Younger Investors Like Options and Crypto. They Might Be Sorry. — Barrons.com

By Andrew WelschThanks to smartphones, easy-to-use brokerage accounts, and zero-commission trades, everyone is just a swipe away from buying stocks or other financial instruments. As a result, Americans are starting their investing journeys at far younger ages than previous generations.For Gen Z, typically defined as those born in the U.S. from 1997 through 2012, the average age for their first investment is 19, according to a 2024 Charles Schwab survey. For millennials (1981-1996), it is 25. And for Gen Xers (1965-1980) and baby boomers (1946-1964), it is 32 and 35, respectively.Affordability is an important reason people start at younger ages, says Rob Williams, managing director of financial planning and wealth management at Charles Schwab. "It isn't just easier access," he says. "Costs have evolved to make it available for anyone at any level of wealth."Getting a head start on one's investing journey is undoubtedly a good thing. Per the adage, time in the market is more important than timing the market.But younger investors today also have greater access to risky investment products and strategies, and there's an explosion of new sources of information and social networks that can encourage risky behaviors. That much was evident four years ago when millions of first-time investors, many of them next-gen, poured into markets and joined a frenzy of meme stock trading."The investment world and the world in general have changed dramatically since the boomers were young adults," says Gary Mottola, director of research for the Finra Investor Education Foundation. "For example, boomers, when they were young, didn't have the option of investing in crypto. And back then it wasn't as easy to open accounts, trading was more costly, fractional shares weren't available, and you often needed thousands of dollars to begin investing, so there were fewer young investors."A subset of younger Americans — particularly men and investors who got their start during the pandemic — have gravitated toward investments that are riskier than what other Americans their age or older tend to invest in.Option OptionsTake for example options contracts, which give an investor the opportunity to buy or sell a security by a specific date. Options contracts can be used to generate income, hedge risk, or engage in speculation. Options trade volumes have soared since the pandemic, when younger investors became enamored of them. A 2021 investor survey by the Finra Investor Education Foundation found that 36% of respondents ages 18 to 34 said they had traded options. That compares with 21% of respondents ages 35 to 54 and just 8% of respondents age 55 and older.Popular though options contracts may be, they are complex financial instruments, and novice investors may want to tread lightly. Consider the time-sensitive nature of a call option, which allows the holder to buy a stock at a set price (the strike price) before the contract expires. If the stock fails to reach its strike price before the expiration date, the contract expires worthless the holder loses the premium he or she paid for the contract.In the years since the Finra survey, investors of all ages may have begun experimenting with zero-dated options, otherwise known as 0DTEs, which have soared in popularity. These options expire at the end of the day and enable investors to bet on intraday market moves of major indexes and related exchange-traded funds. An investor can potentially earn a fast windfall — or quickly lose an entire position. 0DTEs have risen from 5% of daily S&P 500 options volume in 2016 to about half of all volume last year, according to Cboe Global Markets.On the MarginsThe Finra foundation survey also found that both younger and newer investors were more likely to have made purchases on margin. Investing on margin — that is, borrowing money from a broker to trade — can magnify returns as well as losses, and is generally considered to be risky.The ability to buy stocks on margin has been around since before the stock market crash of 1929, but it is gaining popularity with next-gen investors. In 2021, just under a quarter, or 23%, of investors ages 18 to 34 said they had made purchases on margin, compared with 12% of respondents ages 34 to 54 and 3% of respondents age 55 and older. Nineteen percent of respondents with less than two years of investing experience said they had made purchases on margin. By comparison, 17% of respondents with two to 10 years of investing experience had made purchases on margin. A mere 6% of respondents with a decade or more of investing experience said the same.Investors' overall use of margin tends to rise and fall along with market returns. Finra's data show debit balances in margin accounts soaring during the pandemic, only to plunge in 2022. Debit balances rose sharply after last year's presidential election, reaching about $900 billion, their highest level since December 2021, when they reached $910 billion.Crypto BrosThe demographics of crypto investors also skew younger and male. According to a Pew Research survey based on February 2024 data, men under age 50 are more likely than older men and women of all ages to have used cryptocurrency. The gender divide is notable even among young investors. Forty-two percent of men ages 18 to 29 have invested in, traded, or used cryptocurrency, compared with 17% of women in the same age range, Pew said. Interestingly, just 17% of all U.S. adults say they have invested in, traded, or used a cryptocurrency, according to the 2024 survey. That was statistically unchanged since 2021, Pew said.Since the 2024 survey, it's possible that the share of Americans dabbling in crypto has risen because of the proliferation of spot crypto exchange-traded funds. These ETFs have made investing in crypto easier for Americans because the spot funds typically hold the crypto assets, eliminating the need for investors to have a secure digital wallet to store them. Asset managers such as BlackRock have attracted substantial flows for crypto ETFs, and the prices of Bitcoin and other digital currencies have soared over the past year.Cryptocurrencies may soon get another boost. President Donald Trump has indicated that his administration will loosen crypto regulations, which may result in banks and brokerage firms offering direct access to crypto investments and asset managers launching more funds.Whether crypto investments are risky may depend on one's perspective — and how much of one's portfolio is allocated to digital assets. Certainly, many financial planners still won't go near the stuff. And some investors can't stomach the extreme price volatility Bitcoin and other cryptocurrencies have experienced. But a 1% portfolio allocation, as former financial advisor-turned crypto advocate Ric Edelman and others have suggested, isn't likely to break the bank if crypto hits the skids.Aaron Marks, founding partner and chief strategy officer at Amplius Wealth Advisors, says his firm doesn't use crypto in its recommended portfolios, but a few clients have expressed a desire to allocate sums to digital assets on their own. "If you want to take a shot, that's fine, but stay within your means," he advises.Some young investors are taking a measured approach. Ivan Jackson, 26, says he doesn't consider his cryptocurrency holdings as part of his long-term portfolio, which is overwhelmingly composed of low-cost index funds like the Vanguard S&P 500 ETF. Instead, they're more of a fun hobby. His largest holding — about $34,000 worth of Dogecoin — began as something of a lark when he was in college about four years ago. "Whenever Elon Musk tweeted about it, it'd shoot up," he says. "It was just ridiculous. It was 0.008 cents when I made my first purchase for $80."Jackson says his friends take a similar attitude, avoiding unnecessary risk-taking with their retirement savings while using other funds to invest in things such as Bitcoin that may have more volatility but a potential for outsize returns. Referring to his retirement savings, he says, "This isn't college money. It's real money."Shannon Saccocia, chief investment officer at NB Private Wealth, a division of Neuberger Berman, says she sees younger investors being willing to use a kind of bucketing approach toward wealth, using prudent strategies for long-term goals like retirement and potentially more volatile investments for aspirational goals. "Overall, their portfolios have balance," she says. "They are balancing some of that speculative exposure with a margin of safety."But this approach may not work for older investors, who have different time horizons and potentially less tolerance for volatility within their portfolios, Saccocia says. "If you are intellectually curious, why not learn a little bit about it and talk to your kids and grandkids about what they are investing in and why?"A Do-It-Yourself ApproachAn important generational difference among investors is the use of social-media websites such as Reddit and TikTok for investing ideas. According to Schwab's 2024 investor survey, 39% of Gen Z and 36% of millennial respondents said social media made it easier to manage money. That compares with 20% of Gen Xers and 7% of baby boomers.The quality of information and advice on social-media websites varies widely, as does the character of communities. The vibe of the 21-million-member wallstreetbets subreddit (self-described as "Like 4chan found a Bloomberg Terminal") is notably different from that of the 21-million member Personal Finance subreddit.But that isn't to say that young investors rely solely on social media. Many turn to family for advice and seek out authoritative information sources."I think the industry has a false narrative that you either are going to 'finfluencers' or an expert, but the reality is that you are probably doing both," says Joseph Coughlin, director of the Massachusetts Institute of Technology AgeLab. What that means for advisors is that young clients may either be well-informed or confused about financial topics; they shouldn't assume a lack of sophistication.To be sure, not all Gen Z and millennial investors are eager to roll the dice on risky investments. Most aren't engaging in such activities. Data suggest that women and older millennials are more focused on homeownership and building family wealth. Some studies indicate many Gen Z and millennial Americans are risk-averse because of economic and other hardships they have endured, from the financial crisis to the Covid-19 pandemic. Certainly, they're participating in retirement plans at rates similar to those of older Americans. And many are prioritizing low-cost, long-term investing strategies.Go It Alone?One big uncertainty for the financial-services industry: Will next-gen investors want to work with a financial advisor? Gen Z and millennials are cost-conscious and independent minded. And they are evidently willing to DIY it, but so are an increasing number of Americans.Just under a quarter of all assets were self-directed in June 2024, up from 15% in 2019, according to a comprehensive June 2024 study by Broadridge Financial. Asset share by self-directed investors increased across all generational cohorts except for the Silent Generation, those born from about 1928 to 1945.What's more, it isn't just middle-income investors availing themselves of self-directed platforms. High-net-worth individuals were among the client segments that most heavily used self-directed, according to Broadridge's study. But that doesn't mean they're firing their financial advisors to DIY it instead. More investors are using both an advisor and a self-directed account, says Andrew Guillette, vice president of global insights at Broadridge."We've surveyed end investors asking, 'If you have both, why?' The No. 1 reason is, 'Because I enjoy it,'" Guillette says. The No. 2 reason was diversification.So, it's likely that as younger investors grow older and accumulate assets, they will seek out professional help with their finances — but still keep a self-directed account on the side. Whether next-gen investors stick with other investing habits they may have picked up before and during the pandemic remains to be seen.Write to Andrew Welsch at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.