By ROBIN POWELL
There is a perception that young people are pretty clueless when it comes to saving and investing. Instead of putting aside any spare cash they have, the theory goes, they fritter it away on luxuries like daily lattes or avocado toast. And when they do put their money to work, it’s likely to be in faddish and highly speculative assets like meme stocks, cryptocurrencies or Non-Fungible Tokens (older readers may need to look that one up).
But does this image of 20- and 30-somethings as financial dunderheads actually reflect reality? Ask the investment platforms and robo-advisers that younger investors are using, and they will tell you a different story.
Take Vanguard, for example, which prides itself on offering plain vanilla, broadly diversified, value-for-money and, let’s be honest, essentially rather dull portfolios. Since January 2020, around 400,000 UK investors have joined Vanguard, and more than 70% of them are under 45. Around 35% are under 30.
“Meme stocks and crypto may have grabbed headlines,” Zoe Dagless, a senior financial planner at Vanguard, told me, “but over the past couple of years we’ve seen a surge of young investors moving into low-cost, long-term balanced portfolios.”
Interactive Investor paints a similar picture. According to its Personal Finance Campaigner Myron Jobson, younger customers are generally making sensible choices.
“Our youngest cohort have less direct equity exposure generally,” says Jobson, “and a higher allocation to globally diversified investment trusts.”
Among ii clients aged between 25 and 34, half of the most held funds are Vanguard funds. The only age cohort which doesn’t have Vanguard amongst the top ten average holdings is the 65+ category. Also, the older clients are, the more likely they are to hold individual stocks.
The good news is that, according to ii’s latest Private Investor Performance Index, sensible investment choices by younger clients are translating into superior outcomes. “It is our youngest customers,” says Jobson, “who have produced the best returns since we launch the index in 2020.”
Another perception about young investors is that they lack discipline; that they try to time the market and end up buying high and selling low. But is it actually true?
The last three years have provided a stern test of investor behaviour, and on the whole, it’s a test that Vanguard’s younger investors have passed with flying colours.
“Investors have been extremely disciplined, in what’s been an extremely volatile environment,” says Zoe Dagless. “The ‘Covid crash’ of 2020 was the fastest bear market on record. But throughout the last couple of years we’ve seen very little trading from clients in response to market conditions.
“Where we have seen investors respond, it’s generally been to buy equities, suggesting they are rebalancing portfolios. We also see a large proportion of young investors making monthly contributions to their investments.
“This is excellent investment behaviour, and suggests that the long-term approach we’ve been advocating for over 45 years is resonating with investors.”
Nor is it just in the UK that younger investors have kept their discipline. Vanguard conducted a study of its US investor base in the wake of the Covid crash. It found that only a tiny percentage of customers — less than 0.5% — panicked and switched into cash between February and May 2020. Of those, more than 80% would have been better off had they simply stayed in the market. As it was, they locked in losses, and then were too late to come back into the market following its rapid recovery in May.
“Nobody can see around corners,” says Dagless, “and the best days of market performance often follow in the wake of the worst days, making it extremely difficult to time markets.”
No surprise to me
None of this comes as much surprise to me. For the last 12 years I’ve worked to educate the general public about the benefits of systematic, evidence-based investing. I’ve repeatedly warned of the folly of active investing — trying to pick the right stocks and funds and dip in and out of different markets at the right time.
This blog has a younger audience than most investment blogs, and, judging by their comments, most of its readers appear to have a better grasp of the principles of successful investing than many older investors.
In my experience, it’s often the same with financial advisers and, dare I say, financial journalists. In other words, younger advisers and journalists, if anything, tend to have a better understanding of investment management than their older peers. They are certainly more likely to challenge received opinion and the claims that fund managers make about their products.
Don’t get me wrong, there are still too many young investors making foolish choices. Social media and seductive advertising by online trading sites are having a particularly harmful impact. For many Britons in their 20s and 30s today, there is a very real possibility that they will have to work well into their 70s to ensure that they have enough money to support themselves financially until the end of their lives.
The combined effect of less generous pensions, missing out on the house price boom and stagnating wage growth has only served to make their challenge harder. There is also evidence to suggest that returns on both equities and bonds will be lower over the coming decades than they have been over the last 50 years.
All of those factors mean that young people will probably need to make bigger sacrifices than previous generations to become financially independent.
But let’s not patronise young investors and sneer at their mistakes. Investing has become easier, cheaper and more transparent, and most young people are reaping the benefits. My own prediction is that our children and grandchildren will achieve better investment returns than we do.
PREVIOUSLY ON TEBI
FIND AN ADVISER
Investors are far more likely to achieve their goals if they use a financial adviser. But really good advisers with an evidence-based investment philosophy are sadly in the minority.
If you would like us to put you in touch with one in your area, just click here and send us your email address, and we’ll see if we can help.
© The Evidence-Based Investor MMXXII