Millennials: stop making this investing mistake
At a recent CFA conference, Patrick O’Shaughnessy, a portfolio manager at O’Shaughnessy Asset Management, spoke about the investing behaviour of millennials (those born between the early 1980s and early 2000s). In his presentation, O’Shaughnessy proposed that these young investors are making three big investment mistakes:
- They are not saving enough
- They have poor asset allocation
- Their stock selection is mediocre
With regard to the 'mediocre' stock selection, it appears that millennials have a tendency to lean towards those companies that are perceived as exciting, young, and/or hip when implementing an investment strategy. For these investors, it is not uncommon to seek out the latest tech company on the verge of world domination or an equally exciting company offering the latest product set to revolutionize the way we live. Stories about successful companies with brilliant leaders and groundbreaking products can send millennials’ imaginations running wild, and tempt young investors to load up on high-risk tech stocks or the new 'flavour of the month' strategies.
In doing so, millennials may be exhibiting familiarity bias which is when investors tend to trade in the securities which are more visible and therefore, recognizable. For example, Patrick O’Shaughnessy’s research has found that millennials, who are more likely to be using tablets, smart phones, and social media, tend to hold a higher percentage of companies like LinkedIn, Facebook, and Twitter in their portfolios.
But millennials take note: this 'fast-paced' mindset may be detrimental to a successful investment strategy.
The consistency of successful investment models highlights a great irony of the stock market: the investors who produce the flashiest returns usually do so in the un-flashiest of ways.
According to Mark Hulbert, editor of the Hulbert Financial Digest, “‘Boring stocks’—those that have exhibited the least historical volatility—on average outperform the most ‘exciting’ issues—those that have been the most volatile.” And the types of stocks that are catching millennials’ eyes, such as Twitter, tend to be more volatile.
While telling your friends about your recent investment in Apple, Netflix, or Yelp might be mildly entertaining, try getting your next dinner party swinging by announcing your recent investment in XP Power. You might find it difficult to keep your friends’ attention while you detail XP Power’s range of alternate and direct current power supplies, including openframe, chassis mount, rack mount, external and DIN rail.
After the sound of crickets has subsided and your friends have wiped the stunned looks off their faces, I would suggest you try to enjoy the remainder of the dinner party, as you may not receive an invitation to the next.
As investment professionals who regularly speak to young clients, friends, and family, we know all too well the lure of mimicking the magpie and collecting every shiny object in sight. While the occasional purchase of the latest gadget may not be detrimental to one’s retirement plan, an investment strategy that follows the same model might. Investing should never be about the latest fad, or glitz and glamour. Rather, it should be about boring quantitative models with cold, hard data and tedious research that would put the average person to sleep.
A thorough research process can help to quiet the bursts of emotion and excitement that might cloud an investor’s judgement and lead them towards flashier, less robust investments.