Financial Times: Why the younger generation likes to chase risky assets

Original: https://www.ft.com/content/bce2ef2a-77d8-485e-ba69-92579f8fceb6

ByMadison Darbyshire

With $1,000 in savings and two U.S. government stimulus checks, Chris Zettler started investing in 2020. At first he bought companies he knew, "but then I got fed up with it," he said. As prices fluctuate, he continues to buy call options on companies whose stock prices fluctuate. He bought 100 AMC shares for $30 in May and sold them for about $65 in June.

The 35-year-old finance major at the University of Alabama at Birmingham has a TD Ameritrade account that allows him to trade on margin (borrowing money from a brokerage to maximize potential returns) and bet nearly $8,000 of his initial $4,000. He turned that money into $18,000.

Zettler saw his account balance rise to $50,000, only to drop to $35,000 when a bet went sideways. He sold $20,000 in stock and paid for college tuition. "I've been incredibly lucky," Zeitler said.

But he added that the risk was worth it. Possibility of big payoff outweighs risk of loss: "If I did it again, would I do it responsibly and sit on that $4000?" Damn no...you have nothing to lose , so you'd better bet on it. "

Zeitler is part of a generation of investors who grew up during the 2008 financial crisis and its aftermath. Over the past decade, many have struggled to build wealth through traditional means and have turned to speculating in the riskier corners of financial markets.

The growing interest in speculative assets such as cryptocurrencies, NFTs and “meme stocks” (which soared in value in early 2021, fueled by retail traders and social media hype) isn’t just about getting rich quick, experts say.

Stagnant wages, razor-thin interest rates, skyrocketing housing prices - and now corrosive inflation - have discouraged those under 40 from taking the proverbial path to financial security, as their parents did idea. Younger investors say they feel the game is rigged and playing by the old rules is a losing strategy.

A combination of inflation and rising interest rates has shaken the crypto market in recent months. Plunging token prices and high-profile bankruptcies of crypto lenders and hedge funds have exposed dangerous practices rife in the riskiest sectors of the market. The question now is whether young DIY investors will retreat.

Zeitler's experience suggests otherwise. He has watched his peers bet desperately on cryptocurrencies and volatile stocks in hopes of riding the wave and getting rich. "A lot of people think they can't afford not to do it," he said. "I think they've run out of hope."

fear, uncertainty and doubt

Natasha Schüll, a cultural anthropologist at New York University, attributes increased risk appetite to a generalized disillusionment that anyone can achieve economic success just by working hard. Part of the appeal of cryptocurrencies and meme stocks is that they are anti-system, designed to operate outside the rules of the traditional financial system.

“From recent experience, the idea that the mainstream economy is more trustworthy than other (assets) is a bit dubious,” she said. “There is now a growing willingness to say, ‘fuck it’.”

The appetite for risky speculation is particularly strong among Americans, who tend to have high levels of personal debt, the researchers said. The average American student now graduates with $37,000 in student debt, up from $17,000 in 2001.

"The idea is that you should be able to save for college, but very few middle-class families can do that to a significant degree," said Caitlin Zaloom, a professor of social and cultural analysis at New York University. "There's not enough financial stability at the core of people's lives. If there is, there's very little incentive to speculate."

Rents have grown faster than incomes in most U.S. states since 2001, according to estimates from the Center on Budget and Policy Priorities. Inflation has pushed up the cost of living in recent months. Experts say the relationship to risk has shifted as low interest rates and heavy debt materialize. Younger investors are less likely to view speculative financial products as potentially valuable investments. Instead, they tend to treat them like lottery tickets—possibly worthless, but still worth betting on for life-changing payouts.

“If you have a housing lottery, investors will buy some of it,” said Jeremy Grantham, co-founder of GMO, a Boston-based asset management group. When people get bored . . . they start acting in strange and new ways."

Ben Johnson, director of ETF research at data provider Morningstar, said the logic was simple: "Negative real yields? No thanks. What are the alternatives? Monkey JPEGs and fake web currencies? Investors think they It’s no surprise to be caught between NFT pet rock and the Dilemma.”

This dissatisfaction is not limited to the United States. The majority of 35-year-old Britons surveyed by insurer Urban Jungle said they felt "unfairly disadvantaged to previous generations" when it came to financial stability and savings.

Gary Stevenson, 35, a former trader and financial education campaigner in east London, said: "My dad didn't go to university. He worked in the post office for 35 years and could raise three Having a kid and paying off the (mortgage) ... he's retired comfortably." "That's not possible for most young people right now. It's causing some panic."

"If you can't do what your father or grandfather did . . . you have to come up with a better plan," he added. At some point, risky bets start to look like a rational choice: "Somehow, you see zero chance of success. But if you take crazy risks. . . at least you still have a chance. "

Skyrocket

During the meme stock frenzy in early 2021, stories of big returns fueled a rush of new deals. Some people make a lot of money. Investors who bought GameStop in late December 2020, when the meme stock peaked on January 29, 2021, would have turned £10,000 into £168,744 in a month - an increase of almost 1,600%. But there's also the potential for huge losses: Investors who bought and then sold in late February would have wiped that same £10,000 down to £3,129 in a month following a 69% plunge, according to analysis by Boring Money. GBP.

Even so, many young investors resist labeling their deals "dumb money." Given the other options, the odds are worth it, they say. Many investors remember the inequality recovery from the 2008 crisis, when government bailouts and the ensuing decade-long market bull run left the uninvested behind. In March 2020, when the new crown pneumonia epidemic broke out, the market plummeted, and they did not want to miss the second time. New technology means now is the easiest time to get involved.

The introduction of commission-free trading in stocks on the eve of the pandemic added momentum to the lottery-like investing act. In 2015, zero-commission brokerage firm Robinhood launched with the promise of “democratizing” financial markets. Four years later, nearly all U.S. brokerages eliminated commissions on stock trades. Robinhood's game-like app allows customers to sign up and start trading stocks on their phones in minutes.

With the explosive growth of the number of digital currencies in the market, cryptocurrency exchanges such as Coinbase have emerged. The “meme coin” craze fueled by super-influencers like Elon Musk has launched a raft of eccentric products — from products named after celebrities (Coinye West) to “dogecoin” Shiba Inu and Dogecoin . In April 2013, only seven cryptocurrencies were available for mining and trading. Today, there are tens of thousands.

Participation is simple. "It's five buttons on the website," said Luke Hawley, 21, a finance major at Endicott College in Massachusetts. "It is easier to buy Shiba Inu on Coinbase than to buy index."

Hawley said talking about gambling and speculation has become the norm on his college campus. "People think, 'Well, I have a few thousand dollars in the bank — in the real world, it's like being broke,'" he said. "There's a lot of Fomo," he added, about giving up the chance to turn a small stake into a large sum of money.

Young people, in particular, are drawn to such booming investments. According to British brokerage Interactive Investor, the vast majority of cryptocurrency investors are men, with more than 90% of trades at Gamestop and AMC at the height of the meme stock mania being made by men. One reason these investments are seen as casual bets, experts say, is because brokerage apps feel like gambling platforms — just without the regulatory guardrails.

"More and more platforms are blurring the line between gaming, gambling and investing, especially those that enable the use of cryptocurrencies," said Jack Symons, chief executive of Gamban, a UK-based app that Allows users to block gambling apps on phones and computers. Gamban began blocking brokerage and crypto platforms last summer. "Some might say it's blunt, but gambling doesn't look like it used to. It's not just something that happens on green felt [in a casino]," Simmons said in October.

Late last year, the largest gambling hotline in the US told the Financial Times that it had seen a significant increase in calls from people addicted to day trading, rather than traditional gambling or sports betting. One reason might be that, as Stevenson explains, investing doesn't carry the same social stigma that gambling does.

"If you said, 'My dad gambles all day long,' [I] would say, 'My God, I feel sorry for your family,'" he said. But "if someone said, 'My dad trades forex all day long,' you'd think he was the wolf of Wall Street . . . It's not gambling, it's investing — and investing is how you get rich."

diamond hands

The most speculative parts of the market have been hit the hardest in recent months as the cryptocurrency balloon burst. But as prices plummeted, some crypto firms tried to convince investors to stay confident and hang in there, arguing it was just another cyclical "crypto winter," a sign of the growing power of online communities.

People under 25 are twice as likely as any other age group to turn to social media for financial advice and more than three times as likely to seek professional help, according to a survey by British consultancy OpenMoney.

Robinhood's rise comes as online communities on Twitter and Reddit start to play a bigger role in investing. Reddit subforums like r/WallStreetBets provide potential investors with expert information, fueling their discussions and tugging at their heartstrings.

Great losses can be laughed at by peers, while great gains can be shared and celebrated. Those who stuck to their guns were praised for their hubris: "Diamond hand" became the vernacular of an emoji daring to hold in a risky position, even if broken down.

A study last year by academics at the University of Sydney found that 18- to 24-year-olds were more likely to make risky decisions when they believed their peers were watching them. Agnieszka Tymuła, the study's lead researcher, said that online communities of investors amplify the same behavior: "People want to take risks, want to get big wins and post about it."

The illusion of control also amplifies risk-taking behavior. Whether by laying out the specifics of niche cryptocurrencies or discussing "pump" strategies, online forums encourage members to think that the odds of winning the jackpot are far greater than they really are. Regulation has not kept pace with the spread of disinformation.

Some college students said they were becoming more familiar with the dangers of cryptocurrency "pump and dump" schemes, such as so-called "runaways" -- when a developer launches a crypto asset, pumps up the price via social media influencers, and then crashes when the price plummets. The former disappears with the proceeds.

“Running is not a good thing,” said Harrison Turner, a 19-year-old junior from Montgomery, Alabama. Still, he said, he understood the influencer’s motivation: “He saw an opportunity. , and seized it."

get rich slowly

Despite the increasingly hostile investment environment, risky speculation is likely to persist. "It works really well for some people, and old habits die hard," said Steve Sosnick, chief strategist at U.S. trading platform Interactive Brokers. Speculating on margin."

In May, the amount borrowed for margin trading was 25% higher than pre-pandemic levels, according to Finra.

Traditional wealth managers are nervous about the prospect of digital assets becoming mainstream. According to Natixis research, nearly half of fund selectors say they feel pressure to offer cryptocurrencies to attract younger investors. However, 70% said they believed individuals should have no exposure to this volatile asset.

“Cryptocurrencies are not a systemic solution to income inequality,” said Georgia Lee Hussey, a wealth manager and founder of modernism Financial. "If your investment strategy is tempting, you're doing it wrong."

The brokerage is also concerned that investors who have suffered large losses may withdraw from the market altogether, reinforcing their view that the game is rigged. Trying to educate potential clients means reaching out to investors where they are on social platforms. Fidelity has embraced digital assets and social media outreach in an effort to connect with investors and convince them that getting rich slowly is possible.

“Younger investors say their number one concern is financial security — how to have enough money to be ‘ok’,” said Kelly Lannan, director of emerging clients at Fidelity. “It’s very basic. . . . our generation hears more."

While Zettler says his investments have become increasingly "boring," others like Turner are still willing to risk everything. He once lost his brokerage money by betting the wrong time once, but said he always made enough to put a few thousand dollars in a brokerage account. "Money will come and go," he said. He knew he could lose everything.

Then again, he said, he could get lucky.