(Bloomberg Opinion) — My financial education didn't get off to the best start. I guess I was lucky to have a basic investing and finance class in high school. But I cringe when I remember that we read One up on Wall Street, which encouraged us to go to a local mall, look for stores that had a lot of customers, and consider buying their stock. Since then, financial education has become more common – but obviously not much better.
Access to financial education has never been greater, according to the CFA Institute, which survey Gen Z on their investment habits. The Gen Z cohort — those born between 1997 and 2012 — were almost 60% more likely to have some financial instruction in school compared to millennials, and 150% more likely than Gen Xers.
And yet, the survey reveals that Gen Z is making some terrible investment choices. They tend to be under-diversified and over-exposed to exotic assets. Their investing practices suggest that either they are not being taught what is important or that any effort being made in school is being drowned out by the lure of day trading apps and YouTube tips.
It is progress that more young people are in the market. The sooner individuals begin investing, the more time they will have to grow their wealth and be able to fully participate in and benefit from the American economy. In addition to education, technology has made it easier to enter markets with less money. Gen Zers have the highest rates of stock market participation at their age compared to earlier generations. In 2022, about 40% of young people under 25 are in the stock market in some form (including retirement accounts), compared to just 16% in 1995, according to the Federal Reserve's Survey of Consumer Finances. But much of that growth comes from more speculation.
The graph below shows the percentage of people under 25 who own individual shares. After the bear markets in 2000 and 2008, young people stopped picking stocks. But once those bad markets were distant memories, new investors flocked.
The CFA survey found that one of the main reasons young people say they invest is easy access to markets through trading platforms like Robinhood that do not require a minimum investment.
Another big factor is FOMO. And it shows. More than half of young investors in America own some form of crypto, making it the most popular asset in Gen Z portfolios. Indeed, an alarming 19% of Gen Z investors are only in crypto, rather than stocks or any other type of tradable asset. About 41% own individual stocks, while only 35% buy mutual funds. All of this adds up to a very risky, potentially volatile portfolio.
But who can blame Gen Z when you consider their lived experience? They've only seen the S&P 500 rise, led by a few large stocks that outperformed the rest. They also saw some of their peers get very rich from crypto and be are treated as heroes for trading meme shares. The lure of trading cryptos was especially tempting when they were shut down during the pandemic with stimulus money to spend. We created a generation of speculators and gave them tools that provide a video game buzz.
Education might not have been able to completely counter the excitement of day trading stocks and speculating on currencies with no discernable value, but it could have helped people understand the role these assets should play in a portfolio. Buying single stocks (or any commodity or currency) is best understood as speculation because it is a bet on the rise or fall in value of a single company. Speculation is a zero sum game where you face professional investors who have time, years of expertise and deep pockets. While it's tempting to grab the little guy, the pros usually win.
This does not mean that the markets are rigged. Investing, or buying lots of stocks in the market, is a bet on the overall growth of the economy and not on a stock going up or down. As the economy grows, everyone wins.
There is nothing wrong with speculation – in crypto, meme stocks or any other non-traditional asset. But it should be appreciated for what it is, fun that occasionally pays off, like gambling in a casino. It should not be one's primary investment strategy. Index funds aren't exciting, but they're often the best way to build a nest egg.
And it's worth noting that most young investors report that they're putting their money into the markets not for fun, but so they can have a comfortable retirement, according to the CFA survey.
Younger investors are still learning and have less money to lose. The median financial assets of under-25s in 2022 were $4,000, according to the Fed. But when the market turns, and chances are, it will eventually because we're headed for one most unstable era, Gen Zers, undiversified and crypto-heavy, are especially vulnerable to big losses. If the market turn happens relatively quickly, they can shake it off and do better next time. But if the bull market continues for longer, the losses will be greater and could hinder home ownership and other financial rites of passage.
However, it is not ideal to rely on market declines to teach each generation about the nature of market risk. However, it is not clear what the alternative is outlawing one-share ownership for non-accredited investors. I am not ready to count the power of education, even if it is clear that it is weak now. But that doesn't mean it can't be better and more effective. In a world where investing is more accessible and there are tons of persuasive videos online full of bad advice, it's never been more important to get it right.
My Bloomberg Opinion colleague says Matt Levine The main flaw of financial education is that it teaches the wonders of compound interest, but often fails to explain why some assets return more than others. Basically, it fails to educate us on what underlies financial markets – risk.
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Allison Schrager at (email protected)