Right before the pandemic hit, my generation, many of whom were either graduating HS or starting college at the time, found investing to be boring or not necessary at that point in life. We had more important things to do like plan trips, head to the movies, or focus on homework. Investing was for adults! Anything but investing was the norm since most of us were always told never to talk about money in the first place! Easier on our end!
There was a large enough stigma to call investing boring among the majority of twenty-somethings and at that stage in life, although time is abundant, it isnât top of mind for most to take advantage of in the best and simplest way through the public markets! Once lockdowns went into effect, retail trading soared, and virtually everything you can think of went up in value with sky-high valuations and excess froth, dollars sprang out of my generationâs pockets and into high-flying exuberant companies such as those on the verge of bankruptcy like AMC and BestBuy. Gen Z were amazed at how well they could grasp the markets overnight and most importantly, how too much fun it was! At that point, they regretted not investing earlier given how returnable it seemed.
From 2020 till the end of 2021 before fundamentals settled in, brains started to quickly become confused with a bull market and meme stocks became a safe haven for newly minted investors due to all the froth, noise, and of course, gamification and speculation around. Since all magical lofty things must come to an end, reality eventually settles in. We always retreat to our baseline of something in life. Whether it be happiness or returns, the good times donât last forever.
Once the Fed began to raise rates to cool down record 41-yr high inflation fueled by record monetary and fiscal stimulus and stuck supply chains since March 2020, Gen Z became concerned and experienced their first real bear market. Heck, this was the first time they lost real money overnight.Â
Now, as a roughly 5-year-old investor at this point, I was in the same boat however, thereâs a difference in how your wealth fluctuates dependent on whether youâre financially literate or not; since if you arenât, thereâs one dangerous factor that always comes to bite, emotions.
Why Gen Z Are Seeking Advisors During Turbulent Times & If Itâs Really the Right Choice
When do you typically seek advice for anything? When youâre already stuck in a hole or during roaring times? I hope the latter. Planning for the worst, hoping for the best should always be top of mind, especially when it comes to shopping around for advisors when times are great.
Majority of newly minted investors are guilty of following this financial track when experiencing first-hand losses for the first time. FYI this is when emotions get in the way and permanent decisions are made on temporary emotions. At all costs, try to avoid this kind of quick-level decision making to save time, money, and headaches down the line:
They start investing at the peak, selling at the pit and follow their gut until they lost too much to stomach. They eventually see the market correct by even more, roughly 10% and at that point, thatâs when they can justify to themselves to pay for some advice. They quickly seek an advisor and forget to do their due-diligence on the basics such as if theyâre a fiduciary, licenses held, what their fee structure entails, and contract terms. Itâs already too late and they assume their new handy advisor will magically erase all their losses. Theyâre professional after all.
They stick to that sentiment until a few months in when it comes to portfolio check-in time. The advisor doesnât do any better job than a monkey throwing darts with their eyes closed after all and the investor realizes that no one has a crystal ball! They consult with the advisor and it takes them over an hour into the meeting past a general market rundown to eventually admit portfolio performance was still down and essentially unchanged. Since the gullible investor didnât read the contract terms, they are unfortunately locked into paying for one full year and eventually end up having to pay more per month than they earned in the end. What a deal.
Since 2022 was an especially choppy year after impressive gains the last two years, this has been a wake-up call for retail and institutional investors alike. Hopefully, it made you realize how important the basic fact of diversification is, why several passive and active income streams need to be set, how a nest egg/rainy day fund can fuel further growth and independence, and why alternative assets are for non-correlated exposure to the public markets are vital.Â
No matter if you chose to work with an advisor or not, itâs importnat to consider two facts:
-If you arenât planning on keeping your moeny invested for more than 5 years, youâll likely be paying more in fees and taxes than netting much
-Historically, passive investing hsitroicaly beats out active investing
2022 into 2023 has been an unsettling time for many investors due to too much uncertainty flouting in the clouds. Whether youâre looking to retire soon or have taken on excess leverage and bought too much on margin you have no idea how youâll pay off, factors such as the Fedâs relentless rate hike push, the Russia Ukranian war, new variants poping up all over the place, sky-high mortgage rates, and stubborn inflation which finally cooled in October may have caused you to shift your personality which of course impacts the way we invest, spend, and as a result, feel. Feeling rich is as important as being financially secure.
You may have possibly noticed the rollercoaster of emotions experienced lately such as possibly feeling more anxious, frightened or a shift in your personality to a more negative demeanor during down days or for the past couple of months as the markets sold off. If so, this is a wake-up call that sticking to a fiduciary advisor who works in your best interest may be better-suited for your individual circumstances in the long run. Emotions must be at bay to limit distractions.
Personally, Iâve tested out all kinds of advisors up to this point. From robo to real humans and have come to the conclusion that algorithms to top traders canât predict the future any better than I can, almost. Iâm no genius but sticking to the basics is a tried and true way to get rich slowly. If you arenât in it to beat the benchmarks, take it down a notch and stick to index funds that are proven to work. Patience is the secret sauce which is hard to come by these days with screen time through the roof!
When you look at passive vs active manager performance for a random portfolio in the long run, passive investing historically beats out an active day trading style for clear reasons. One, the less dipping in and out of the markets is more tax-advantageous, takes the emotions and timing out of the markets where you can focus on the long-term horizon and goal-setting not gamification speculation aspect of it. It allows you to focus on earning that passive income to buy at the dips through a DCA approach, instead of through various metrics that constantly fluctuate and half the time are highly overvalued. Investing should work for you in the background, whether that means fully yourself or having someone do it for you. Itâs personalized after all.
Ironically, although many Gen Zers may work well with a temporary advisor that still holds emotions unless with a robo-advisor, they will be less emotion-prone than newly minted ones whoâre still getting a feel for the waves and we should all expect choppy waters in the near term!
Factors To Watch Out For
Every brokerage and wealth manager/portfolio/financial advisor has their own fee structure which is typically based on taking a percentage of invested AUM. One of the most important things to consider when working with an advisor is to realize this: they make money no matter if you lose or gain.Â
Depending on what you are willing to spend on a manager and if it makes sense financially since you hope to earn a spread from what you pay them and how much more your portfolio nets compared to the benchmark, trying one out for a couple of months to a year may be a helpful test in gauging how well you know the markets, how much time it takes from your own life, whether itâs worth it, and if you can do as good of a job as they can. Spoiler alert, most investors are surprised that they can and save thousands in the process!
According to a report from Northwestern Mutual and cited in Morning Brew, around 30% of Gen Z stated they didnât have a financial advisor prior to last year however are looking into working with one in 2023. From reading this statistic, there are a few concerning signs that stand out that are most common among new 2020 investors which include making permanent decisions based on temporary micro/macroeconomic headwinds and emotions. If you find yourself wanting to shift course and try out a new investment plan or manager, take stock of your emotions and project how likely you are to sitck with them and or need them in the long run.
Itâs reassuring to hear my generation has reduced the taboo on money and is taking charge of their financial health earlier than later. Time is truly on our side and even if you did invest your life savings into one company that may have went bust in 2022 when fundamentals set in and dry powder evaporated, you still have time to recover as long as you donât make the same mistakes over again.
Gen Z is not only the most socially conscious generation but also seems like the savviest financially as the side-hustle revolution and entrepreneurial itch have tickled us. With national savings rates plummeting to concerning lows, over 70% of Gen Zers stated they built up a sizable cash cushion during the pandemic, unlike other generations who felt cash-strapped and splurged on a home when apartment deals were too enticing to give up during lockdowns, cough cough Millennials.
Nevertheless, itâs reassuring to hear that saving and investing are top of mind for my generation, both of which should have equal importance and attention.
No matter where the markets stand in 2023 and what your portfolio composition looks like, itâs always recommended to never invest more than 10% of your net worth or investable capital into one single asset or investment, to risk whatever youâre willing to lose, and invest for the long haul!
Nowadays, deep discounts are all around for Big Tech that normally trade at lofty valuations and sky-high multiples so if thereâs anything to consistently follow, itâs to buy the dip and keep it going no matter if a prolonged bear market rally or reverse turnaround in a possible recession unexpectedly hits.