Game on: How millennials and Gen Z are changing investing

Novice investors have time on their hands and are taking greater risks to get rich quickly, but experts warn they risk losing their money

Getty Images

The line between investing and gambling has always been a fuzzy one, but now it’s in danger of becoming completely blurred.

A new generation of young investors is adopting a get-rich-quick mentality towards investing and taking ever greater risks along the way.

The slow process of building a balanced portfolio of shares, cash, bonds, property and gold, and watching it grow, year after year is not for them.

They want to make fast money today, and plenty of people out there are more than happy to encourage them to pursue it.

Bitcoin is partly to blame, as are runaway tech stocks such as Tesla. Early adopters struck gold but now others want a piece of the action.

Frankly, who wouldn’t?

Just look at the recent frenzy over US video game retailer GameStop. It looked doomed until it became a meme on Reddit message boards, resulting in private investors loading up on the stock to make a killing and stick it to the big, bad hedge fund managers who were shorting it.

Non-fungible tokens (NFTs) are an even more extreme case. Investors are willing to blow more than $200,000 to “own” an online video clip showing a great moment in NBA basketball history, which anybody can view for free on the web.

A host of other factors are driving the “gamification” of investing. They include bored people stuck at home who are looking for excitement but have access to fewer sporting events to punt on. US President Joe Biden’s latest stimulus has pumped $1,400 straight into most Americans’ bank accounts. Guess where that’s going?

We are also in the late stages of a long bull market, which typically sees a surge in risk-taking, as people seeking to make a fast buck. Fear of missing out on the fun is another driver.

The authorities are getting worried. In the UK, the Financial Conduct Authority recently warned that young people are now investing for the “challenge, competition and novelty”, rather than conventional, “functional” reasons such as saving for retirement.

Many are driven by “the thrill of investing” after picking up tips on YouTube and social media, lured by online adverts or high-pressure sales tactics and the accessibility of new investment apps.

Too many don’t realise the risks, with almost four out of 10 unable to list a single “functional” reason for investing in their top three holdings, FCA research shows. Even more worryingly, six out of 10 admit that a significant loss would have a fundamental impact on their lifestyle, it adds.

It is hard to blame millennials and Generation Z for seeking a quick solution to their current predicament, where many will never afford a home no matter how hard they save, while their career prospects have diminished.

These trading strategies might seem like a sure-fire way to make money, but people could end up losing most, if not all, of their investment

The old ways have failed the younger generation, so they’re trying a new one.

The problem is the only people who will consistently get rich from gambling are those who promote it.

Anthony Morrow, co-founder of low-cost trading platform OpenMoney, says people will get hurt. “These trading strategies might seem like a sure-fire way to make money, especially when promoted by influencers and social media, but people could end up losing most, if not all, of their investment.”

James McManus, chief investment officer at investment management company Nutmeg, says younger investors are typically more bullish and this makes them an easier prey for unscrupulous firms promoting high-risk investments.

“Many will have lost a great deal through short-term, speculative stock picking, which is more akin to gambling than investing.”

The challenge facing those who favour risky short-term trading over sensible, long-term investing is that it is far more alluring than the pension fund.

Chaddy Kirbaj, vice director at Swissquote Bank Dubai, says investing is a hard and slow process, but there is a good reason for that. “Building wealth takes time, losing it is the easy part.”

As an investor, you have to work hard to avoid the temptation to gamble, and coolly assess the risk you are taking. “While some losses are part of the game for any investor, the trick is keeping them to a minimum. At the end of the day, it’s your money,” Mr Kirbaj says.

Naturally, investing in shares is also a gamble. Few professional investors predicted Tesla’s dramatic surge last year. Most were shorting it instead.

The Covid-19-induced market crash in March last year caught many out, as did the swift recovery after the US Federal Reserve flooded markets with liquidity.

Again, young people can hardly be blamed. They know how the world work as they find themselves at the sharp end of it.

Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, warns of a “crypto Wild West”, where a new breed of younger investors risk losing it all by dabbling in products they don’t fully understand, often after being lured by social media influencers.

While it is encouraging to see social media inspiring a more diverse range of investors, she says they must avoid following the herd and investing for speculative short-term gain.

“Trading apps have democratised investing but need to be used thoughtfully. If you are trading on the go, give each trade as much consideration as you would if you were sitting quietly at home to avoid being swept up in any hype,” says Ms Streeter.

Heather Owen, a financial planner at Quilter Private Client Advisers, says investing has never been more accessible as you can buy and sell securities, including complex options and derivative contracts, with a click.

“However, this has exposed young people to risks like never before and they are not aware of basic pitfalls, such as losing money.”

Trading apps have democratised investing but need to be used thoughtfully

Ms Owen notes that Instagram has 8.9 million posts featuring #investing and 8.7m featuring #finance.

“On TikTok, the numbers are even starker. Videos featuring #investing have generated over 1.6 billion views, with #finance generating 1.5 billion. Temptation is all around, and the fear of missing out has resulted in many young investors jumping in, some right at the top of the market.”

She says the “gamification” of investing is drawing in young people seeking diversion and with time on their hands. “The temptation to play the markets has been too great, but there is no such thing as free money.”

Ms Owen says proper investing takes time and ongoing attention, but the rewards can be much greater and set people up for life.

The following tips can help you take a more level-headed view, she says.

• Diversify, diversify, diversify: Buying a single stock is incredibly high-risk as you are putting all your eggs in one basket. Back lots of horses and then if one fails, you have a back-up.
• Understand what you are investing in: The investment universe is enormous, from cryptocurrencies to commodities. You have to understand what you are buying, or risk coming unstuck.
• Beware of leveraging: As well as knowing what you have to gain, make sure you understand exactly how much you could lose. In some cases, your exposure could be unlimited.
• Have a realistic plan: You need to know how much you can afford to invest, how much risk you can stand and how much you can afford to lose. If, say, you want the money for a house deposit in the next five years, reduce the amount of risk.
• Beware of social media money mentors: Anyone can set up a social media profile and start handing out investment tips and advice. Some even charge for tips. They will often pose as successful day traders, but the reality is often different.

Watch out for online scams. Be wary of an investment proposition that offers an unrealistic rate of return, which downplays the risks or puts you under time pressure to make a decision. If it looks too good to be true, it probably is.