In response to high inflation and interest rates, American investors are active in the stock market. But according to a recent study from Bankrate, no group has been more active than younger investors, especially Gen Z, although millennial investors have also been quite active. The investor group includes anyone with stocks or a stock-related account such as a 401(k).
Nearly 9 in 10 Gen Z stock investors (ages 18-26) took action on their investments in 2023 due to inflation or higher interest rates, including buying, selling or holding back additional investments. Second, nearly 7 in 10 millennials (ages 27-42) took action, compared to an average of 52 percent of U.S. investors overall.
While active investing is generally associated with lower investment returns, in the case of these young Americans, they are taking some steps that could lead to higher returns.
Young investors are active in the market
More than half of American investors (52 percent) say they have bought, sold or held back investments because of inflation or higher returns on safe investments (such as savings accounts), or both. But it’s young investors, Generation Z and Millennials, who are really driving that average up. And ironically, these young investors are more likely to buy stocks than older Americans.
Here’s how Americans responded to higher interest rates or inflation by age group:
- 87 percent of Gen Z investors took action, whether by buying, selling or intentionally holding back on stock investments.
- 68 percent of millennial investors made one of these active moves.
- 38 percent of Gen X investors (ages 43-58) took action because of inflation or higher interest rates.
- 35 percent of baby boomers (59-77 years) bought, sold or withheld investments.
But perhaps the most surprising finding of the Bankrate survey was that young investors were the most likely to buy stocks, not just bail out the stock market.
- 53 percent of Gen Z investors expect to invest more in stock-related investments this year than last year, compared to 14 percent who expect to invest less.
- 43 percent of millennial investors expect to buy more stock-related investments this year, compared to 15 percent who will invest less.
- Only 19 percent of Gen X investors expect to invest more in stock-related investments in 2023, compared to 21 percent who will invest less.
- Only 9 percent of baby boomers expect to invest more in stock-related investments this year, compared to 23 percent who plan to invest less.
The move to invest more — if done right — can be beneficial for young investors, and is especially valuable because Americans’ biggest financial regret is routinely not having enough savings.
A recent Bankrate survey found that for 21 percent of Americans, not saving early enough for retirement is their biggest financial regret. Overall, 39 percent of Americans said not saving enough (for retirement, emergencies, children’s education) was their biggest regret.
For reasons like these, making smart investment decisions is crucial. But investing more is not the same as smart investing, which uses proven principles to build wealth. So the fact that young investors are planning to invest more can be positive if they use sensible strategies.
How Americans can earn more on their investments and avoid savings regrets
Investors who want to maximize their profits must ultimately move from a short-term mentality to a long-term mentality, from a trading mentality to an investor mentality. Or to put it another way: they need to switch from an active approach to a passive approach. This is why.
1. Passive investing is better than active investing
The proof has been shown time and time again: passive investing beats the vast majority of investors, including the pros. A report from S&P Dow Jones Indices shows that about 95 percent of American fund managers will not be able to beat the market in the next twenty years. The professionals – whose sole job is to outperform the market – can’t even keep up.
So the solution for individual investors is simple: be the market. Buy a broadly diversified index fund, such as one based on the S&P 500 stock index, add to your position regularly, and then hold it. Over time, you achieve the return of the index, which historically has been about 10 percent per year. Although you may be tempted to sell for various reasons, such as market volatility, you must remain a passive investor if you want to capture the long-term returns of the index.
2. As a passive investor you can compound faster
If your annual profit as a passive investor is better, you can of course compound faster. But there’s another reason too: you don’t have to pay taxes on unrealized gains, so you can hold your shares for decades and they can accumulate faster.
Essentially, the government gives you an interest-free loan and you can put together the investment. Only if you sell the investment at a profit will the government collect its share. In the meantime, you have increased the government’s share of the investment.
3. Traders raise taxes
The downside to compounding returns is taxes, and every time you make a profit by selling an investment, you owe Uncle Sam a piece of the action. So not only will you miss out on that interest-free loan and the subsequent interest payments, but you will also have to write the government a check.
You may get a more favorable tax rate on capital gains if you hold your investments long term (i.e. longer than a year), but it’s still money out of your pocket.
4. Traders will likely miss the big days
It may seem smart to dip in and out of the market, but remember that passive investors beat active traders. And there’s a good reason for that: traders are likely to miss the biggest days of the market. You need to invest in the market to capture those days and avoid losses.
A recent report from Bank of America shows how being out of the market can hurt your performance. The total return of the S&P 500 between 1930 and 2020 was 17,715 percent. But what if you had only missed the market’s ten biggest days per decade, a total of ninety days in those nine decades? Your total return over the entire period would be a paltry 28 percent.
That is why investors say that “time in the market is more important than market timing.” You get the long-term returns of the market if you stay invested, not if you try to make short-term profits.
5. Trading is a zero-sum game
Trading is a zero-sum game, meaning if you win, someone else loses, and vice versa. So trading is a game played against the sharpest traders, those with highly developed trading skills and algorithms, who want to take your money. It is not a game for individuals.
But if you are an investor, you can play a positive sum game. You are investing in the success of a business, and its growth can make you and other investors money over time.
In short
While many young Americans are actively deciding to invest more in the stock market this year, it’s important that those looking to increase their financial security understand how to build wealth using proven strategies. Chief among these strategies is a passive approach that takes a long-term perspective, giving individual investors the best chance for success.
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All figures unless otherwise stated are from YouGov Plc. The total sample size was 3,676 adults. The fieldwork was conducted from April 17 to 20, 2023 and the survey was conducted online. The figures are weighted and are representative of all US adults (18+ years).
