The 2020 Stock Market Changed An Entire Generation of Young Investors
Was it a positive change, or negative?
Photo Credit: Timothy Dykes
There’s many prominent financial scholars and experts who say we’re at the top of the hill.
That we’re so close the precipice it may be time to go “Risk Off” as they call it on Wall Street.
In other words, with people getting cold feet and the general public sucking up all the cable news coverage they can manage, well. . .
Unfortunately, regardless if we’re at the top or not, and despite solid facts that seem to say otherwise, if enough people say the right (or wrong) things for a long enough time — inevitably we will have a major correction.
Honestly, it’s hard not to think negatively when it comes to the stock market and your hard earned money sitting there, protected by the likes of the Bush family and more recently, the Trump’s!
For example, take this passage from an article I read earlier.
“With the market caps of companies like Amazon surpassing the GDP of whole countries such as Russia and Brazil, and its boss heading to space in his personal rocket, why couldn’t this be the top?” — Quote By SeekingAlpha
But, alas, there’s still hope!
The Next Generation Steps In To Take The Reigns
This new group is something the Stock Market, scratch that, the world, wasn’t prepared for. The sheer resiliency of these young investors is remarkable!
They’ll hold a bag until it’s covered in gaping holes and the food inside is clearly rotten from sitting out for way too long — Yet, they see value in that beat up, rotten bag they’re holding, and where they see value, money will follow.
Trust me, they won’t let go either
Funny part is, for the most part, those bags they’ve been holding turned out to be filled with gold!
Cough
GME
Huh?
Forget about it, let’s get back on topic!
So, what then is so special about this newest addition of fine young investors on Wall Street?
Next Gen
When a new generation comes of age and gets involved with investing for the first time, they tend to dive in head first.
Why wouldn’t they? I mean, think of the 2020 market. It was crazy. We were in the midst of the longest Bull Market in history, yet it showed no sign of slowing down.
Despite the pundits saying we’re overdue for a correction, or the volitile political landscape that was tearing the country in two, it just kept going higher.
People from all walks of life were making their fortunes. Crypto was coming into the limelight. I mean shit, we had a year in which 17 year olds were the cool kids if they knew how to trade Put Options and what the commodities markets were up to.
An astounding 10 million new brokerage accounts were opened up in America in 2020
More than half came from the millennial’s top brokerage pick: Robinhood.
Based on research by Charles Schwab, 15% of current retail investors made their first attempt trading stocks in 2020.
Yeah, Charles Schwab also set a record as well. They got about 4 million new clients last year in 2020, with over half of them being under the age of 40.
But Robinhood now has over 15 million clients at this point, with the median age being just 31 years old.
Can you guess what age the average age of a millennial was last year? 32
Crazy, right?
The “megawinners” and the uncanny ability of millennials to pick them
JPMorgan Asset Management recently published a great paper called Agony & Ecstasy.
It’s a deep dive into the performance of the US stock market over the past 40 years.
JPMorgan found almost half of stocks suffered a “catastrophic loss” from 1980 to 2020. Meaning they plunged and never recovered.
Another 26% of stocks produced returns lower than the overall market.
Effectively, all the market’s returns came from just 10% of stocks, which JPMorgan called “megawinners.”
What I’m trying to say is that these new investors are not just lucky. There has to be more to it. Period.
Let’s face it: Most people are better off owning a broad basket of stocks or simply buying indexes.
By owning the S&P 500 ETF (SPY), you would have doubled your money over the past five years.
That would be the safe route to go, but it’s not one that people were taking last year.
They were very risk tolerant and to be frank, most ignored the Stock Market’s tumultuous past, thinking it to be exactly that.
The past!
Now that we know who is dominating the markets, let’s get into why, or rather, how they got to be that way in the first place.
How new investors view the stock market has a lot to do with what the conditions of the market was like when they first entered.
Luckily, it’s not hard to figure this out and decipher who came in when.
Essentially, we can divide them into two categories. Every investor comes in and experiences one of these when new.
All that needs to be looked at is weather they came in during a Bull Market, or a Bear Market.
Here, let me explain.
#1 The Bull Market
If a young person enters the market during a year like we just had, they’ll likely develope a mindset that investing is easy by years end.
The old-timers who claimed this was so difficult are just out of date, not relevant anymore in 2021!
Says the legions of 25 year old meme investors who YOLO’D it all on GameStop and made $300,000 racks.
This attitude comes entirely from abnormal gains.
It is possible to pick the right stock every time, starting from day 1 as a 17-year-old with no prior knowledge of financial markets.
But it’s very unlikely to happen. Even if it does, I assure you that it will not happen consistently, year after year.
Let’s not forget that they probably made the $300k with nothing more than their iPhone and the Robinhood app.
When you mix good fortune like that with situations like 2020 — TESLA — when the gains were so big, so fast, so exhilarating. . .
You get new investors with some big egos and a lot of confidence in their money making abilities.
That’s not always a bad thing. It’s good to be confident and take risks. Especially if it’s paying off.
But. . .
God forbid that a normal 5–8% avg. return year comes along!
That would cause most of the new age investors to think something is wrong, or that the market must be crashing.
Or that it’s just boring
Let’s move on to the next group of unfortunate potentials.
#2 The Bear Market?
In this case, the ramifications can be even more devastating than they were with Bull Market entries.
In the Bull scenario, new investors simply developed high expectations.
Yes, they are saddened when they realize that the 610% gains they enjoyed with Tesla are not a thing that tends to happen year after year.
But those expectations are easier for them to lower considering that they still made a healthy sum of cash that’s growing, albeit at a slower rate.
This leads to the creation of the next generation of investors.
As they come off the pink cloud of 10x gains, they remain grateful to have experienced those years of insane returns.
Then, they simply take the fattened-up brokerage account they now have and set up longer-term, more conservative portfolios for their future.
We young folks tend to have strange memories
When we make money, our memories tend to be short. We’ll forget sudden losses, thinking only of when the next GameStop type play will happen.
Yet, let us lose money all year long without any miraculous wins, and well. . .
Suddenly we’re like elephants.
We will never forget that time we invested our hard-earned money into the stupid stock market, only to lose it all!
Not a single detail is forgotten.
You ever meet one of those really old people, and I mean OLD? The type of old that they lived through some sort of devastating market crash or economic depression?
Many of these folks don’t trust the stock market.
They have firsthand experience (or witnessed their parents) with losing all the money they had saved because of the stock market.
They’ll go through life with their money in a savings account that yields them .02% per year!
— With luck, perhaps they’ll keep pace with inflation, not lose any money in the process.
If they really got burnt by the government or a market crash, you could very well find their retirement funds in a shoebox under the bed.
Perhaps some gold bullion stored in a safe and locked away in the back room of the basement.
Look, I hate to be a Debby Downer, but there’s a good moral to this story and a reason for the doom and gloom.
The reason is to point out that although the market seems chaotic at times, it’s actually pretty damn efficient.
It’s a hard task to predict which direction it will go on any given day, month, or year.
But, if you plan to stay invested in the market for a long time, then rest assured that with almost 100% certainty, you’ll come out on top.
In the grand scheme of things, the market always trends in one direction: UP.
It may hit some bumps along the way, but inevitably, it always trends up.
The Stock Market never loses money over the long run.
