Technology has lowered the barriers to investing. You can do it from your phone, and with free tips from friends and “finfluencers”, many Gen Z-ers and millennials see online trading platforms as their route to wealth – but are they getting it right?
Technology has democratised investing and that’s a good thing, says Ralph Benson, co-founder and head of financial advice at online advisers Moneycube. Traditional gatekeepers to investing like stockbroking firms, fund managers and banks are being bypassed by a generation who are tech savvy and often sceptical of received wisdom.
“It looks like many people have absorbed the lessons from the financial crisis, which is to take responsibility for their own money and not rely on big-name financial institutions telling them everything is okay,” says Benson. “So Gen Z is getting a lot right.
“They are putting their arms around their own money. They are unafraid to ask questions about how to put it to work, and they are taking action. They are also investing rather than spending, which is sensible in anyone’s book.”
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Accessibility of online trading platforms such as Degiro, LightYear, Trade Republic, Davy and Revolut, and increased financial literacy have enabled the trend.
Young people in Ireland are increasingly turning to stocks and exchange-traded funds (ETFs) as a potential route to building wealth long term, according to Revolut. The bank has three million customers here and it’s possible to invest in stocks, ETFs and cryptocurrency through its app too.
More than half of investors using Revolut in Ireland are under the age of 34, according to research the FinTech published in September. Ireland also has the second-highest proportion of women investors in the Gen Z age group across Europe, with more than 35 per cent, it says.
Revolut positions investing through its platform as an alternative route to building wealth for young people locked out of the housing market.
A third of Gen Z-ers, those born between 1997 and 2012, say they feel the capital markets are more effective at building long-term wealth than getting on the property ladder, according to the Revolut research. Its investing platform, like others, earns money from investors by charging them trading and subscription fees.
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Funds tracking the S&P 500 are the most popular option for recurring investments, says Revolut of its Irish investors.
Young people here can’t rely on home ownership for their financial future, so they are starting earlier, investing smaller amounts and using tools that were once the preserve of professional investors, says Revolut.
Diversify
If you can invest from your phone, why would you darken the door of a stockbroking firm or financial adviser? Especially if their fees are higher than an online investing platform where you can do it yourself. You might be missing a longer-term view and someone to skewer your biases, for a start.
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Younger people started investing more during Covid, did well, and it gave them confidence, says Nick Charalambous, managing director of Alpha Wealth, but markets have become more volatile since.
“As people go through more financial cycles, they realise it’s not as straightforward as just investing in the Vanguard S&P 500,” he says.
“There is benefit to getting some financial advice and knowledge around different investment instruments, so it’s not just about investing in funds, it’s about how to manage a portfolio and not having all your eggs in one basket.
“I find a lot of Gen Z are very exposed to a single company’s shares, typically the companies they work with, and that can be a problem.”
Those who work in tech or pharma here can be too biased towards their own employer or industry, he says. “They are in well-paid positions, but they might not be allocating their money in the wisest way.
“Equities are a good long-term investment, but they are not the only one.”
Gold has performed well this year, for example.
“Its price has fallen, so it’s back to that portfolio approach rather than getting on the bandwagon of where the most noise is being made,” says Charalambous.
Those investing are well educated, they often work in the big multinationals, but they can sometimes be “naive” when it comes to more holistic financial planning, he says.
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Some he meets are top heavy in investments while neglecting their pensions and the tax relief from contributing to a pension. Or they have too little on deposit for short-term needs or emergencies, he says.
He advises a “core” and “satellite” approach to money. Have a pension at the core; a single company or high-risk investment should only be a satellite to that.
“It’s almost turned on its head now where some have their core invested through the likes of Degiro and other platforms which are low cost, but pretty much all equity derived. If I had a euro for every time somebody mentioned the Vanguard S&P 500 ... ,” he says.
The Vanguard S&P 500 is a passively managed investment fund, so it’s cheap to buy into, with a heavy concentration in a few large US tech stocks.
Some novice investors are overestimating their own knowledge.
“They are well schooled in certain aspects, they can explain investment in 10 stocks that they have chosen themselves, but in the universe of investments, that’s just way too narrow,” says Charalambous.
Bigger picture
You have to think about the “big picture” when building your wealth, says Ralph Benson. “Many in Ireland have their job, their pensions and their investments all highly exposed to US tech.”
Bury your head in investing in the “right” stocks and you can fail to recognise your exposures, he says.
“The overexposure to ‘mega-cap’ tech stocks and ‘meme’ stocks is a particular risk in the portfolios we see from online investors,” says Benson.
Mega-cap stocks are shares of publicly traded companies with a market capitalisation, or value, of more than $200 billion and include the likes of Apple, Microsoft, Nvidia and Amazon. They are often considered a relatively stable investment due to their large size and established market positions.
Meme stocks gain popularity among investors through social media and are often associated with young and inexperienced investors.
He namechecks GameStop – the company gained massive media attention in 2021 when retail investors on Reddit drove its stock price up dramatically. The company is now at about 25 per cent of its peak value from five years ago, he says.
“You have to avoid getting caught up in the fervour of single stocks,” says Benson. “For most people, diversified funds are the right place for most of their money.
“The balanced portfolio is a little out of fashion, but there will be times when investors are very glad to own them.”
There are many ways to make money in markets, as the 46 per cent rise in gold so far this year indicates, he says.
“Many overlooked assets have performed better than US tech. Emerging markets have been another bright spot – for example, Ghana and Zambia are the two top-performing stock markets so far this year.
“China, South Korea and Japan have also been interesting places to invest, offsetting US tech and dollar exposure. Often online investors miss out on these plays which can generate returns and reduce your risk.”
Timeframe
Some younger investors are using investing as a way to make money for short-term goals – but this can be a mismatch, says Charalambous.
“It’s fine if markets continually rise, but that’s not always the case. Fine if you’ve got time to ride things out, but some people are effectively using these investment accounts for short-, medium- and long-term goals and I don’t think it’s the right philosophy,” he says.
“If you are saving for a house deposit in three years, you can’t really be fully invested in the S&P 500. It might work out more by luck than design, it’s too risky.”
Looking at your investments on an hourly, never mind daily basis, can be counterproductive too.
“It’s sometimes better to make an investment strategy and just let it sit,” he says.
Some investors are eschewing managed funds, he says.
“They are just not sexy enough, they are too plain vanilla, they are boring, but I keep saying, you are benefiting from the expertise of the fund manager,” says Charalambous.
“They have more time and more information than you. Yes, it comes at a cost, and maybe it’s not as exciting because I’m not going to get the big highs, but I’m not going to get the big lows either.”
Fans of the “financial independence retire early” (FIRE) movement can see investing as the way to get there.
Most of his conversations with millennials have been about advising them on the benefits of pensions, the tax relief they are missing out on by not contributing, and how they may be able to access some of this pot from age 50.
“Lots of things can get in the way of FIRE, like buying a home, having a family, losing a job,” says Charalambous.
Amazon, which has offices in Cork, Dublin and Drogheda, is to make an estimated 150 job cuts here it was announced last month.
Workers with multinational employer perks can suddenly find themselves worried about finding a job that pays as well, or has the same benefits and share options they were used to.
Alarm bells?
A quarter of 18- to 24-year-olds turned to social media for guidance and advice on financial matters, according to a Deloitte survey of more than 2,500 UK consumers, conducted in August 2023.
One in five in this age group have invested money based on social media recommendations, with almost half of these having invested between £100-£500 and 16 per cent invested over £1,000, in their lifetime.
Some 21 per cent invested specifically in cryptocurrency, based on social media guidance.
With the rise of technologies such as deep fakes, relying on social media for advice makes people vulnerable to scams, phishing and risky financial decisions, according to Deloitte.
Younger people in Ireland are more likely to invest in cryptocurrencies, invest online and use informal information sources when investing, according to a Banking & Payments Federation Ireland survey from 2023.
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One in five younger people here holds cryptocurrencies such as bitcoin or ethereum, according to the data.
The tendency for younger investors to fall for TikTok scams may be overblown, says Benson. If anything, Gen Z can be wiser to these tricks than their elders.
“They know more than most when someone is paid to promote something, wants them to click on an affiliate link or is pushing a scam,” says Benson.
“In reality, lots of younger investors are getting the big calls right, they are just not shouting about it.
“For every influencer pushing a single stock, there are thousands of regular people dripping in money in a sensible way into portfolios which build their wealth.”
Beware, however, investment platforms and influencers who make investing alone seem like the silver bullet to wealth. Financial security through investing only isn’t something most of us can personally game to win. Yes, their fees can be low, but by charging fees and subscriptions, even when you don’t make money from investing, they do.
