It’s Time for Wall Street to Start Investing in Gen-Z
For those who think of investing primarily as an activity of older and more affluent Americans, the beginning of 2021 came as something of a shock. Empowered by the increased democratization of the market caused by apps like Robinhood, as well as the ability to instantaneously communicate with fellow investors on social media, millions of amateur investors bought up shares of flailing retailer Gamestop in mid-January, betting against major hedge funds in a short-squeeze operation. The coordinated buying effort became a viral news sensation, particularly because so many of the buyers were young and experienced. We will no doubt be grappling with the long term implications of the Gamestop Short Squeeze for years to come; for now, it can be seen as the dramatic entrance of Gen-Z into the investing world.
Obviously, “Gamestop-Gate” does not tell the entire story. While, yes, there are plenty of young traders who throw caution to the wind, ignore traditional financial wisdom, and invest heavily in viral “meme stocks,” there are also a large number of young people who have a more serious interest in investing long term. Thanks largely to technology increasing access to the market, young people have begun investing en-masse in recent years. And although at the moment “zoomers” are investing relatively small amounts, that may very well change. Over the next several decades, the greatest wealth transfer in history is set to take place as Boomers leave their money to younger children and grandchildren. As Gen-Z gains access to more capital, the idiosyncrasies of this new generation of investors will be impossible for Wall Street to ignore.
For all the talk of Gen-Z disrupting the markets and shattering decorum, you would think the industry was afraid of these potential new investors, rather than eager to bring them into the fold. This is a short-sighted attitude. Gen-Z may bring some new behaviors and values to the world of investing, but they also create an opportunity for investment firms and fintech companies to adapt to a fast-changing world. What follows are a few insights that I hope will shed some light on how Gen-Z’s investing habits differ from their generational predecessors, and how forward-thinking financial services companies can best serve them.
They trade with their gut… for better and for worse.
One of the most confounding aspects of the Gamestop story was that young investors were seemingly ignoring the rational rules of the marketplace. Why bet against the experienced hedge fund managers, especially for a failing retailer during a global pandemic? Some called these irrational investors “nihilists,” but their behavior was not actually so different than their generational cohorts. According to Peter Garnry, head of equity strategy at Saxo Bank, many Gen-Z investors are buying shares not based on valuation, but on “narratives, stories, and themes.” Without the ingrained mindset of Wall Street investment bankers, young traders are instead basing their decisions on more intangible qualities, such as having a personal connection to a company.
Some speculate that the impulsive decisions of young, inexperienced traders will have disastrous effects further down the road. Criticizing apps like Robinhood for doing “little to deter poor decisions,” Financial Times reporter Siddarth Shrikanth lamented that young people could potentially jeopardize their financial futures due to a lack of knowledge and discipline. Still, not all Gen-Z investors go to those extremes. Many are more risk-averse, investing carefully with long-term gains in mind. These are the kinds of traders that the industry should pay attention to: those who are invested in companies on that more personal level, but not to the extent that they will throw away their money on a whim. By focusing on this instinct for narrative and personal connections, companies and investment firms can attract Gen-Z investors who are looking for something more than just dollars and cents.
Investing is political.
For a generation that has thrown much of its weight behind social movements like Black Lives Matter and March for our Lives, it should come as little surprise that Gen-Z brings their political beliefs onto the trading floor as well. The practice of socially responsible investing (SRI) has become extremely popular among younger generations, with a US Trust study finding that 76% of millennial and Gen-Z investors have reviewed their assets for their social impact. This could mean investing only in funds that divest from fossil fuels, or supporting companies that are committed to certain values like diversity, equity, inclusion, and justice. The thought process is that, by supporting socially responsible companies and withholding capital from those with bad practices, young people can make a real difference with their wallets.
Financial activism is certainly not a new phenomenon, but it seems to be a popular one among Gen-Z investors in particular. It is also growing in influence: in 2019, $21 billion in new money was pulled into “sustainable” funds, a 400% increase since the previous year. That said, it can often be difficult to find a balance between supporting companies with strong values and maximizing returns. Some critics in the financial community call it a contradictory idea, while others believe that sustainable investing will guarantee a more prosperous future for everyone. Regardless of where one falls along the political spectrum, it is undeniable that Gen-Z is taking into account these factors in their investing. This is just another way that the new generation projects their specific personality into the world of investing, and it is another opportunity for the financial services industry to reach out to them. By offering sustainable investment opportunities, they can attract the interest – and the dollars – of Gen-Z.
…and also social.
Who says playing the market is only for rugged individualists? True to their reputation as a generation fluent in social media from birth, zoomers are also turning to platforms like Instagram, Reddit, and TikTok for investment advice and camaraderie. A recent Magnify Money study found that, while unlikely to seek advice from traditional financial advisers, 44% of Gen-Z investors have gone to YouTube for investing information in the past month, with 41% opting for TikTok. At the same time, nearly 60% of millennial and Gen-Z investors are a part of an online investment forum – such as r/WallStreetBets, the subreddit that was instrumental in the Gamestop short squeeze. Like any other online community, these forums are rife with inside jokes, memes, and indecipherable lingo. But they also provide a sense of community to young investors who are just getting starting in the financial world. That kind of community is something that Gen-Z looks for in many parts of their lives, and it’s something that the financial services industry should take note of.
While some may question the wisdom of taking stock tips from social media influencers (for whom there is little barrier for entry, and zero regulation), it cannot be denied that Gen-Z is doing exactly that. 45% of Gen-Z gets financial advice from social media platforms, a number that should jump out to any company looking to reach this coveted demographic. Not only should these companies invest in social media outreach strategies – what better way is there to reach zoomers? – but they should also pay attention to the deeper lesson. Zoomers are not averse to seeking out help. They are, for the most part, brand new to investing, and they have a lot to learn. In video interviews conducted by Knit, zoomers admitted that one of of their main barriers to investing was a lack of education. However, they want this education to be on their own terms. Take the time to get to know these potential investors, learn what their values are, and make an effort to communicate to them on a personal level. For the company that takes that lesson to heart, working with Gen-Z should be no trouble at all.
Knit has helped both challenger Fintech brands and legacy institutions do just that – keep a pulse on this growing generation to adapt & build products for the future. Recent work with Digital Agency, Shepherd, helped guide a nationwide multimedia GTM campaign for their large Fintech Client, providing a better understanding of how college students use social media to make “adulting” choices — especially choices related to financial decisions. Check out the case study for a deeper understanding of how Knit can help your org gain real time feedback from Gen Z: goknit.com/shepherd-case-study