New investors are older and riskier: Investopedia
Investopedia editor-in-chief, Caleb Silver, discusses mistakes new investors make with Alexis Christoforous and Kristin Myers of Yahoo Finance.
KRISTIN MYERS: When we think of investors now, we usually think - or at least new investors - we usually think of them as younger. However, a new survey shows that they are actually older and take greater market risk. Let's talk to Caleb Silver, Editor-in-Chief of Investopedia. As I mentioned earlier, we Caleb usually think these riskier, newer investors are pretty young. Why do you think you see some of these older investors getting involved?
CALEB SILVER: Well, it's great to be with you. And we've served our readers knowing that in 2020 millions of new investors started investing and trading for the first time amid the pandemic. Maybe they were home from work. Maybe they were unemployed. Maybe there wasn't a sport to bet on. Maybe they got their stimulus checks up and running. For some reason, we know that for the first time, over 10 million new investors were created.
So we wanted to find out who they are and where they learn to invest and what their habits are. And we found out that a lot of them are GenX and older. About 60% of those who responded to our survey - and this is Investopedia, which is active investors of all ages - said they were Gen X or older. Many of them taught themselves how to invest. And many of them took risks that seasoned investors would never take.
ALEXIS CHRISTOFOROUS: Yes, when I talk about risk taking I want to talk about some of the most common mistakes these new traders make. And I wonder if demographics or age are what make them wrong. They point out that some of them are trading on margin. And of course, an oldie but a goodie, they try to time the market.
CALEB SILVER: Right, we always say that the time in the market is better than the timing of the market, but who hasn't tried to time the market or act on a gut feeling? You admit these mistakes. Many of them are new as I said. So teach yourself how to do it. And there was so much volatility, especially in late spring or early spring 2020, that they tried to hit the bottom of the market or catch it on its way up or catch individual stocks that caught fire, like a GameStop, like a Tesla, like some of the other stocks that stay at home.
Many of them have tried that. Many of them acted on the sidelines and did not know what they were doing. Many of them traded in and out of stocks without thinking about the tax ramifications. And many of them again acted on their gut instincts and admitted mistakes. Many of them said they made money, but around 50% said they lost money in a year when it was difficult to lose money at all.
KRISTIN MYERS: I know you mentioned Caleb, you know, the pandemic is part of the reason so many people are really getting into the market. However, I would like to know something about this component of being self-taught. If you think that access, now almost unlimited, to the internet of free knowledge of resources, sites like, you know, even ours, YahooFinance.com, where everyone can see, you know, free bell-to-bell coverage If that's all there is to it - and even your website, Investopedia - is that even serving to involve more and more people? Because they don't feel like they need an advanced degree or knowledge to really get involved in the market.
CALEB SILVER: Good question. It has never been easier to learn. Thank you, Yahoo Finance. Thank you, Investopedia. We've both been here for a while. So when they say they are self-taught I think they are using sites like ours and other resources like ours. But there is also no trading commission so it has never been cheaper to start trading or invest. It has never been easier to sign up for one of these online platforms. Most of them are related to your bank or people's banks. It's never been easier. There are no trading fees.
With fractional access, you don't have to afford Berkshire Hathaway, an A share. You can buy a small piece of it. Access has never been so open. And I think that's what got people into it too. Simple technology - people were home too. They weren't at work where anyone could see them trading over their shoulder. And there were no sports to bet on. People were looking for something to do. It was an incredible year for the stock market too. So it seemed like an easy place to make money. And many of them did, but again, many admitted losing money last year, a year that was almost impossible to miss.
ALEXIS CHRISTOFOROUS: Yes, how active are these new dealers? I mean, in terms of ... would you characterize the majority of them as day trading? And I wonder if they realize the tax ramifications of getting in and out of positions frequently.
CALEB SILVER: Yes, we asked you that question. And more than 30% said they had no idea about the tax consequences of day trading and these short-term tax gains. And about 20% said they flip their portfolio quite often. Not only that, Alexis, they only focused on a few stocks. So they broke the rules of diversification. You have violated the rules for long term buying and holding or the average cost of dollar cost. And they broke the rules for creating this long-term investment plan because I think a lot of first-time people don't. I don't know the difference between long-term investing and trading.
And you could do a little bit of both. However, if you are investing for the long term, you will want to build these positions. You want to diversify your portfolio. And you want to be a dollar that costs your average and averages your path as it rises and falls. And many of them were learning these lessons for the first time. Hopefully they have them now and they have a long career ahead of them. Because that's the point - don't jump in and make money quickly, but build long-term wealth with a real investment plan.
KRISTIN MYERS: I know you highlight some of the mistakes, some of the pitfalls, some of the downfalls. But do you at least get an overall feeling for how your portfolios are developing? Maybe after doing some of these you know, more rookie mistakes first, are you doing much better with some of your investments now?
CALEB SILVER: Yes, a lot of them 85% said they had made some money and posted profits in the past 12 months. I would hope so because it was really hard not to be able to. But I think a lot of them are first learning what it really means to be in the market for the long term and what it really means to book or invest your profits at the top - you know, carry on with a real plan, that employs her for 10 or 20 years. So the good news is that there are a lot of people in the stock market. Lots of people invest. It's a great road to wealth.
The bad news is, if you don't learn the right way right away, it's easy to lose money and get discouraged. We hope that people will learn some lessons, take those lessons with them, and have a long career ahead of them that is good for them and good for everyone.
KRISTIN MYERS: Well that's one of the best recommendations I can think of for a place like Yahoo Finance and a place like Investopedia. Caleb Silver, Editor-in-Chief of Investopedia, thank you for joining us today.
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