By Jessica Rabe of DataTrek Research
Whenever I attend family events, at least one person asks me an investment question given what I do for a living. Thanksgiving should be no different and I’m sure the same goes for many of you. So today I thought I’d help bridge the gap between Baby Boomers and my own Millennial cohort by explaining how I’d field potential investment inquiries from younger adults :
#1: “I’ve made a lot of money in digital currencies, what should I do now?” My answer here would revolve around risk management. It’s easy to develop a higher risk tolerance after reaping huge gains from an investment. Here’s an example I’d give:
Any sports fan has likely seen this scenario play out: one team is up big, so they grow more comfortable making risky plays. The other team exploits this sloppiness and quickly ties the score. The team that lost their advantage panics, contributing to further sloppiness as they try to regain their lead before the game ends.
The same situation often happens when investing. Most investments made in popular digital currencies since the pandemic started are deeply in the money. This can give people a false sense of security, which fuels subsequent risky investments and even pushes prices higher in the near-term. The trouble is once these prices correct, investors tend to make poor decisions such as holding on too long on the way down and then implementing dicey strategies as they try to recover their losses.
Millennials need to understand that this newly earned money in digital currencies is still “theirs” and that future investment decisions should be made independent of their prior experience. And just like athletes need to remain patient and use their teammates productively until the right opportunity presents itself, millennials should diversify their investments in not just digital currencies, but also the stock market.
#2: “Why should I invest my money in stocks and how should I go about it?” I run across many peers who are either intimated about investing in capital markets or are wary about it out of mistrust from growing up during the Financial Crisis.
On the former, I’d leverage Nick’s advice from many prior reports: “don’t make things harder than they have to be.” Young adults need to understand that investing in equities is necessary for capital growth, especially to overcome inflation which is now an actual threat. But they don’t need to worry about individual stocks. Start simple and small with a low cost, diversified fund such as an ETF that tracks the S&P 500. There’s a reason no one pays a premium to buy individual songs on iTunes anymore, but rather subscribes to music streaming services like Spotify. These platforms come with many songs subscribers will never listen to, but they still offer cheap access to a slew of hits that leaves listeners with a good user experience.
I would try to keep them focused on their long-term goals and appeal to their most recent experience. Millennials have now lived through 3 major market dislocations, yet the S&P 500 is currently trading at record highs. If anything, the latest crisis showed they offer opportunities for attractive investment entry points. The next crisis will eventually come just like the past three, so don’t get caught up in daily volatility, but rather invest for the long term and ride the waves.
#3: “I only want to invest in companies I believe in.” Many of my peers feel an ethical responsibility when allocating their capital, in line with the rising popularity of environmental, social and governance investing. They can also get emotionally attached to an investment idea because it supports a cause they back, such as legal marijuana or space exploration. That’s totally fine, but I also try to make sure they understand two things:
1) Feel free to invest in whatever you believe in, but just know that they may not be money-making ideas. That means you will need to both save more and invest in other areas more aggressively in order to reach your financial goals.
2) Be careful when investing in theme-related funds; analyze their actual holdings. For example, many ESG products invest in energy companies and most are heavily concentrated in tech. Additionally, not all marijuana or space-related ETFs are invested in “pure-plays”, or stocks directly tied to those topics. Some marijuana ETFs include cigarette companies, and a lot of space ETFs hold large defense contractors and conglomerates.
To end, I’ll finish with a question I often receive from Baby Boomers looking to help their kids or family friends embarking on their Wall Street careers: “How did you get your start in finance?” Here’s a brief synopsis along with some advice:
You don’t have to graduate from Harvard or have family in the business, but you need to figure out how to set yourself apart. In my case, I graduated high school in 3 years and college in 2.5 years. During that time, I also took on unique internships that gave me a well-rounded resume, including with my US Congressman’s campaign advisor, EMC’s Big Data Research and Development Center in Rio de Janeiro, and a PM at a Registered Investment Advisory firm.
I co-authored my first investment book published by Wiley Finance at age 20 about a new asset class called liquid alternatives. I wrote it soon after college with my first boss who owns the RIA I interned and then worked at, and had the idea from assisting him with consulting studies for the mutual fund industry.
While working for the RIA, I also published articles on financial sites. My Dad forwarded them to his friends who work on Wall Street, and one of them showed my work to the Chief Market Strategist (Nick) at the NYC brokerage that would soon hire me. His research associates were leaving for grad school and a new job, so Nick interviewed me and I started that same week.
Nick and I made up the market strategy team for 3 years, and then when the brokerage we worked at was sold we started DataTrek Research just over 4 years ago. That’s in a nutshell how I began working on Wall Street at age 19.
The upshot: success in any career, or investing for that matter, comes down to process. To me, that’s setting goals and making a daily commitment to hard work in order to achieve them