Are today’s young, diverse investors making good choices?

Twenty-something Canadians are investing earlier and more aggressively than previous generations. Are they at risk of being scarred for life?

Nearly three-quarters, or 74 per cent, of Canadian Gen Zs surveyed reported holding at least one investment. This is markedly higher than U.S. Gen Zs at 56 per cent. But the most likely held investment was crypto with 57 per cent of Canadian Gen Z investors reporting that they held some form of cryptocurrency. Mutual fund ownership was second at 45 per cent, followed by individual stocks at 41 per cent.

These are just some of the stats contained in a joint study put out by the FINRA Investor Education Foundation (a U.S.-based organization) and the CFA Institute last year. Coupled with focus groups on younger, non-white investors in the U.S., two overarching themes that have emerged are that the next generation of investors relies heavily on social media for information and also ends up speculating heavily in cryptocurrency and meme stocks.

The results are exacerbated for non-white investors, who are now entering capital markets at a much higher rate than white investors. So, on the one hand, financial inclusion is increasing. Capital markets are becoming more accessible to younger and non-white investors. On the other hand, there could be more investment mistakes being made.

Ninety per cent of Canadian Gen Zs feel their overall financial situation causes financial anxiety. That’s no surprise. The prospects of potentially never being able to buy a home in Canada’s big cities, growing up witnessing a narrative of Wall Street’s risk-taking being subsidized by Main Street, student debt, and the precarity of gig work all add up to a desire to find any way to try and get ahead.

With the barriers to entry having been reduced by fin techs that have driven investment minimums to near-zero through low account funding requirements and fractional share trading, add a little grift on social media and the recipe for increased speculative behaviour is no surprise.

I recently wrote about a study that found that low minimum investment requirements could actually anchor new investors to contributing too little to their portfolios over time. But other gamification techniques may also contribute to speculative behaviours.

One young investor in a focus group noted that her trading app offered a free stock for signing up for an account. “I think I got a weird pharmaceutical one, and then that put me into a weird hole of looking for clean energy or something, I think,” she said.

A potential silver lining is that we may just be seeing a shift of the “on-ramps” to life-long investing. Whereas before, exposure to a workplace-sponsored retirement program may have sparked more initial interest in personal investing, now the combined effect of social-media influence and the gamification of investment platforms has sparked those investing journeys into starting earlier.

My own investing journey started well before I knew anything about investing. After I got my first paycheque from a job at McDonald’s as a teenager, my father took me to the bank to set up a bi-weekly contribution to an investment. I had to pick the investment, and I just looked up the last year’s best performing fund. It was a natural-resources fund with a triple-digit gain.

I had committed a few glaring investing sins: return chasing and not diversifying being the two biggest. It took me years to even learn the basics, such as understanding the power of asset allocation and rebalancing, among many other important lessons. Over time, it started to all make sense.

It would be delusional to think we can teach new investors all the mistakes to avoid, but there are some that we need to highlight because they are outsized in terms of potential harm. Leverage, trading on margin, and derivatives possibly shouldn’t even be allowed when you start. As it stands, it’s just too easy to fill out forms without knowing if the applicant even understands what they are agreeing to.

But beyond leveraged products, anything that suggests a get-rich-quick element is one of the biggest warning signs there is that danger lies ahead. And combined, both of these can boil down to truly understanding one of the most fundamental principles of investing: the relationship between risk and return. As it stands, it feels like a lesson doomed to be learned the hard way for far too many.

Every investor starts somewhere. It’s actually pretty rare for someone to end up investing the same way they started. And that’s not to say that everyone ends up a successful investor, but more to say that everyone follows a changing path when it comes to investing.

The key is if, and how fast, you learn the big, avoidable mistakes. To a certain extent, making mistakes when the stakes are comparatively low can be beneficial. But in some cases, they can scare an investor away from capital markets or away from an appropriate level of savings or exposure to risk at all.

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