The Gambling Class of Investors

I started investing in late 2020 and experienced the biggest bull run of all time. 2022 has been a wake up call. I’ve experienced extreme volatility in my portfolio, as have many other investors. While the recent changes in the market have made ripples in the entire retail investing space as investors attempt to adapt, I’ve found that young investors are particularly affected due to their risk heavy investment strategies, as well as their affinity towards technology and emerging markets.

The past four months have been difficult for the tech sector. While the S&P 500 is down 7.5% YTD, the tech-heavy NASDAQ has fallen more than double that: 16.75% since the year started.

S&P500 (blue) vs NASDAQ (orange) 5Y performance; data from macrotrends.net

This reflects the historic volatility of the tech sector and it’s equally disproportionate gains since the March 2020 crash. However, this volatility has now decimated the portfolios of many young and overzealous investors. Growth equities, especially in the tech sector, are among the most popular investments for people aged 18–24. In conversations with my peers, I’ve seen that their losses these past four tumultuous months have far exceeded that of the tech-heavy indices, some of their portfolios losing upwards of 40% of their value in just a few short months.

While my experience with my peers is only anecdotal, I think it is heavily indicative of macro trends in the behaviors of young investors in conjunction with the sectors they invest in.

Young people tend to be extremely risk oriented — they are our most dangerous drivers, our highest proportion of drug users — and that risk-oriented mindset extends to their tendencies in financial management. Overzealousness and lack of analysis when approaching the market has resulted in detrimental losses for young investors. Groupthink, personal biases, and media seems to drive their investment strategy far more than any other factor.

These traits in young investors have only been exacerbated by a false feeling of security that this recent bull run provided, during which retail investing participation rates (mostly young people) have reached all time highs. The lack of care in young people’s investment strategies could continue to detriment their ability to handle tumultuous markets in the future, should we see a recession take a hold on the economy over the next year.

These investment strategies often include options trading, trading for short term capital gains, and investing in low market cap companies and IPOs. All of these tend to have high volatility and downside, but carry with them the chance of multiplying your money quickly.

I believe the prominence of these risky strategies and the get-rich-quick mindset comes primarily from social media influence, with sites like Reddit and TikTok showing abnormal (to say the least) gains from incredibly risky strategies.

2022 has been a wake up call

These shifts in the market, however, could prove to be a useful educational tool for young people. I know it already has been for me. It’s a potential educator on the downsides of an instant gratification mindset that rules young people’s worlds. While I am long on technology as a sector, and I believe that this market downturn will prove to be a fantastic buy point for this part of the market, the attitudes of many young people — this gambling class of investors —prevents them from taking advantage of these opportunities, and is detrimental to their ability to set themselves up for financial independence.

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Justin DeLoach

Justin DeLoach

Student at UNC Chapel Hill. I write (mostly) about the market. Email me @justin.deloach@live.com