Next-Gen And The Future Of Investing
“You don’t have anything to lose, so you may as well shoot your shot.” 1Chris Zettler, 35
OG (Old Guard), Meet NG (Next-Gen)
Last year, Zettler, a 35-year-old finance major, ploughed his small savings ($1,000) plus two government stimulus cheques ($3,000) and used 100% leverage to buy call options on AMC, the U.S.-based movie theatre company, as well as shares of other highly volatile companies. His initial investment of $4,000 generated over $50,000 at one point. He sold $20,000 and used the proceeds to pay his tuition. “I got lucky as heck,” Zettler told the Financial Times. Eventually, he lost his brokerage funds in a mistimed meme-stock bet, but he remains sanguine and says he’ll try again after saving up a few thousand dollars.
Like other Next-Gen, Zettler was only in his low teens during the Great Financial Crisis (GFC) of 2008 and the ensuing recession. He was too young to be in the workforce but old enough to feel the impact it made on family members who may have lost their jobs, savings, investments, and possibly even their homes. Yet, even while average Americans (and Canadians, too, but to a lesser extent) were wading through a financial ditch, uncertain how or if they would ever get out, investment bankers on Wall Street and Bay Street still got their big Christmas bonuses and the CEOs of debt-ridden companies, bailed out by taxpayers, still got their stock-option-based compensation.
It should come as no surprise, then, that Next-Gen has little faith in the financial system, which they view as rigged. This attitude has vast implications on the decision-making and investing behaviour of the roughly 72 million people born between 1997 and 2012—as well as on the financial health of Millennials, Gen X, and Boomers who remain invested alongside them in the markets.
Weather Forecast: Snowflakes Ahead
Income inequality and scale of wealth rank high among other concerns, such as climate change, keeping Millennials and Gen Z up at night. According to The Deloitte Global 2021 Millennial and Gen Z Survey2, two-thirds see wealth and income unequally distributed in society and a majority look to legislation and direct government intervention as the remedy to close the gap. Even among the sub-set of both cohorts who believe anyone can achieve great wealth, nearly a third conceded that greed and the protection of self-interests by businesses and the wealthy is a problem.
One outcome is a resurgence of interest in labour movements since unions are better positioned to negotiate wages and benefits than giggers. In a 2018 Pew Research Survey, those under 30 were the only age group where a majority agreed that the decline in union membership was mostly bad for working people. Recent union drives at Starbucks, Amazon, and Apple speak to this trend.3
Another consequence of income inequality is the rise of populism. In 2021, groups of young people used chat rooms to launch a trading campaign involving unloved stocks like GameStop, whose price jumped from $20 to $480 in a matter of weeks before dropping again. The intention behind the coordinated buying frenzy, turbo-charged by leverage, was the financialized version of “sticking it to the man”, aka the financial establishment. Gen Z traders are viewed by some as a new and volatile systemic risk within the financial system.
Youthful rebellion includes taking the renegade path of investing in meme-stocks, NFTs and other risky bets while giving a middle finger to their parents—all while making some money and maybe even striking it rich. In a world of wage stagnation, rising inflation, sky-high housing costs (especially in major centres), and a paucity of workplace pensions, many Gen Zs view day trading as an acceptable and cool form of gambling and as their only chance to get on the financial rung.
Young men are particularly susceptible to taking big, sloppy bets and posting about them on social media sites like the Reddit subforum r/WallStreetBets. Investing becomes a spectator sport that generates discussions and a sense of community with peers. This social atmosphere spurs participants to take more risks. A 2021 study at the University of Sydney found people between 18 and 24 were more likely to make riskier decisions if they thought they were being watched by peers.4
Unlike in the mainstream economy, comments posted on these sites are mostly unregulated and filled with misinformation that obfuscates the amount of risk involved. In some cases, the sites hire influencers for social media campaigns called “pump-and-dump” that drive up the price of an asset and then sell, leaving unsuspecting buyers with big losses.5
Unlike Millennials, Gen Z are not digital natives; they are what the Wall Street Journal called “network natives”. Whether on TikTok, Snapchat, Discord, YouTube, Instagram or Reddit, Gen Z are all about making connections, learning from, and taking collective action within a network of their peers.
This has both positive and negative implications. Gen Z is five times more likely to say they get financial advice through social media channels than Millennials, with 28% turning to friends or online “influencers” for guidance. Unfortunately, there has been a rise in popular Gen Z personal finance content creators being targeted by scammers who clone their accounts to financially exploit their followers.
Investing Is A Game, Right?
To help raise financial literacy, schools organize stock-picking games. Each year more than a million schoolchildren use play money to see who can make the most money in the shortest time. The techniques used include leverage, shorting stocks, and rapid-fire day trading. The way the contests are structured, students are rewarded for taking big risks and churning their holdings throughout the day based on stock momentum, not fundamentals.
In other words, they are learning habits that are the very opposite of successful, long-term investing. What will happen when these same kids invest real money? Will they easily switch what they learned from kindergarten through Grade 13 to the real world of investing? Will they have built the patience and fortitude to stick with a financial plan through different market cycles? The gamification of investing is evident in the design of trading apps from such companies as Robinhood, which, after a backlash, recently discontinued the exploding confetti animation whenever the user made a trade.
Next-Gen has access to more financial information than any previous generation. They are also more inclined to reach out to their communities for financial advice. This bodes well for democratizing investing and lowering costs. However, there are plenty of potholes ahead for naïve investors, especially those whose goals are to get rich quick. Amazon founder Jeff Bezos once asked Warren Buffett why more people don’t follow his simple investing style, to which Buffett replied, “Because nobody wants to get rich slow.”
Rita Silvan, CIM is a finance journalist specializing in women and investing. She is the former editor-in-chief of ELLE Canada and Golden Girl Finance. Rita produces content for leading financial institutions and wealth advisors and has appeared on BNN Bloomberg, CBC Newsworld, and other media outlets. She can be reached at rita@ellesworth.ca
Sources:
1 https://www.ft.com/content/bce2ef2a-77d8-485e-ba69-92579f8fceb6
5 https://www.ft.com/content/bce2ef2a-77d8-485e-ba69-92579f8fceb6