The most dangerous way to start a lifetime of investing is with a run of beginner’s luck.
In the annals of investing, beginners may never have been luckier than they were in the rally back from the stock market crash in March. So much money has been made by millennial and Gen Z investors in ways that have almost no applicability to long-term investing success. Now is the time to get back to fundamentals – mostly, anyway.
Let’s give praise where it’s due – millennials and Gen Z investors did a commendable job of jumping into a stock market that appeared to be in free-fall in March. “A lot of millennials graduated into the ’08-09 crash, or shortly after that, and saw the massive market rebound,” said Shannon Lee Simmons, a financial planner with a millennial client base. “They learned from that. It was the scariest thing in the world and then the rebound happened.”
The recovery from the March crash happened at hyperspeed, so it was instantly rewarding. It was also easy to figure out for novice investors. Most of the gains have been fuelled by familiar technology stocks, notably the FAANG stocks (Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc.), but also Tesla Inc., PayPal Holdings Inc. and Nvidia Corp. The 36-per-cent gain for the Nasdaq-100 Index, a tech benchmark, was double the return of the much broader S&P 500 for the six months through Sept. 9.
The ascendance of tech stocks has occurred at the same time as the rise of commission-free trading apps for smartphones such as Robinhood in the U.S. market and Wealthsimple Trade in Canada. In the pandemic, these apps offered an almost game-like investing experience aimed directly at millennials and Gen Z.
New investing technology has enabled a mass movement of young people investing in technology stocks. But tech stocks stumbled in early September because of concerns they’ve come too far, too fast. Even if tech rebounds, there will be an entirely normal and even healthy pullback at some point. When this happens, the tight little tech portfolio that killed it this summer will be crushed as beginner’s luck runs out.
It’s time to prepare. Timing the stock market’s ups and downs is guesswork and most investors guess wrong most of the time. But if you’re a young investor who cleaned up in the market this past summer, consider selling much of your holdings to lock in profits and pivoting to a more traditional investing strategy. Long-term investing success is rarely built on a narrowly focused group of stocks chosen because they’re trendy in the moment.
Ms. Simmons urges her clients to create a diversified portfolio of exchange-traded funds as their main engine of saving for retirement and other long-term financial goals, while also keeping a small amount in another account for trading or speculating.
Her suggested investing mix: Five per cent of a young adult’s investing dollars go into the trading account and the rest into diversified long-term investments.
A quick, smart way to build a diversified long-term investment portfolio is to use a robo-adviser, where you pay a modest fee, starting in the area of 0.5 per cent at most, to have a portfolio of ETFs built and managed for you.
Another good choice is a balanced ETF, which is an entire diversified portfolio contained in a single low-cost fund that you buy like a stock. Balanced ETFs are available in conservative, middle-of-the-road and aggressive versions, each with a different mix of stocks and bonds. You simply add money to them and it’s distributed among the various components of a balanced portfolio.
Millennials have more excuse than anyone to choose a portfolio heavy on stocks and light on bonds, which yield close to nothing right now. With retirement decades away, there’s plenty of time for the good years in stocks to outweigh the bad.
If tech stocks keep rising, diversification is going to seem excessively cautious. But it’s not like an investor gives up entirely on tech in a balanced portfolio. About 28 per cent of the S&P 500 is accounted for by tech, and the S&P 500 itself might account for roughly one-third or more of a portfolio suitable for a young adult investor.
Also, let’s be honest about millennial stock-picking. It’s not infallible, even when focused on tech stocks. Wealthsimple Trade published a list of the most-traded stocks on its platform in the second quarter of the year and the names included both Shopify Inc. (SHOP-TSX), up 103 per cent in the past six months and Gevo Inc. (GEVO-Nasdaq), a renewable chemical and biofuels stock that was down 21 per cent over the same period.
Ms. Simmons said the interest her clients have shown in tech stocks this year follows similar infatuations with crypto-currency and cannabis stocks in the past few years.
Her take is that young adults who feel shut out of the housing market are looking for alternative ways to build wealth. “A lot of millennials are looking at the stock market and thinking, this is my opportunity to take on a little bit of risk and try to benefit in the long run because I don’t know if I’ll ever have that pot of home equity money.”
Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today.