My financial education didn’t have the most auspicious start. I suppose I was lucky that in high school I had a class on basic investing and finance. But I cringe when I remember that we read One Up on Wall Street, which encouraged us to go to a local mall, look for stores that had a lot of customers, and consider buying their stock. Since then, financial education has become more common — but evidently not much better.
Access to financial education has never been greater, according to the CFA Institute, which polled Gen Z on their investing habits. The Gen Z cohort — those born between 1997 and 2012 — was almost 60% more likely to have some financial instruction in school compared with millennials, and 150% more likely than Gen Xers.
And yet, the survey reveals that Gen Z is making some terrible investment choices. They tend to be under-diversified and over-exposed to exotic assets. Their investment practices suggest that either they aren’t being taught what’s important or that whatever effort is being made in school is being drowned out by the lure of day-trading apps and advice from YouTube.
It is progress that more young people are in markets. The sooner individuals start investing, the more time they will have to grow their wealth and be able to fully participate in and benefit from the US economy. In addition to education, technology has made it easier to access markets with less money. Gen Zers have the highest rates of stock market participation at their age compared with early generations. In 2022 some 40% of under-25-year-olds are in the stock market in some form (including retirement accounts), compared with only 16% in 1995, according to the Federal Reserve’s Survey of Consumer Finances. But much of that growth comes from more speculation.
The chart below shows the share of under 25s who own individual stocks. After the bear markets in 2000 and 2008, young people held back on stock-picking. But once those bad markets were distant memories, new investors piled in.
The CFA survey found that one of the primary reasons young people say they invest is easy access to markets through trading platforms such as Robinhood that don’t require a minimum investment.
Another big factor is FOMO. And it shows. More than half of young investors in America own some form of crypto, making it the most popular asset in Gen Z portfolios. Indeed, an alarming 19% of Gen Z investors are only in crypto, instead of stocks or any other kind of marketable asset. About 41% own individual stocks, while only 35% buy mutual funds. It all adds up to a very risky, potentially volatile portfolio.
But who can blame Gen Z when you consider their lived experience? They have only seen the S&P 500 rise, led by a few large stocks that outpaced the rest. They also saw some of their peers get very rich from crypto and be treated like heroes for trading meme stocks. The lure of crypto trading was especially tempting when they were locked up during the pandemic with stimulus money to spend. We created a generation of speculators and gave them tools that offer a video-game buzz.
Education might not have been able to completely counter the thrill of day-trading stocks and speculating on currencies with no discernible value, but it could have helped people understand the role these assets should have in a portfolio. Buying single stocks (or any commodity or currency) is better understood as speculation because it’s a bet on a single company’s value rising or falling. Speculation is a zero-sum game where you are up against professional investors who have time, years of expertise and deep pockets. While it is tempting to root for the little guy, the pros usually win.
That doesn’t mean markets are rigged. Investing, or buying many stocks in the market, is a bet on the economy’s overall growth rather than on one stock going up or down. As the economy grows, everyone gains.
There is nothing wrong with speculation — in crypto, meme stocks or any other nontraditional asset. But it should be appreciated it for what it is, entertainment that occasionally pays off, like gambling in a casino. It shouldn’t be one’s primary investment strategy. Index funds aren’t exciting, but they’re often the best way to build a nest egg.
And it’s worth noting that most young investors report that they are putting their money into markets not for entertainment but so that they can have a comfortable retirement, according to the CFA survey.
Younger investors are still learning, and they have less money to lose. The median financial assets of under 25s in 2022 was $4,000, according to the Fed. But when the market turns, and odds are it will eventually because we are headed into a more volatile era, Gen Zers, under-diversified and heavy into crypto, are especially vulnerable to big losses. If the market turn happens relatively soon, they might shake it off and do better next time. But if the bull market goes on for longer, the losses will be larger and could set back homeownership and other financial rites of passage.
Either way, it isn’t ideal to rely on market downturns to teach each generation about the nature of market risk. Yet it isn’t clear what the alternative is, short of outlawing single-stock ownership for non-accredited investors. I am not ready to count out the power of education, even if it is clearly falling short right now. But that doesn’t mean it can’t be better and more effective. In a world where investing is more accessible and there are many compelling online videos full of bad advice, it has never been more important to get it right.
My Bloomberg Opinion colleague Matt Levine says the major shortcoming with financial education is that it teaches the wonders of compound interest but often fails to explain why some assets return more than others. In essence, it fails to educate us on what underlies financial markets — risk.
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