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Gen Z’s stock market volatility – smart or risky?

Gen Z is active in the stock market: Good or bad?

Gen Z investors are making waves in the stock market, and a recent Bankrate survey sheds light on their active engagement, particularly in a climate of rising interest rates and inflation. This surge in activity among young investors prompts a crucial question: Is their strategy of heightened stock market involvement a wise move?

Interest Rate and Inflation Dynamics

The Federal Reserve has been on a mission to curb inflation by increasing the federal funds rate, the rate at which banks borrow and lend money to each other. Since March 2022, this rate has seen a remarkable 11 hikes. The aim of these hikes is to bring inflation down to a manageable 2%. While the Consumer Price Index (CPI), a widely used measure of inflation, reported a 3.2% increase in July, it was deemed “slower than expected” by CNBC. This represents a significant drop from the alarming 9.1% surge observed in June 2022.

Survey Findings: Gen Z’s Stock Market Activity

The Bankrate survey revealed intriguing insights into the stock market behavior of different generations. Among Gen Z investors, aged 18 to 26, a staggering 87% were actively buying, selling, or holding additional investments in 2023. This contrasts sharply with 68% of millennials (ages 27 to 42), 38% of Gen X investors (ages 43 to 58), and 35% of baby boomers (ages 59 to 77) who engaged in similar activities. The average for all American investors, including those with stock or related accounts like 401(k)s, stood at 52%. In essence, Gen Z investors displayed a higher level of volatility in their investment strategies, a characteristic that could pose challenges for their long-term financial growth.

James Royal, a Bankrate analyst, warned that consistent trading by younger investors is likely to underperform in the long run. Moreover, the survey revealed that young investors had a stronger inclination to buy stocks rather than withdraw from the stock market altogether. This preference for additional investments could potentially benefit young investors, as noted by Bankrate. Greg McBride, Bankrate’s chief financial analyst, emphasized that both Gen Z and millennial investors were inclined to increase their stock investments in the current year. Bankrate conducted the survey among 3,676 adults, with 1,665 holding investment or retirement accounts.

Navigating the Landscape: A Long-Term Approach

In a market climate marked by volatility, the key message for investors, particularly Gen Z, is to adopt a long-term perspective. Passive investing, recognized as a strategy for building wealth over time, involves purchasing diversified index funds and holding onto them. This approach stands in contrast to active investing, where investors attempt to time the market and outperform it. Holding onto investments for the long haul allows investors to capture long-term returns, as highlighted by Bankrate. Additionally, the consistent buying and selling of assets can lead to higher tax liabilities and the risk of missing out on the market’s most significant gains.

In summary, while Gen Z investors are making waves in the stock market and displaying a penchant for active engagement, it’s essential for them to consider the benefits of a long-term, passive investing approach. By embracing a strategy that focuses on the bigger financial picture and avoids excessive trading, they can reap rich rewards.

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