- Retail trading exploded at the onset of the coronavirus outbreak in the United States.
- With easy access to investing through online platforms, young investors rushed to cash in on the stock-market recovery. For some, it marked their first investing experience.
- Financial experts typically recommend a passive investment strategy; the risks associated with frequent trading are higher and the rewards aren’t consistently better.
- But active investing can pay off for investors who have the time and interest required to develop the skill.
- This article is part of a series focused on millennial financial empowerment called Master your Money.
When the coronavirus outbreak shut down businesses, schools, and entire cities in the spring, the US stock market crashed, and investors flocked to the fire.
It’s not unusual for seasoned investors to seek buying opportunities in market downturns, but this crisis surprised financial pundits when it spurred action from newbies too. While a great number of Americans were suddenly stuck at home and reconfiguring their budgets, retail trading exploded, specifically among millennials.
According to an analysis of 1.3 million investment accounts at brokerages with an average owner age of 31, Apex Clearing, a digital custody and clearing firm, found that trading volumes rose by about 27% in the first half of this year.
Despite a decidedly horrible economic outlook, investors with cash to spare saw possibilities.
“For many young people, there seems to be more recognition of the difference between the economy and the stock market,” Wilson Muscadin, a financial coach and founder of The Money Speakeasy, told Business Insider.
“On one hand, the economy is experiencing record unemployment levels, significant business closures, and the effects of a resurging pandemic in many areas of the country,” Muscadin said. “By contrast, the US stock market by many measures is back to pre-pandemic levels.”
Over the past few years, Muscadin said, a widespread effort to democratize the investment industry by reducing costs and making tools more accessible to the average person has culminated in a rise in active investing.
Now, easy-to-use technology paired with coronavirus-induced volatility has turned the stock market into fertile ground for millennials, some who are investing for the very first time.
New tech and low costs means investing is easier than ever before
In Business Insider and Insider Intelligence’s recent Master Your Money Invest & Thrive Survey, 47% of millennials identified as investors. Among them, 34% said an awareness of new investment apps influenced their decision to start investing.
In total, about 38% of the MYM Invest & Thrive Survey respondents who currently invest said they use a no-fee trading app, 27% said they use a traditional brokerage, 24% said they invest through a certified financial planner or adviser, and 13% said they use a robo-adviser (the respondents were able to choose more than one answer).
Three of the biggest online brokers in the US reported exceptional surges in investor activity and engagement during March and April, collectively opening more than 780,000 new accounts. But Robinhood, the wildly popular financial app, has been the bellwether for no-fee trading. The company ignited a price war last year that ended with nearly every big retail brokerage introducing zero-commission trading.
During the height of the coronavirus outbreak in the US, Robinhood opened roughly 3 million new accounts on its platform. The company said half of those investors were first-timers.
With a smartphone or computer and a couple of bucks to invest, the stock market’s barrier to entry has never been lower. But easy access can lead to foolhardy behavior, some experts say.
“Many people see the current situation as an easy way to make money. When one looks at oil or airlines stocks, they realize that they cannot not make money. It is an opportunity to make a quick return,” said Inga Timmerman, a certified financial planner at Attainable Wealth and an associate professor of finance and financial planning at California State University, Northridge.
“When volatility is high, the returns fluctuate much more,” Timmerman said. “Some people have one to two great trades and think they can always make money. This is much harder to accomplish in normal market conditions.”
A passive investing strategy is better for most investors
Active investing is regarded as much riskier than the buy-and-hold strategy championed by experts and icons like Warren Buffett. Stock picking and options trading may give the investor more control, or some semblance of control, but returns aren’t always superior to those produced with a passive portfolio that’s designed to match the market. These strategies are often multi-layered and complicated transactions unfit for a beginner.
“Although there certainly are arguments for active management, in the end, I will sum up the research in one sentence: Active management is expensive, and it does not have a consistent track record of outperformance — actually, it has the opposite record,” Timmerman said. The result of trying to beat the market is often lower returns for investors, she said.
Burton Malkiel, an economist and author of the classic finance book “A Random Walk Down Wall Street” said in a blog post written for the online adviser Wealthfront, where he currently serves as chief investment officer, that he doesn’t “confuse day traders with serious investors.”
Malkiel favors a passive approach to investing, where “broad diversification, rebalancing, active tax management, avoiding market timing, staying the course, and the use of investment instruments such as ETFs with very low fees” all but guarantee long-term success.
Muscadin also believes a passive strategy is best for the average person investing money for a long-term goal, like retirement. It safeguards you from your own emotions, which are often heightened when you’re just starting out investing because it doesn’t require constant attention or changes, he said.
“Active investing is a skill that can be learned and developed over time. For those that do it successfully, it is not an emotional exercise. In fact, successful active investors put measures in place to protect themselves from emotional decision making,” Muscadin said. “If one lacks either the will, skill, or time, passive investing is likely a better strategy.”
It’s hard to say whether the interest in active investing is a temporary byproduct of more free time and a uniquely turbulent market, or if it represents a sea change in the way the digital generation invests. But some firms are already expanding their business offerings to meet demand. Betterment, the so-called robo-adviser built on an ethos of passive investing, said it’s considering more options for portfolio customization, inspired by Robinhood, to help users “sort of scratch that need for control.”
- Read more from Master Your Money:
- 3 people at 3 different stages of saving explain how they’re working toward their big financial goals
- How to make a plan for your goals, no matter how big or small
- How the American millennial is overcoming debt, the dollar, and the economy they were handed
- How to pay back your student-loan debt, no matter where you start or what type of loans you have