In my last column, I noted that most young Americans are not saving and investing, even though time is on their side.
And the small percentage that are investing are going about it in a completely blinkered way.
They’re gambling, not investing. In some ways, this is understandable…
Millions of young men opened brokerage accounts during the pandemic and gravitated toward highly risky investments.
They chased meme stocks. They traded on margin. They bought and sold crypto. And they became active option traders.
Option contracts give an investor the opportunity to buy or sell a security by a specific date.
They can be used to generate income, hedge risk, or engage in speculation.
Take a wild guess which young traders went for?
Option trade volumes have soared since the pandemic, when young men – unable to visit a casino or sports book – became enamored with them.
A 2021 investor survey by the Finra Education Foundation discovered that 36% of respondents ages 18 to 34 said they had traded options.
That compares with 21% of respondents 35 to 54 and just 8% of respondents ages 55 or older.
While an options trader can close out their positions on any market day – at a profit or a loss – approximately 80% of all stock options expire worthless.
As if these odds weren’t daunting enough for anyone but die-hard speculators, the young and the restless have begun experimenting with zero-dated options.
These options expire at the end of the day, enabling traders to bet on intraday market moves of major indexes and related exchange-traded funds (ETFs).
A trader can potentially earn a quick windfall or rapidly lose an entire position.
Excitement? Guaranteed. Profits? Not so much.
If you’re a big boy, have plenty of options trading experience, and a high tolerance for risk, knock yourself out.
If you’re a low-net-worth young person who likes to gamble, cup your groin.
The sad thing, especially since these guys have so much time ahead of them, is what they’re giving up on future returns.
For example, most young people can bounce back from losing $5,000 in zero-dated options. (Or on a typical gambling junket to Atlantic City or Las Vegas.)
But I wonder how many of them stop to think that it’s not just the five grand that’s gone.
It’s the $234,000 it would have turned into over the next 40 years if it earned nothing more than the historic total return of the S&P 500.
As the Renaissance genius Leonardo da Vinci said, “He who wishes to be rich in a day will be hanged in a year.”
(Although, in this case, it’s your portfolio that will be swinging at the end of a rope.)
This goes for crypto traders also.
Most young people have seen that Bitcoin – while highly volatile – has mostly trended up over the past 15 years.
Yet economists at the Bank of International Settlements – an institution widely considered the central bank of central banks – analyzed data on crypto investors in 95 countries between 2015 and 2022.
Their conclusion? “Around three-quarters of users have lost money on their Bitcoin investments.”
Moreover, they found that “as prices were rising and smaller users were buying Bitcoin, the largest holders (the so-called ‘whales’ or ‘humpbacks’) were selling – making a return at the smaller users’ expense.”
The study also found that the biggest segment of cryptocurrency users – roughly 40% – were extreme risk-seekers, men under 35.
The Bank of International Settlements study is a few years old. But it dovetails with Bank of America’s 2024 Study of Wealthy Americans.
The new study found starkly different views on asset allocation between Americans over the age of 44 and those between the ages of 21-43.
Both groups thought that real estate investments should make up 31%-32% of their portfolio. I have no quarrel with that.
But the older and more experienced investors thought they should have 41% of their portfolios in U.S. stocks. The younger investors thought only 14% was right.
The real divide? Older investors thought they should have just 4% in crypto and other digital assets. (Still too much in my view.)
Young people thought they should have a whopping 28% of their portfolio in this sector.
Crypto is a solution in search of a problem. At least, if you’re a law-abiding citizen.
If you’re not an extortionist, bribe-taker, kick-back receiver, tax cheat, drug cartel, terrorist network, heavy weapons dealer, human trafficker, or country trying to evade economic sanctions, crypto does nothing to make your life simpler, easier, or better.
It’s just something to bet on, although three-quarters of the bets – apparently – are not paying off.
If I were to hazard a guess, I’d say a much larger percentage will fail in the future.
In sum, young people have plenty of time for appreciating assets to deliver the high net worth they ardently desire.
But many are squandering that opportunity by investing a substantial portion of their portfolios in long shots that are more likely to deliver capital losses.
However, I will say that these folks are at least trying to get ahead.
A much larger percentage of young people aren’t even trying.
In fact, I recently discovered a Fidelity Investments survey that made me realize why so many millennials and Gen Zers are pessimistic about the American Dream.
I call it “The Startling Statistic.” And I’ll reveal it in my next column.
