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If you want to build serious wealth from investing for the long-term, it helps to start investing at a young age. But unfortunately, today’s youngest investors seem to be making some big new-investor mistakes.
A recent survey from the CFA Institute found that Gen Z investors are taking on too much risk and making some dubious investment choices — potentially endangering their long-term financial goals.
Let’s look at a few bad money moves that Gen Z investors are making — and see how you can protect your investment portfolio from beginner mistakes.
According to the CFA Institute survey on Gen Z and Investing, 50% of Gen Z investors said they have made an investment based on “fear of missing out” (FOMO). Gen Zers also said that FOMO-related investments were most likely to be made in:
Cryptocurrencies (57% of FOMO investors)Individual stocks (32% of FOMO investors)Meme stocks (28% of FOMO investors)
Here’s the problem with FOMO investing: Fear is not a good reason to invest — especially fear driven by peer pressure or short-lived social media fads. Many Gen Zers have gotten caught up in short-term groupthink around risky assets. Just because a stock or asset category is a hot topic on TikTok today doesn’t mean its price surge is going to last. Many of the most popular meme stocks of 2021 lost 80% or more of their value by April 2024.
Lesson for investors: If you’re feeling peer-pressured into making an investment in an over-hyped stock, coin, or any other asset, remember that stocks (and meme stocks, and crypto) can go down as well as up. Don’t get stuck holding the bag.
The CFA Institute survey found that American Gen Z investors have a median (typical) investment amount of $4,000. Unfortunately, Gen Zers are betting an excessive amount of their investment funds on risky assets:
The typical Gen Z investor has $1,000 invested in crypto, or 25% of their total investment money.19% of American Gen Zers are only invested in crypto or NFTs.
Here’s the problem: Crypto can be volatile and risky (even more so than the stock market), and it doesn’t pay dividends like stocks or interest like bonds. If you’ve made big gains from crypto you bought years ago, good for you — but I’m not buying any crypto at today’s prices, and I don’t believe it’s a sustainable long-term investment for most people.
Lesson for investors: If you want to dabble in crypto or other alternative assets, be aware of the risks — and don’t invest more than a small fraction of your portfolio in high-risk, high-volatility assets.
The survey also found that Gen Zers are highly concentrated in individual stocks: 41% of Gen Z own individual stocks, while only 35% own mutual funds.
On the one hand, there’s nothing wrong with buying stocks. Sometimes beginning investors have certain companies that they love and want to support by owning the stock. Picking stocks or buying fractional shares of stock can be a fun way to learn about the markets and see how investing works in real life.
But putting too much of your investment money into individual stocks can be risky. Any individual company’s stock price can plummet for reasons beyond your control; while the stock market as a whole has ups and downs, any individual stock can potentially go to zero.
Some people can make money in the short run by picking stocks. But most investors, even professionals, are outperformed by the overall stock market in the long run.
Lesson for investors: Broadly diversified index funds, mutual funds, and exchange traded funds (ETFs) are often a better way to get stock market upside while managing your risks.
It’s good that more young people are investing in the stock market, but if they end up losing too much money on risky speculative bets, they could become disillusioned and miss out on bigger returns in the long run.
No matter how experienced you are as an investor, try not to let your investment choices be ruled by social media fads and FOMO. Instead, just keep investing each month, every payday. Use IRAs, 401(k)s, and brokerage accounts. Keep buying a diversified portfolio of stock and bond ETFs that is appropriate for your age, time horizon, and financial goals.
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