Understanding young investors
How you can help young investors navigate their investing journey
Greg B Davies, an expert in investor psychology and Head of Behavioural Finance at the behavioural fintech Oxford Risk, recently spoke to Aviva about how financial advisers can engage younger people’s interest in financial planning, a subject they are notoriously uninterested in.
Nowadays the media seem obsessed with labelling the different generations, whether it be Gen Z, Millennials, or Baby Boomers, and publishing endless, often sensational articles, about their individual traits.
Some of the differences between the generations are, however, very real. Nowhere is that truer than in terms of attitudes towards money, says Greg, and that simply reflects the age-old cycle of life. “Young people don’t face the same commitments or pressures as older generations. In your late teens and twenties, retirement seems impossibly far off. It’s only when life-stage events – like having children – kick in that people start thinking seriously about financial security”, he explains.
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.
Tunnel vision
Greg explains: “People avoid thinking about ideas that feel psychologically uncomfortable. When we’re short on something – money or time – we tend to focus on the pressing problem and tune everything else out. But by solving today’s issue, we often create bigger ones for tomorrow. Someone struggling to pay the rent by Friday might solve the problem by borrowing at high interest – but that just sets up deeper trouble down the line.”
Coaching good habits
An associated factor is our differing personalities — particularly the psychological trait known as 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 no matter how hard they work, they believe luck or other external forces will determine the outcome. 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
There’s certainly evidence that young people need guidance. Millions, for example, are choosing crypto without being aware of the risks says the Financial Conduct Authority1. The financial markets watchdog has also warned that young investors are making important investment decisions in a matter of hours, rather than taking the time to check out whether the product is right for them in the long-term. ‘Fear of Missing Out' (FOMO) also plays a major role in these hasty – and risky - decisions2.
These trends, says Greg, could open a new avenue of approach for advisers by allowing them to initiate a conversation with younger people around cryptos and the dangers of making impulsive investments.
Given the risks associated with this behaviour, 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 FOMO.
So, Greg suggests advisers adopt a life-coach approach here too:
“Maybe suggest younger investors set aside a small portion of their investible wealth – say, 10% – as a ‘play pot’ for crypto and the like. The rest should go into long-term, diversified investments. If you try to supress the urge for instant gratification entirely, people often just become more anxious … and may not invest at all.”
Accentuating the positive
In conclusion, Greg believes that it is beneficial all round for advisers to exploit the appeal of trading apps and the lure of instant gratification if that means they can engage with a cohort of people who traditionally aren’t interested in finance because they don’t have children, haven’t bought a house, and/or aren’t worried about retirement. Ultimately, it could prove a way to get them interested in long-term financial planning.
Sources
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It’s only when life-stage events – like having children – kick in that people start thinking seriously about financial security
Dr. Greg Davies, Head of Behavioural Finance, Oxford Risk, Oxford Risk