are investing<\/em> are going about it in a completely blinkered way.<\/p>\nThey\u2019re gambling, not investing. In some ways, this is understandable\u2026<\/p>\n
Millions of young men opened brokerage accounts during the pandemic and gravitated toward highly risky investments.<\/p>\n
They chased meme stocks. They traded on margin. They bought and sold crypto. And they became active option traders.<\/p>\n
Option contracts give an investor the opportunity to buy or sell a security by a specific date.<\/p>\n
They can be used to generate income, hedge risk, or engage in speculation.<\/p>\n
Take a wild guess which young traders went for?<\/p>\n
Option trade volumes have soared since the pandemic, when young men \u2013 unable to visit a casino or sports book \u2013 became enamored with them.<\/p>\n
A 2021 investor survey by the Finra Education Foundation discovered that 36% of respondents ages 18 to 34 said they had traded options.<\/p>\n
That compares with 21% of respondents 35 to 54 and just 8% of respondents ages 55 or older.<\/p>\n
While an options trader can close out their positions on any market day \u2013 at a profit or a loss \u2013 approximately 80% of all stock options expire worthless.<\/p>\n
As if these odds weren\u2019t daunting enough for anyone but die-hard speculators, the young and the restless have begun experimenting with zero-dated options.<\/p>\n
These options expire at the end of the day, enabling traders to bet on intraday market moves of major indexes and related exchange-traded funds (ETFs).<\/p>\n
A trader can potentially earn a quick windfall or rapidly lose an entire position.<\/p>\n
Excitement? Guaranteed. Profits? Not so much.<\/p>\n
If you\u2019re a big boy, have plenty of options trading experience, and a high tolerance for risk, knock yourself out.<\/p>\n
If you\u2019re a low-net-worth young person who likes to gamble, cup your groin.<\/p>\n
The sad thing, especially since these guys have so much time ahead of them, is what they\u2019re giving up on future returns.<\/p>\n
For example, most young people can bounce back from losing $5,000 in zero-dated options. (Or on a typical gambling junket to Atlantic City or Las Vegas.)<\/p>\n
But I wonder how many of them stop to think that it\u2019s not just the five grand that\u2019s gone.<\/p>\n
It\u2019s the $234,000 it would have turned into over the next 40 years if it earned nothing more than the historic total return of the S&P 500.<\/p>\n
As the Renaissance genius Leonardo da Vinci said, \u201cHe who wishes to be rich in a day will be hanged in a year<\/em>.\u201d<\/p>\n(Although, in this case, it\u2019s your portfolio that will be swinging at the end of a rope.)<\/p>\n
This goes for crypto traders also.<\/p>\n
Most young people have seen that Bitcoin \u2013 while highly volatile \u2013 has mostly trended up over the past 15 years.<\/p>\n
Yet economists at the Bank of International Settlements \u2013 an institution widely considered the central bank of central banks \u2013 analyzed data on crypto investors in 95 countries between 2015 and 2022.<\/p>\n
Their conclusion? \u201cAround three-quarters of users have lost money on their Bitcoin investments.\u201d<\/p>\n
Moreover, they found that \u201cas prices were rising and smaller users were buying Bitcoin, the largest holders (the so-called \u2018whales\u2019 or \u2018humpbacks\u2019) were selling \u2013 making a return at the smaller users\u2019 expense.\u201d<\/p>\n
The study also found that the biggest segment of cryptocurrency users \u2013 roughly 40% \u2013 were extreme risk-seekers, men under 35.<\/p>\n
The Bank of International Settlements study is a few years old. But it dovetails with Bank of America\u2019s 2024 Study of Wealthy Americans.<\/p>\n
The new study found starkly different views on asset allocation between Americans over the age of 44 and those between the ages of 21-43.<\/p>\n
Both groups thought that real estate investments should make up 31%-32% of their portfolio. I have no quarrel with that.<\/p>\n
But the older and more experienced investors thought they should have 41% of their portfolios in U.S. stocks. The younger investors thought only 14% was right.<\/p>\n
The real divide? Older investors thought they should have just 4% in crypto and other digital assets. (Still too much in my view.)<\/p>\n
Young people thought they should have a whopping 28% of their portfolio in this sector.<\/p>\n
Crypto is a solution in search of a problem. At least, if you\u2019re a law-abiding citizen.<\/p>\n
If you\u2019re not an extortionist, bribe-taker, kick-back receiver, tax cheat, drug cartel, terrorist network, heavy weapons dealer, human trafficker, or country trying to evade economic sanctions, crypto does nothing to make your life simpler, easier, or better.<\/p>\n
It\u2019s just something to bet on, although three-quarters of the bets \u2013 apparently \u2013 are not paying off.<\/p>\n
If I were to hazard a guess, I\u2019d say a much larger percentage will fail in the future.<\/p>\n
In sum, young people have plenty of time for appreciating assets to deliver the high net worth they ardently desire.<\/p>\n
But many are squandering that opportunity by investing a substantial portion of their portfolios in long shots that are more likely to deliver capital losses.<\/p>\n
However, I will say that these folks are at least trying<\/em> to get ahead.<\/p>\nA much larger percentage of young people aren\u2019t even trying.<\/p>\n
In fact, I recently discovered a Fidelity Investments survey that made me realize why so many millennials and Gen Zers are pessimistic about the American Dream.<\/p>\n
I call it \u201cThe Startling Statistic.\u201d And I\u2019ll reveal it in my next column.<\/p>\n
<\/p><\/div>\n