"How the young should invest" - The Economist
- Felix Will
- Sep 13, 2024
- 4 min read
Saying that learning how to invest for the first time is an easy feat is certainly not true; with a wide range of stocks, bond securities, and household assets to invest in, it can seem quite daunting at first. The article written by The Economist warns the young of what not to do when investing, especially
stressing that we are in different positions than the older generations.
Why are we different?
Throughout the article they place a lot of importance on the understanding that we will not experience the markets like the older generations; even with the global financial crisis of 2007-2009, the last few decades have been a wild success. Nowadays we are faced with globalization, reduction of interest rates as well as steep inflation, leading to less profitable margins in markets all around the world. The article then goes on to say that these are not even the most dangerous factors, but it is rather the psychology of going into a less profitable
era. First of all, they claim that investors will look at previous market fluctuations from the past and will accordingly invest; however, it is crucial to understand that the past is not going to reflect onto the future: The article ‘The evolution of wealth over life cycle’ (Lafrance, A. and LaRochelle-Côté, S.) further strengthens this argument as they discover that different generations have different external factors which could skew possible prediction graphs.
Furthermore, according to the book The Psychology Of Money, Housel goes on to say that the main reason for large changes in the market is massive events. These huge events are often unpredictable and highly unlikely to re-occur, meaning that by looking at past data, you are looking at large events that will never happen again. Second all, they state that another source of danger is the unrealistic high hopes that the money the young will have invested will produce large profits, leading to riskier investments and ultimately losing more money.
This is shown in the book written by Antti Ilmanen in his book ‘Investing Amid Low Expected Returns’ he shows that although there has been a steep increase in returns from 0.5% to 4.5% in American treasury bonds, it is still no match to the 16% yield during the 1980s.
What not to do:
Although the article does talk about what the young should invest in, they do stress many things that the youth should avoid at all costs, the first one is keeping money in their bank accounts. According to Vanguard, the average portfolio of a Gen-Z comprises 29% cash, in comparison to the 19% cash that baby boomers have. This cash will be susceptible to the power of inflation and will soon possess lower purchasing power than before as well as opportunity costs. The second issue can also be identified in the research by Vanguard,
showing that the average Gen-Z portfolio only comprises roughly 5% of bonds and other ‘safe’ assets compared to the 20% that baby boomers own; this shows the general reluctance to invest in stocks which have low opportunity costs as well as being relatively safe. Although this is natural due to past events, which lead to the destabilization of the said ‘safe’ investments, it is still crucial to allow for the compounding of your assets.
Another key issue that I believe is very apparent is the trading into EFT’s as they can be perceived as being volatile and there can also be chunky fees. Furthermore, the easy access to EFTs through apps and websites creates ease in investing which people from older generations never had. A sub-category of these EFTs is known as ESG’s which has even higher fee prices; a recent Harvard Study discovered this.
What we should do:
Within the article, there is one main takeaway, that being the ‘magic of compounding’, which I believe is correct. By implementing such strategies, you are securing the welfare of yourself in both the present as well as the future. However, I also believe that there are other things that the young should invest in, namely insurance. A research paper by Kunreuther, H (Mitigating disaster losses through insurance), shows that there is limited interest in voluntary
insurance purchases, and so can leave their physical properties as well as online ones at risk; this risk is often not anticipated until an event (such as natural disasters) occur. By investing in insurance, you can protect your current and future investments which can lead to reduced stress. Finally, I believe that investing in education is especially crucial for the well-being of your future. By investing in courses (either online or in person) you can gain more crystalized
knowledge, (Agarwal S., Driscoll J., Gabaix X., and Laibson D. (2009), ‘The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation’), which can greatly increase your financial literacy as well as your general understanding of the economy and the world around you. This crystalized knowledge will aid in making more educated decisions and in return make safer investments which will lead to a large gross profit.
To summarize, newer generations, such as Gen-Z will have to make informed decisions disregarding the past due to the drastic change in the economy. With the change in the economy have come many bad habits which The Economist has urged the young to drop, such as large percentages of liquid cash, low percentages of stocks as well and the investment into EFT’s and ESG’s. Although the article mainly focused on what the youth was doing wrong, they urged people to invest in compounding assets which I believe is crucial to the
well-being of their future.
Sources
Agarwal S., Driscoll J., Gabaix X., and Laibson D. (2009), ‘The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation’, Brookings Papers on Economic Activity, Fall, 51-101.
Lafrance, A. and LaRochelle-Côté, S. (2012), ‘The evolution of wealth over life cycle’, Perspectives on Labour and Income, 24(3), pp. 1– 16.
How the young should invest. (2023, November 16). The Economist. https://www.economist.com/finance-and-economics/2023/11/16/how-the-
The Psychology of Money (1st ed., Vol. 1). (2020). [Paperback]. Morgan Housel.
Kunreuther, H. (1996), ‘Mitigating disaster losses through insurance’, Journal of Risk & Uncertainty, May, 12, 2, pp.171– 187.
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