If you want to build significant wealth by investing for the long term, it helps to start investing at a young age. But unfortunately, today’s younger investors seem to be making some of the same mistakes as novice investors.
A recent CFA Institute survey found that Gen Z investors are taking on too much risk and making questionable investment decisions, potentially jeopardizing their long-term financial goals.
Let’s look at some bad financial moves Gen Z investors are making and see how you can protect your investment portfolio from rookie mistakes.
1. Investing based on fear of missing out (FOMO)
According to the CFA Institute survey on Gen Z and investing, 50% of Gen Z investors said they have made an investment out of “fear of missing out” (FOMO). Gen Zers also said FOMO-related investments were most likely to be made in:
- Cryptocurrencies (57% of investors FOMO)
- Individual stocks (32% of investors FOMO)
- Meme stocks (28% of investors FOMO)
Here’s the problem with FOMO investing: fear is not a good reason to invest, especially fear driven by peer pressure or ephemeral social media fads. Many Gen Zers have been caught up in short-term collective thinking around risk assets. Just because a stock or asset category is a hot topic on TikTok today doesn’t mean its price surge will 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 feel peer pressure to invest in an overvalued stock, coin, or any other asset, remember that stocks (and meme stocks and cryptocurrencies) can go up and down. Don’t walk away empty-handed.
2. Taking big risks with investments
The CFA Institute survey found that US 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 cryptocurrencies, or 25% of their total investment money.
- 19% of American Gen Z only invest in cryptocurrencies or NFTs.
The problem is this: cryptocurrencies can be volatile and risky (even more so than the stock market) and they don’t pay dividends like stocks or interest like bonds. If you’ve made big profits on crypto you bought years ago, good for you, but I don’t buy any cryptocurrency at current prices and I don’t think it’s a sustainable long-term investment for most people.
Lesson for investors: If you want to get into cryptocurrencies or other alternative assets, be aware of the risks and do not invest more than a small fraction of your portfolio in high-risk, high-volatility assets.
3. Lack of diversification
The survey also found that Gen Z is highly focused on individual actions: 41% of Gen Z owns 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 they love and want to support them by buying shares. Picking stocks or buying fractions of shares can be a fun way to learn about the markets and see how investing works in real life.
But investing too much money in individual stocks can be risky. Any individual company’s stock price can plummet for reasons beyond its control; while the stock market as a whole goes up and down, any individual stock can go to zero.
Some people can make money in the short term by picking stocks, but most investors, even professional ones, outperform the overall stock market over the long term.
Lesson for investors: Broadly diversified index funds, mutual funds, and exchange-traded funds (ETFs) are often a better way to earn profits in the stock market while managing risk.
Bottom line
It’s a good thing 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 an investor you are, try not to let your investment decisions be ruled by social media fads and fear of missing out (FOMO). Instead, just keep investing every 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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