Are Younger Investors More Optimistic?

Friday, September 4, 2020 6:59 AM | Neal Farmer

There have been lots of news stories since the coronavirus hit about a surge of young investors. There are also good reasons to believe these younger investors are different from their older peers in at least one important way, their optimism about the market.

Age is Just a Number

First of all, the simple fact of being younger gives investors a longer time horizon. This means they can worry less about short-term volatility. A 20-year-old saving for retirement has 40 years or more before they need to start making withdrawals. This means that a correction in the next five years should be seen as a buying opportunity more than something to worry about, as the market will have plenty of time to recover before that investor needs the money.

Older investors with much shorter horizons are much less able to wait out volatility as their assets will be needed much sooner. This is why older investors typically rotate into less volatile assets as they the get closer to needing that money. They tend to have higher net worth and are primarily concerned with their assets maintaining value after a lifetime of accumulation. Retired people have even less reason to be optimistic they need those assets to meet their current liabilities.

Another reason for younger investors to be optimistic is that people tend to heavily prioritize what is in front of them and discount the future. Because of this, younger investors are likely just more focused on more immediate concerns and optimistic that the future will work itself out.

Why Optimistic on a Recovery Now?

An E*TRADE survey recently showed the majority of Gen Z and Millennial investors have increased their risk tolerance since the COVID-19 outbreak. Many have opened new positions, reducing their cash holdings. A majority are also now trading more frequently. A big reason for this is that 50% believe their portfolios will recover in the next six months while only 33% of the total population believes this.

Health factors may play a significant role as younger individuals are more likely to view COVID-19 less of a concern due to it having a stronger effect on elderly people and those with pre-existing conditions. While health good may not make you more confident in the stock market, it seems reasonable that investors with less direct fear of coronavirus might also be less worried about its effect on their investments.

Money Printer Go Brrrr

The biggest reason for the rise of investments from younger investors could simply be the stimulus checks provided by the government. Many individuals with jobs and income sufficient to cover costs of living saw that $1,200  as "extra" money, and with limited places to spend during the pandemic, investing seems like an attractive option. The boom Robinhood’s boom in its user base suggests that many seem to have used that money for investing.

It makes sense that the stimulus wasn't used the same way most treat their income as humans irrationally perceive money from different sources in unique ways. We have a tendency to treat money from work for essentials while the $20 bill won in a bet is "spending" money.

What Stocks Have the Best "Value"?

While it is possible that younger generations simply aren't as experienced with the market and thus are overly optimistic, they have many reasons to be so bullish on the market. With an extremely long time horizon and little reason to think America will collapse within the next century, younger investors should be extremely optimistic about their portfolios growing in value over the long run. Short term volatility is of little concern. If anything a crash in the market might signal a potentially good time to invest while prices are low.

The major indices have recovered from their lows but that doesn’t mean there are not great values out there. This rally has been overwhelmingly led by Apple (AAPL), Microsoft (MSFT), Google (GOOG), and Facebook (FB) as many of the smaller companies in different sectors remain far below where they were at the beginning of the year. Real Estate, Financial Services, and Energy stocks are still significantly down on the year and long-term investors focused on great values will find many attractive stocks in those sectors. Investments in stocks such as Morgan Stanley (MS), Cyrusone (CONE), and Enbridge (ENB) may not be as glamorous, but offer great value at their current prices. They may continue to lag for a while, but eventually they will recover. In many cases, the biggest names in a particular sector are likely to regain their spot and grow as while smaller competition may not survive the recession.

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