The face of the typical investor is changing.
Lots of people have gotten into the market since the pandemic started, and many of those new investors are younger, less affluent, and more likely to have seen their finances take a hit because of Covid-19, according to a recent survey from Charles Schwab, which dubs this group Generation Investor or Gen I. The survey estimates that of the people currently invested in the stock market, 15% of them began in 2020.
The household income of these newer investors is $55,000, more than a third less than the $88,000 their more experienced investor counterparts bring home, and nearly 50% of these newer investors report living paycheck to paycheck. Almost 40% say their finances were negatively impacted by the pandemic.
More experienced, pre-pandemic investors, by contrast, are mostly baby boomers, born between 1946 and 1964. Only 28% of them reported that their finances took a hit due to the pandemic and only a third live paycheck to paycheck.
The rise of new investors may be due to events like the meme stock craze from earlier this year, says Anthea Tjuanakis Cox, a managing director at Charles Schwab. Some of the uptick can be attributed to the stimulus checks they qualified for from the federal government or their ability to save more because they stopped going out so much.
The rise of retail investing, particularly with smartphone apps, also likely encouraged more younger people to start investing.
Regardless of how Gen I got into the market, they are likely to need some education and support, Tjuanakis Cox says. "You have something like a meme stock that gets someone potentially engaged in the market," Tjuanakis Cox says, but now that they're in, Charles Schwab's research shows that these new investors "are walking around with a host of financial questions" about investing their money.
One reason newer investors have so many questions is likely because they skew much younger than their more seasoned counterparts, Tjuanakis Cox says. "There's also awareness among Gen I investors that their needs today are not necessarily their needs tomorrow," she says.
More than half, 51%, of those investors who got started during the pandemic are millennials born between 1981 and 1996; 16% are members of Gen Z, defined for the purpose of the survey as those born between 1997 and 1999. That's a stark contrast from the 29% of millennials and 3% of Gen Zers who made up the pool of pre-2020 investors.
One great benefit for these newer investors is that they've been able to take advantage of one of the most bullish markets in recent memory: Despite the brief, pandemic-induced recession in the spring of 2020, the S&P 500 index has grown almost 50% since October 2019, according to data kept by the Federal Reserve Bank of St. Louis.
Bull markets inevitably end, however. Pullbacks are part of the normal market cycle. New investors can still benefit from learning the basics of long-term investing, including how to navigate market bumps.
Most finance professionals will tell you that the best time to begin investing is now, so that you can have the best shot of growing your money over a long period of time, thanks to the power of compound interest. Younger folks have the added benefit of being able of putting away a portion of their income toward saving for retirement.
They're more able to keep an eye on the horizon, hold steady, and learn how to keep from panic-selling when markets do fluctuate.
Another added benefit: Investors in their 20s or 30s can build the habit of automatically saving and investing part of their income for the long term. The common wisdom is to save 15% of your income for the future, often to fund your golden years, and it's OK to start small as you build that habit, experts say.
Video by Courtney Stith
Whatever the reason they got into the market, newer investors should be aware that the big gains from the current market are not typical, and that they should anticipate weathering dips in the market and getting more modest returns in the future, experts say.
"Check your ego at the door and really ask yourself, if you've made some money trading in and out of stocks, were you skillful or lucky?" says Rob Greenman, a certified financial planner and chief growth officer at Vista Capital Partners in Portland, Oregon. "The evidence overwhelmingly would suggest that it's luck."
Greenman's suggestion? Forget dreams of beating the market and choose more solid, proven performers like low-cost index funds, which tend to be far less risky. "Once an investor comes to grips with the fact that the odds of beating the market are slim to none, they can utilize low-cost index funds and take a needless element of chance out of the equation," he says.
Video by Courtney Stith
Catherine Valega, a certified financial planner with Green Bee Advisory in Winchester, Massachusetts, takes the idea of going to back to basics one step further and advises that new investors consider making the biggest contributions possible to other investment vehicles, like employer-sponsored 401(k)s or IRAs, before dabbling in the market.
"Many of these young investors are gambling with their funds, and have not maxed out 401(k) or IRA contributions before they start dabbling in day trading," Valega says. "My advice is to always consult with a financial planner prior to making money decisions."
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