It’s generally accepted that younger investors, who have more time to let their money ride out the market waves, have a higher tolerance for risk than their older counterparts.
New data from investing app Openfolio found that investors under age 25 are taking full advantage of this truth.
By analysing the investments of 2,500 hundred of their user profiles, Openfolio found that the youngest investors are indeed taking more risk … but they don’t have much to show for it.
Older investors, who take less risk, experience returns nearly three times as high as the under-25 set.
“It doesn’t surprise us that young investors take more risk,” explains Openfolio cofounder Hart Lambur, “but it does surprise us that they take more risk and their returns are significantly worse.”
This risk, Lambur explains, comes largely from two patterns in particular: buying disproportionate amounts of stock in their favourite companies, and “swinging for the fences,” trying to win big.
This disparity is illustrated below:
“Younger investors are much more geared to invest in single stocks or single name companies,” Lambur says. “They own a much smaller percentage of funds and ETFs.”
Specifically, they tend to hold about 61% of their portfolio in stocks, compared to the 49% of the older groups.
“I don’t want to opine too much on what the younger millennial thinks,” Lambur continues, “but even in my own experience, I identify with the concept of buying a company you really like, or the concept of trying to swing for the fences and beat the market.”
However, he cautions, “You learn over time that if you’re making bets like that, they’re more bets, less investments — and they don’t pan out.”
There is an upside, though: Investors start seeing better returns as they get older (and more conservative).
When Openfolio broke the users down into smaller cohorts, they found that users age 50-plus saw the best returns of any group. Those under 25 saw the lowest, so there’s really only room for improvement.
“I think we’re seeing with older investors that there’s a lesson learned,” Lambur concludes. “There’s less concentration on single name companies, and a greater understanding of diversifying a portfolio with funds and ETFs.”
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