Why did retail traders, especially millennials, choose the COVID Crisis to finally become interested in the stock market? As a member of that cohort, I (Jessica) can explain it:
#1: Expected future returns drive investor behavior.
- Prior to COVID-19, my age group lived through both the Dot-Com Bubble Bursting and 2008 Financial Crisis. Many millennials witnessed the distress it caused our parents directly in the stock market or indirectly through job losses or wage cuts.
- The flip side to that volatility is that we learned a valuable lesson: when stocks crater there’s a decent opportunity to make money.
- This is very different from our Baby Boomer parents, who grew up investing in the 1980s and 1990s, when crashes were short term phenomenon and stocks compounded at 18% annually across those 2 decades.
The problem for us: US equities have only compounded at a +6% rate the last 20 years, and even if millennials don’t know that exact number they certainly understand that when opportunity strikes in the form of a quick and vicious bear market they have to buy stocks.
That’s one entirely valid reason why Robinhood – well known for its predominantly millennial user base – has added +3 million accounts so far this year and mostly post-virus. Millennials have seen this boom-bust movie twice already. They know how it ends – with a rally – and that’s exactly what happened in 2020.
By way of example, here are some supporting results from E-Trade’s quarterly tracking study of 873 US self-directed active investors who manage at least $10k in an online brokerage account (conducted July 1-9 2020):
- “Over half (51%) of Gen Z and Millennial investors say their risk tolerance has increased since the coronavirus outbreak, 23 percentage points higher than the total population.”
- “Over one in three investors (34%) under the age of 34 said they are moving out of cash and into new positions, 15 percentage points higher than the total population.”
- “While only 9% of young investors said their investment portfolios have recovered since the beginning of the pandemic, 50% think it will happen in the next six months, compared to 33% of the total population.”
Bottom line: nearly 12 years after the ‘08 bear market, the March 2020 stock market crash enabled millennials to aggressively take advantage of a rare major market pullback and build wealth. And unlike Baby Boomers who were more likely to be fully invested at the top, we had the firepower to move cash off the sidelines. The stimulus checks also helped, of course, for those millennials who were still employed.
#2: Millennials tend to buy what they believe in or feel they understand.
- My cohort grew up reaping the benefits of using technology on a daily basis. While Robintrack was discontinued recently, it used to tally the number of accounts that hold specific stocks at Robinhood. Given that we reviewed it regularly when it was active, we know that “Big Tech” companies were always among the top most-held positions, whether it be Microsoft and Apple or Amazon and Facebook.
- Millennials broadly know and love tech more than boomers and their intuition about the sector remains spot on as it continues to rally to new highs and maintain its stance as market leadership. Tech was the only major sector to show positive earnings growth in Q2 and should do so again in Q3. By virtue of millennials’ own experience, they struck the right theme whether they understood the underlying fundamentals or not.
- As another example, airlines and cruise operators were also Robinhood favorites early in the COVID Crisis. More examples of “buying what you know”, yes… But also good examples of millennials not buying all “the sky is falling” rhetoric of the March market narrative. A risky move, of course, but entirely consistent with their belief that economic recoveries always occur.
In sum, while Baby Boomers are mostly investors, this pandemic showed many millennials turned out to be savvy traders. Different life experiences create varying investment styles.