Never too young to invest
The idea of the ‘generation gap’ first emerged back in the swinging 1960s, when the young seemed to turn their back on their parents’ tastes in fashion and music, their belief in deference to authority, and a host of other characteristics.
In truth, however, there has always been a generation gap in terms of attitudes towards money, says Greg, and that simply reflects the age-old cycle of life.
Young people simply don’t face the same commitments and pressures as older people. In your late teens and twenties, retirement seems impossibly far off. It’s only when lifestyle-triggering events – such as having children – occur that individuals really start thinking about achieving financial security and become interested in protection and other products
Greg notes that the growing problems facing younger people, such as soaring rents and living costs, are increasing financial anxiety and may now be impelling people to start engaging with their finances at an earlier age than in the past. But there is a barrier called tunnelling, created by increased anxiety, that must first be overcome.
People don’t like thinking about ideas that are psychologically uncomfortable, so whenever we have a scarcity of something, whether it be money or time, we tend to focus on the pressing problem of the moment, and exclude everything else. However, by focusing on solving today’s issue, we set up bigger problems for tomorrow. So, for example, someone who is struggling to pay the rent by Friday evening could solve that problem by borrowing at a very high interest rate, but be left with a growing financial burden down the line.
An associated problem is that we all have different personalities, a concept established in psychology as the locus of control.
According to Greg, some people have an internal locus of control and tend to believe they are in control of their destinies, so if they work hard, success will follow. But those with an external locus of control believe their fate is in the hands of the gods, so however hard they work, either luck or some other external force will determine whether they succeed or fail in life. That can lead to apathy and a failure to engage in financial planning, because those affected think their future is beyond their control whatever they do.
A financial adviser can play a crucial role here by providing dispassionate advice about the steps an individual can take to improve their financial well-being – acting almost like a life coach, in Greg’s words.
It’s good to talk
The COVID-19 pandemic, when people were forced to spend long periods indoors, sparked an interest in all sorts of activities, including short-term trading in cryptocurrencies as well as in traditional financial instruments. That trend, says Greg, could open up a new avenue of approach for advisers by allowing them to initiate a conversation with younger people around cryptos and short-term trading.
Given the risks associated with such trading, it is clearly not something to be encouraged. Realistically, however, it is just about impossible to prevent people from trying to gain the potential instant gratification associated with these activities. In fact, trying to stop them may only increase their sense of anxiety due to the well-known concept of FOMO – Fear of Missing Out.
So, Greg suggests advisers adopt a life-coach approach here too:
Maybe suggest younger investors set aside a small amount of their total investible wealth, perhaps 10%, for crypto etc – a ‘playpot’ – on the understanding that the remainder is invested in sensible long-term, diversified assets. If you try to remove urges such as instant gratification, people will simply become more anxious, with the risk that they don’t invest at all as a result.
A means to a positive end
In conclusion, Greg believes that it is beneficial for all concerned for advisers to exploit the appeal of trading apps and the desire for instant gratification if that means they can engage with a cohort of people who traditionally aren’t interested in financial planning because they don’t have children, haven’t bought a house, and/or aren’t worried about retirement or taking out life assurance or mortgage protection. Ultimately, it could prove a way to get them interested in long-term financial planning.