August 13, 2020
This week, investing app Robinhood reported an incredible statistic. It now boasts more monthly trades than any other brokerage firm…
It is especially popular with the millennial crowd, particularly those looking for a quick investing win. The app is easy to use and trading is free. Its popularity has soared during the COVID-19 pandemic… In fact, more than 3 million accounts signed up in the first quarter.
But there are risks to its “gamified” approach…
A few months ago, Alexander Kearns, a 20-year-old student at the University of Nebraska, was one of those new Robinhood investors. He ended up making a complicated options trade… and the app’s interface led him to believe that his account had plunged more than $730,000 in the hole.
Tragically, thinking that his future was ruined over this massive debt, he threw himself in front of an oncoming train. As Dan Ferris reported in the Stansberry Digest at the time…
Kearns’ cousin, Bill Brewster, posted his suicide note on Twitter… It clearly indicates the young man was distraught and confused over the substantial deficit showing in his Robinhood account. But even worse, it appears that Kearns didn’t actually owe the money… Apparently, it’s just how Robinhood displays the financial figures as the trades play out.
In his suicide note, Kearns admitted that he had “no clue” what he was doing and didn’t understand how Robinhood could give “almost a million dollar’s [sic] worth of leverage” to “a 20 year old with no income.” He signed off, “F— Robinhood.”
Robinhood has made changes to its platform as a result of this and other stories… but the reality is that if you are an inexperienced investor, it is far easier to lose a large amount of money quickly than it is to make a large amount of money quickly.
Today, more than half of America is now of the millennial generation or younger. And it’s time to consider what happens next.
We are very interested to see how millennials will fare now that they are coming into their prime earning years… years that will serve as a foundation for their investing future.
Below, we’re featuring a fantastic essay from Alice Lloyd from our June American Consequences magazine that examines how millennials have hopped from crisis to crisis… and why their experience will dictate the future of the financial landscape.
The Millennial Investor
A Generation’s Crisis-Conditioned Approach
By Alice Lloyd
“Is it safe to come out now?” is the question of the year. It’s top of mind whether your pandemic panic has been predominantly financial, psychological, medical, or social in nature. In a certain sense, we seem to be entering a recovery phase tailor-made for the millennial mentality. Because “Is it safe to come out now?” also sums up millennials’ crisis-conditioned approach to investing.
The generation’s collective financial experience has been one of either chaos and calamity or stretches of productive recovery too calm and consistent to completely trust. Even as millennial millionaires grow in number and weigh what to do with their money, there’s a lingering trepidation.
Millennials are making money, and with the oldest of them pushing 40, the whole generational cohort is approaching what are supposed to be its peak earning years – middle age. Millennial-headed households earn more than adult households in the equivalent age bracket have at any point in the past half-century. What they do with all this wealth will dictate the future of the financial landscape. And yet their elders are starting to notice they don’t invest quite the way their parents did…
One recent survey found that millennials are a class that favors real estate investments. (It was commissioned, not so surprisingly, by a real estate firm.) Another study – this one, fittingly, from Investopedia – canvassed affluent millennials and found confirmation for a stereotype that spent those 11-ish fondly remembered recovery years (RIP), from 2009 until this March, gaining strength: These kids aren’t investing enough in the stock market! The study found 40% are wary – calling investing “risky” – and a quarter are genuinely worried: The word they chose was “overwhelming.” I’d wager the “overwhelmed” quadrant has grown in 2020.
COVID-fueled volatility is triggering flashbacks to the early days of the recession when millennials – then at various stages of the slow crawl toward upwardly mobile independence – suddenly confronted a crippled economy. For older millennials, this was the second major setback they’d faced: The first hit just as these now-middle-aged millennials were entering adulthood.
Consider that an elder millennial would have been on the cusp of contemplating college when the tech bubble burst at the turn of the 21st century… A sophomore or junior in high school, he would have been forced to confront, perhaps for the first time, how his family’s ability to pay his tuition fees would directly affect his future success and earning potential. And he would have been graduating, so to speak, into this financial awareness during a drastic downturn – learning, all of a sudden, that market corrections dramatically impact the course of our lives.
Flash forward a few years, and he’s finishing college – which he probably took on debt to help pay for – when the real estate crash hits just as he’s looking for his first job… Big banks are getting bailed out, and unemployment is at 26.6% for young men with bachelor’s degrees. Maybe he takes on more debt to attend a mediocre law school, thinking that would help his prospects. But in 2010, the outlook for law school grads was grim… Only 45% of one top-50 law school’s recent graduates had landed real jobs nine months after graduation. And our hypothetical expensively educated, debt-ridden, millennial man was – unsurprisingly, knowing his luck – in the under-employed majority. Last I heard, he rode out the bull market in his mom’s basement, where he remains to this very day…
In all seriousness, this guy is not the norm – but he does exist. And everybody his age knows somebody whose life’s trajectory looks like his. Somebody very active on social media, somebody who posts a lot about Bernie Sanders, somebody whose very existence among your acquaintances serves as a reminder not to put your faith, or too much of your savings, in “the system.”
How millennial investors weather the next year’s turbulence will be a revealing test of the standard stereotypes concerning their learned apprehension about the stock market. Like every generation, they’ve been shaped by the events they’ve lived through… A degree of wariness makes sense. But then, what do we make of those millennials who approach investing with a reckless fixation on nosing out the next big thing?
As the generation collectively matures, a somewhat sensible pattern emerges linking the two attitudinal extremes. Their risks favor analyses that defy the methods that have worked before – because what’s worked before has always had a pesky habit of, eventually, seemingly ceasing to work. And those who do invest tend to rely on investing apps like Stash or Robinhood and follow the advice of finance-focused social media influencers instead of listening to paid experts. But, say what you will about the old ways, human investment advisers are quick to return a phone call…
Allan Roth, one such adviser, groans at the thought of so large a segment of wealthy Americans wary of investing. “They’ll avoid volatility and maximize risk – because if you put your savings in cash, you’re going to lose to taxes and inflation year after year, after year after year after year,” says Roth, founder of the investment advisory firm Wealth Logic.
Millennials who know, intellectually, that Roth is right feel no less nervous about the prospect. Likewise, an experienced investor knows he should buy more to rebalance when stocks fall 50% – but he’s still going to balk at the prospect when they actually do. “It’s kind of like being kicked in the gut three times and asking them for three more. It’s not such an easy thing to do,” says Roth. It’s an era of learning opportunities in that regard – or an era of abdominal strength-training, to overstretch a metaphor.
Besides conditioning yourself to take the hits and wait it out, nervous millennial investors might do well to avoid peering into their accounts at all for a while: “If somebody can just not look at their statements for a long period of time, they’d be better off,” says Roth, who admittedly advises fairly few millennials – affluent or otherwise.
Brandon Hayes’ clients at the millennial-focused firm oXYGen Financial, on the other hand, are all about his age (37) or younger. Hayes started college amid the tech bubble’s burst in 2001 and was just launching his career when the recession hit. His clients’ standard approach to investing often ranges from stereotypically wary to nonexistent, Hayes tells me. The most common refrain he hears – “‘Oh, that’s like gambling, isn’t it?'” – betrays what he calls, almost euphemistically, “a lack of trust.” Out there in the field, clients with wounded 401(k)s want to liberate their money – leaving Hayes the unlucky job of instructing them to sit back and watch their savings suffer instead.
He talks about millennials and the stock market the way some men talk about war… “Clients who give in to second-guessing their investments go buy rental properties or invest in a business with a relative instead,” and Hayes hates to see it. “They take on unnecessary risk, not having fully researched, not really knowing where that money is headed.” The tragic irony, he tells me, is that low-information investments are hurting his clients’ savings in an era otherwise characterized by an excess of information.
Sitting indoors in today’s quarantined climate and tracking volatile stocks from our smartphones doesn’t make us savvy investors… It makes us miserable. “With everyone at home glued to screens, they just keep refreshing the news and watching CNBC and panicking. There’s no sports on. They’re seeing a lot of wealth eliminated. It puts a deep dent in people’s faith in the market.” All this fear and doubt is the scariest variable. “It’s terrifying to think about the next generation after us,” he says.
Scott Bishop, of the Houston-based firm STA Wealth Management, has been worrying for a while about millennials’ willingness to bet big on anything that smells innovative. The habits he’s noticed cropping up among older millennials remind him of the late decadent growth phase of the dot-com bubble. They’re micro-investing in high-risk, high-return ventures that only the wealthiest few really have the resources to research.
If you and enough of your buddies go in on a private deal, you might feel like high-flying venture capitalists – first to the party for the next Facebook, bro! – but that doesn’t mean you are high-flying venture capitalists. Equity crowdfunding lets you do more or less the same thing. But instead of going in on a private deal to back a possibly promising startup your buddy from college hyped up over the group chat, you’re co-investing with strangers on the Internet. What could go wrong?
On the other end of the spectrum are those who pride themselves on stockpiling for early retirement. Millennials gave the world the Financial Independence, Retire Early (“FIRE”) movement, whose adherents put most of their money in stocks for the long haul, and live frugally while watching their wealth accrue. By the time they have enough to retire comfortably, they will still have enough time to enjoy it.
Current conditions are discouraging for even the committed FIRE followers, Bishop bemoans. Like everyone else, these lifelong planners are facing a future no one accounted for. “When they see their $100,000 IRA shrink to an $85,000 IRA, they’ll not just think what’s the use in investing – they’ll think what’s the use in saving,” says Bishop, who’s generally a FIRE fan.
Lack of Trust
Even pre-pandemic, there was a powerful sense of global instability bearing down on the young investors of today, Bishop allows. They have student debt. They may have invested in an exchange-traded fund – a bundle of securities with a low barrier to entry – because conventional wisdom said it was the smart step for the first-time investor. And then, all of a sudden, the sky went dark.
Meanwhile, millennials who started investing right before the recession just don’t trust the market to reward them, Bishop observes. Instead, they flip houses or invest in regional real estate – rental properties, Airbnbs, and small businesses – because the tangibility of these properties is appealing. Plus, passively profiting off community-building projects more closely aligns with the core values of the stereotypical thirty-something than going along with whatever your robo-adviser says. But then COVID-19 froze all nonessential travel and commerce.
Sophia Bera is the 36-year-old founder of the financial advisory firm Gen Y Planning. She’s naturally sympathetic toward the generational instinct to make an enemy out of any entrenched idea or seemingly outdated approach. “Listening to the expert doesn’t work, because look where the expert got us,” Bera defines the iconoclasm she sees in some clients.
Bera was recently profiled in a pretty bleak article on the unlikelihood her profession would survive the economic fallout triggered by COVID-19. She was, its author concluded, going to be one of the lucky ones – her company seems well set up to survive the setback. Here I can’t help but agree. What sets Bera apart isn’t the way she’s carved out a niche serving up financial advice to the affluent millennial market… It’s how well she knows her clientele – and its peculiar neuroses.
It makes sense that a financial consciousness molded by manmade crises will be wary of the habits and institutions of old. That’s the key, Bera says, to understanding a generation that’s either squeamish about investing in the stock market, on the one hand, or convinced – wisely or unwisely – that they can “game” it, on the other. My assignment, I tell her, is to get to the bottom of why millennials are weird about investing. Her answer is that, from their elders’ perspectives, millennials are weird about everything. “What seems ‘weird’ makes sense in the context of the work to live, as opposed to live to work, approach to finance and wealth,” she explains.
The rhythm of the millennial’s exposure to major market corrections throughout their lifetimes instills a conservative instinct, which Bera doesn’t discourage. But she identifies a more timeless instinct, too: “I have a conservative nature. As a woman, I value security first,” she says. With millennial women twice as likely as their mothers were to outearn their partners, it could be the innately feminine instinct to secure a safe and stable home that’s dictating millennial wealth trends. Bera admits she’s often asked herself in the past if she and her clients were being too conservative, knowing that an older – and, in her field, typically male – adviser would likely be encouraging bolder moves. But, as it turns out, there’s real value in indulging your inner doomsday prepper. “Now we’re seeing that conservatism pay off.”
The instinct to stockpile for early retirement, for instance, comes in part from this generationally endemic desire for security. She finds herself tapping into this instinct in the COVID-19 era when convincing her clients not to panic and move to cash. One, a 38-year-old who’d been preparing to quit his job and take a sabbatical, has been watching his brokerage account go down and his dreams die with it – but, it turns out, he was readier for the unforeseen crisis than he knew. The account is 65% stocks and 35% bonds, a more conservative balance that would have made sense to a more aggressive investor looking at the state of the world a few months ago. Why did they structure it the way they did? “Because we don’t know exactly when or how we’re going to use this money,” Bera says.
And, as we all know, now more than ever, we don’t know what we don’t know, if you know what I mean… Perhaps it’s a season to sympathize – or even to learn from – the weird habits of the millennial investor. We’re all a little wary these days. And we will be for a while, until it finally seems fully safe to come out – if it ever does.
Now here are some of the stories we’re reading…
Robinhood Blows Past Rivals in Record Retail Trading Year
The firm is revealing the data for the first time, in the wake of a surge in online dealing among people stuck at home during the coronavirus pandemic. Newbie investors this year have flocked in record numbers to zero-fee trading apps such as Robinhood and British platform AJ Bell Plc, but the rush has prompted concerns over whether they properly understand the financial risks they’re taking.
Millennials Slammed by Second Financial Crisis Fall Even Further Behind
The economic fallout of the Covid pandemic has been harder on millennials, who are already indebted and a step behind on the career ladder from the last financial crisis. This second pummeling could keep them from accruing the wealth of older generations.
39% of younger millennials say the Covid-19 recession has them moving back home
Even some of those who haven’t made the move home are still getting help. About 15% of younger millennials say their parents are paying part of their rent, while another 15% say their parents are covering all of their housing costs.
The far left looks to seize one of the most prominent political jobs in the country
Two years after Alexandria Ocasio-Cortez toppled a congressional power broker and challenged New York’s political conventions, the far-left movement that boosted her to the national stage has demonstrated it is here to stay.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
August 13, 2020