Are young investors ready for the first possible major downturn?

Are young investors ready for the first possible major downturn?

When Canada last hit a major recession in 2008, today’s youngest class of investors had just started primary school. Now in their late teens and early twenties, Generation Z may soon experience the first prolonged economic downturn in the lives of investors.

With stock and crypto markets plummeting, interest rates and inflation rising, and global events continuing to disrupt supply chains, some analysts expect further economic downturn.

Although there is no consensus yet on whether Canada is heading into a recession in the short term, these transitional periods – characterized by declining GDP, consumer confidence and employment – are an inevitable part of the business cycle. Recessions can also be accompanied by severe market turmoil, but young investors are divided on how to deal with such volatility.

Some follow the classic advice: Don’t panic. said Tristan Walker, a recent college graduate and sustainable energy engineer in Pincher Creek, Alta. His plan is to stay the course, perhaps investing in some exchange-traded funds.

“I try to use the wisdom of people who were before me. Wait in the long run and you will see value,” said Mr. Walker. “Your willingness to weather these waves is more related to psychology than your age.”

Mr. Walker’s approach follows advice given by most financial planners – don’t sell when stocks falter, because they are more likely to bounce. Jessica Sarrazin, an independent representative from Carte Wealth Management Inc, said young investors should remember their long time horizon: “The worst thing they can do is sell their portfolio at scale because things are low.”

However, research shows that young adults are more likely to do just that.

Investment data collected from Scandinavia between 1997 and 2015 shows that junior investors tend to sell more easily in a downturn than their older counterparts, said Sebastian Petermeyer, a professor of finance at Desautels School of Management at McGill University, who has been studying the data.

“It starts with their high risk aversion, and it is precisely this type of action that generates opportunities for the most experienced investors,” said Professor Petermeyer.

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Case in point: In a 2021 study of data, Professor Petermeyer said that in the aftermath of the 2008 recession, beginners – who sold their stocks in larger numbers – saw their portfolios perform “too poorly” compared to experienced investors, who often bought in when they were Prices are low.

“So the first time we experience an economic downturn we tend to overreact for someone more mature,” Professor Petermeyer said.

Despite guidance not to overreact to price volatility, some young people still feel it is better to exit the market than to watch their stocks sink. Among them is Brandon Marsh, a recent college graduate in finance, who has said he is considering cashing in his shares in technology, some of which are tied to cryptocurrency Ethereum.

“I’m actually so scared that I might have to do it,” he said. “I will definitely take my money out of the traditional market and just wait for it.”

According to Bradley Isenga, Senior Portfolio Manager at BMO Private Wealth, one of the keys to success in a recession is emotional detachment from the markets. But that could prove difficult for some young investors who are riding the highest levels of their pandemic gains after the crash in early 2020 that has largely rebounded within two months.

In fact, Generation Z isn’t coming into this recession – whenever it happens – as their parents did: self-directed investing is now the norm, technology has made trading freely available, and new asset classes like cryptocurrencies have increased their exposure to speculation.

Most of the young investors he knows are engaging in high-risk trading strategies involving cryptocurrencies — and some are already feeling the effects of the market downturn, Zach Levitt, a student at Queen’s University of Toronto and founder of the Queens Derivative Options Trading Association, said.

“It’s an approach that has gotten a lot of positive reinforcement, and a lot of people have been surprised” by the recent decline of cryptocurrency, he said. He said that some friends are doubling their speculative investments while the prices are low.

If stock markets continue to fall, Mr. Levitt said he plans to invest in biotech companies that trade around their cash value, and mitigate some of the risks by diversifying his assets.

For those with extra cash, investing in stocks when prices are low can be a good strategy, said Mr. Eizenga of BMO. But investors should remember that a lower stock price during a recession does not necessarily mean that a company is better valued. Instead, he said, the low price could be a problem with the company’s fundamentals.

For a safer buy, many investors hoping to buy bottoms will look for stable companies with proven track records, said Ms. Sarrazin of Cart. These include utilities, telecommunications, and companies selling essential consumer goods such as groceries that are unlikely to go out of business during a downturn. Maintaining a diversified portfolio is key.

She added that investors should also consider setting up an emergency fund in the event of a layoff, preferably in a liquid account such as a high-interest savings account covered by deposit insurance.

Ms Sarrazin said that while there is no certainty about a recession in the short term, one thing remains constant: “It will come eventually, so you have to be prepared for it to happen at any time.”

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2022-05-24 22:52:15

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