Young investors (ages 25 – 44) are more confident than older investors
Young investors have a higher regard for their investment acumen than their older counterparts, according to a Spectrem’s Millionaire Corner wealth level study of advisor usage. The study focused on the attitudes and behaviors of affluent investors (millionaires) regarding their investments and their overall financial health.
Nearly four-in-ten (39 percent) investors under the age of 45 stated they could do a better job of investing than a professional advisor. In comparison, one-fourth of respondents overall share this attitude. Across age levels, seniors over 65 were the least likely to say they were more confident in their own investment abilities (21 percent).
Young investors are more likely to identify themselves as self-directed, or DIY investors, meaning they make all of their own investment decisions without consulting a professional. Six-in-ten (vs. 54 percent of investors overall) said that they enjoy investing and it is something they do not want to give up.
When asked about their asset allocation, young investors said that they control more than half (54 percent) of their assets by themselves with no professional help. Overall, respondents said they control 46 percent. Of those who do use an advisor, the highest percentage (35 percent vs. 18 percent of respondents overall) said that they have a portion of their investments with an advisor to compare results of their own investing.
Financial knowledge plays a key role in young investors’ elevated confidence. They are more likely than their older cohorts to say they are “very knowledgeable” about financial products and investments (31 percent vs. 22 percent of investors overall). Three-fourths (76 percent) rank “smart investing” as a primary factor in their financial success, along with hard work and education, and they are making the most concerted efforts to get smart, our study finds.
Two-thirds of young investors believe that there is much more and much better information available to them regarding investments than there has been in the past. More than half (53 percent) said they have done more research about investments than they have done in the past, compared with 40 percent of respondents overall. Similarly, more than one-fourth (28 percent) said they have subscribed to additional financial publications and/or websites vs. 19 percent of overall respondents.
The payoff is optimism about their financial situations. Nearly three-fourths (72 percent) of young investors said their financial situation today is better than it was one year ago compared with 60 percent of investors overall. 63 percent expect their financial position to be stronger a year from now, compared with 54 percent of all respondents.
All of this is well and good except for one minor problem – the actual performance of these young, affluent, confident investors is significantly worse than their older (and wiser) brethren. According to studies by the Investment Company Institute, Dalbar Inc., and Fidelity, younger investors underperform both the market, and older investors by a wide margin. The main reason is overconfidence. Secondarily it’s a lack of appreciation for the risks that are inherent in investing. There are certain skills that can only be learned from experience, and young investors simply don’t have as much experience as older investors do.
What are the numbers? Over the past 20 years, all self-identified DIY investors earned an average of 5.28% per year. Older investors (45 and up) earned 6.22% per year on average. And young investors earned 4.78% per year.
It’s understandable that young investors would underperform, because they make more mistakes than seasoned veterans. They may know more about investment theory, but they don’t have the experience of actually dealing with periods of market extremes. And what makes matters even worse is the fact that young investors are so confident in their ability to outperform the market and professional investors. This is a serious handicap for any investor to have. It leads to all kinds of trouble, from taking too much risk to not learning from mistakes.
When it comes to investing, older is definitely wiser. There is no substitute for experience.