Nosystem Images | E+ | Getty Images

Almost 9 in 10 young investors have actively traded stocks this year due to higher interest rates and inflation, according to a new Bankrate survey. And that behavior may cost them in the long run, experts said.

“If younger investors trade in and out of the market, that’s almost guaranteed to underperform,” said James Royal, a Bankrate analyst who conducted the research.

The Federal Reserve started raising interest rates aggressively in March 2022 to rein in persistently high inflation. Borrowing costs are now at their highest level in more than 22 years, though inflation has declined substantially since hitting a pandemic-era peak in June 2022.

More from Personal Finance:
The tax man wants a piece of your ‘found’ property
When student loan payments restart, many borrowers may have a different servicer
Even millionaires are feeling financially insecure, report finds

U.S. stocks posted their worst showing since 2008 against that economic backdrop in 2022. But higher interest rates also meant better rates on savings accounts, such as high-yield accounts offered by online banks.

The S&P 500 stock index has rebounded in 2023 and is up 14% year to date.

Eighty-seven percent of Generation Z investors have responded to higher interest rates and inflation by buying or selling stocks, or by withholding additional investment, according to Bankrate.

That share “substantially” exceeds the 52% average among American investors of all ages, Royal said.

The Gen Z group includes people ages 18 to 26 with stocks or a related account, such as a 401(k) plan.

“Gen Z — and, in part, millennials — have never seen a period of high interest rates, nor a period of high inflation,” said certified financial planner Ted Jenkin, founder and CEO of oXYGen Financial, based in Atlanta.

However, allowing emotions rather than logic to guide investment decisions generally leads investors to make “a bad financial decision,” said Jenkin, who is a member of CNBC’s Advisor Council.

Jumping in and out of the market generally leads investors to miss the market’s biggest days and can also lead to a bigger tax bill for investors, Royal said.

A Bank of America historical analysis of the S&P 500 shows that investors who missed the market’s 10 best days per decade would have a total return of 28% between 1930 and 2020. By comparison, investors who held steady would have a return of 17,715%.   

“You simply don’t want to be timing the market,” Royal said.

Young investors were also the most likely to buy instead of sell stock, relative to other ages, Bankrate found. This may serve young investors well if they hold their investment for at least five years, Jenkin said.

Investors can use a rule of thumb known as the “rule of 120” to determine a rough age-appropriate stock allocation in your portfolio, he said. This entails subtracting your age from 120 — meaning most Gen Z investors will have a portfolio that’s about 90% or more in stocks, he said.

Investors would also likely be better served by buying mutual or exchange-traded funds that track a market index such as the S&P 500 — known as “passive” investing — rather than buying a fund that actively trades to try beating the market, Royal said.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *