According to a recent Bankrate survey, nearly 90% of young investors have been actively trading stocks this year due to higher interest rates and inflation. However, experts warn that this behavior may have negative long-term consequences.
James Royal, a Bankrate analyst who conducted the research, explains that constantly trading in and out of the market almost guarantees underperformance for younger investors. This trend can be attributed to the Federal Reserve’s aggressive interest rate hikes since March 2022, which were aimed at curbing persistently high inflation. Although inflation has substantially declined since reaching a pandemic-era peak in June 2022, borrowing costs are currently at their highest level in over 22 years.
In 2022, U.S. stocks experienced their worst performance since 2008 due to these economic conditions. However, higher interest rates have also resulted in better rates on savings accounts, particularly high-yield accounts offered by online banks.
The S&P 500 stock index has rebounded in 2023, showing a 14% year-to-date increase. Bankrate reports that 87% of Generation Z investors have responded to higher interest rates and inflation by buying, selling, or withholding additional investments. This percentage significantly exceeds the average of 52% among American investors of all ages.
It is worth noting that Gen Z investors, aged 18 to 26, have not experienced a period of high interest rates or high inflation. Ted Jenkin, a certified financial planner and CEO of oXYGen Financial, explains that allowing emotions to guide investment decisions often leads to poor financial choices. Jumping in and out of the market can cause investors to miss out on the market’s best days and potentially result in higher taxes.
Bank of America’s analysis of the S&P 500 from 1930 to 2020 reveals that investors who missed the market’s 10 best days per decade would have a total return of only 28%, compared to a return of 17,715% for investors who remained steady. In light of these findings, it is advised to avoid timing the market.
Bankrate’s research also shows that young investors are more likely to buy stocks rather than sell them in comparison to other age groups. This strategy can be beneficial if the investments are held for at least five years. Jenkin suggests using the “rule of 120,” subtracting one’s age from 120 to determine an appropriate stock allocation in the portfolio. Most Gen Z investors would have a portfolio consisting of around 90% or more in stocks.
Furthermore, it is recommended that investors consider buying mutual or exchange-traded funds that track market indexes, such as the S&P 500, rather than actively traded funds in an attempt to outperform the market.
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