experienced economic precarity, either personally or by watching their parents go through recessions. As a result, they are taking a more cautious approach to their financial futures and are keen to start investing early. This is especially true when it comes to retirement funds, with many aiming to retire early.

Furthermore, millennials and Gen Z are using social media and online resources to conduct investment research and inform their investing decisions. They are also more likely to invest in companies with positive environmental impacts or social causes they care about, and to align their investments with their values.

Stimulus checks during the pandemic gave people extra money to invest

The COVID-19 pandemic had a profound impact on the US and global economies, with the US stock market entering bear market territory in March 2020 and the unemployment rate surging to 14.7% in April 2020, the highest since the Great Depression. To combat this crisis, the US government provided stimulus checks, officially known as Economic Impact Payments, to individuals and families. These payments were designed to mitigate the financial strain caused by the pandemic and played a pivotal role in preventing many Americans from falling into poverty.

The stimulus checks were distributed in three rounds, with the first round occurring in March 2020, providing up to $1,200 per income tax filer and $500 per child. The second round, in December 2020, offered $600 per income tax filer and $600 per child. The third round, in March 2021, provided the largest amount, with up to $1,400 per income tax filer and $1,400 per child. These payments were primarily targeted at lower- and middle-income Americans, with income thresholds above which the payments phased out.

The stimulus checks provided much-needed financial relief to individuals and families impacted by the pandemic. They helped prevent economic collapse, aided recovery, and gave consumers money to spend on essential goods and services. The payments also helped prevent millions of people from falling into poverty, particularly the poorest households and those with children.

While the stimulus checks were successful in providing financial support, there were challenges in ensuring that the payments reached all eligible individuals. Non-filers, first-time filers, mixed immigrant status families, and those experiencing homelessness faced difficulties in receiving timely payments. Despite these challenges, the stimulus checks played a crucial role in providing economic relief during the pandemic.

More people are investing in speculative, volatile assets

Speculative investments are those that promise higher returns in exchange for a higher risk of losing all or a large portion of your investment. While investing is the process of exchanging money for assets that you can reasonably expect to increase in value over time, creating a capital gain, speculating is buying assets with the hope of substantial gains over a very short time period.

Speculative investments include:

• Cryptocurrency
• Commodities
• Options
• Artwork
• Collectibles
• Peer-to-peer lending
• High-yield bonds and bond funds
• Derivatives or hedging strategies

The popularity of speculative investments has grown with the rise of bitcoin, cryptocurrency, crowdfunding, and peer-to-peer lending. However, it's important to note that these types of investments often come with a significant risk of total loss in value.

Millennials and Gen Z are a growing force in the world of investing, and they are increasingly choosing to invest in speculative assets. 40% of young people own crypto, and 31% of millennials started investing before age 21, compared to only 9% of baby boomers. Younger investors are more likely to seek alternative investments such as private equity, commodities, real estate, and other tangible assets. They are also more likely to invest in sustainable products and ventures, with 95% of millennials saying they want to use their financial capital for socially responsible investing.

Speculative investing can be enticing due to the promise of high returns, but it's important to approach these types of investments with caution. Before considering speculative investments, it's recommended to evaluate your risk tolerance and only invest what you can afford to lose.

Younger investors are less likely to trust traditional institutions

The financial crisis of 2008 left many young people with a lingering distrust of banks and other traditional financial institutions. With memories of foreclosed homes and lost savings, this generation is less likely to view banks as safe and secure places for their money. This sentiment is reflected in surveys, which show lower levels of trust in banks among younger individuals.

At the same time, the rise of fintech and new investment apps has provided alternative options for younger investors. These companies often leverage technology to offer lower fees, greater accessibility, and a better user experience than traditional banks. The popularity of fintech has led to increased competition in the financial industry and shifted consumer behaviour.

Younger investors also have different preferences when it comes to investing. They are more likely to seek information on social media and online platforms, rather than from traditional investment professionals. They are also more likely to invest in specific companies, take on higher risks, and aim for larger returns. The COVID-19 pandemic, media exposure, and economic conditions have all contributed to these changing approaches to investing among young adults.

Additionally, younger investors have grown up with greater access to a broader set of asset classes. They may have less trust in traditional stocks and bonds, especially after experiencing financial crises and seeing the increased correlation between equities and fixed income. As a result, they are more likely to diversify their assets and explore alternative investments such as hedge funds, private equity, and cryptocurrencies.

Overall, the combination of factors such as distrust in traditional institutions, the appeal of new technologies, and changing investor preferences has led to younger investors being less likely to trust and rely on traditional financial institutions.

Frequently asked questions