Busting three myths about young investors

Reality: Although young investors are more likely than older investors to purchase options, make margin trades, or think they can beat the market, aggressive trading and overconfidence are the exception, not the norm. Most young investors do not think they can beat the market (63%), have not purchased options (64%), and have never made margin trades (77%) .¹ Interestingly, nearly half of young Vanguard clients don’t even see themselves as “investors” (47%), suggesting that a lack of confidence may outweigh overconfidence.²

Why it matters: The antics of overconfident meme stock traders may make for great headlines, but research and history show that “trading is hazardous to your wealth.”³ Over a long period of time, a buy-and hold strategy that keeps pace with the market can lead to extraordinary portfolio growth. For example, the balance in a hypothetical low-cost portfolio with 6% returns over 30 years could grow more than fivefold.⁴

Reality: Most don’t. According to FINRA, three out of four investors under the age of 35 say they are not willing to take substantial risk for higher returns.⁵ And many invest too little in stocks relative to a typical target-date fund allocation for their age group.⁶

The bigger issue? Not risk-taking, but unintentional cash hoarding. According to Vanguard research, investors under 25 leave 14% of their IRAs in cash, often because they forget to invest after making a contribution or executing a rollover.⁷

Why it matters: Young investors have the longest time horizons and the greatest potential for long-term compound gains, but they’re missing out if they sideline their savings in cash. In other words, time is on their side, but only if they put idle cash to work and stay invested for the long haul.

Reality: Social media might lead you to believe Gen Z has given up on saving for retirement in favor of self-care and personal spending. But today’s young adults are actually more likely to have a 401(k) plan than their counterparts in 2004 (54% versus 28%); they’re saving more of their income (5.5% versus 5%); and they have significantly larger account balances ($6,899 versus $3,646).⁸ Gen Z has also made a notable shift from net spenders to net savers. In 2019, when the oldest members of Gen Z were entering the workforce, they outspent their income by over $7,500, but in 2023, they spent roughly $4,000 less than they earned.⁹ “Soft saving” is out; “revenge saving” is in.

Why it matters: Young investors today are ahead of the retirement savings curve, thanks in large part to 20 years of improved retirement plan design. If they can keep the drag from holding cash in check and stick with the right mix of diversified, low-cost investments, their future looks bright.

• Don’t believe everything you hear about the sad state of young investors. The reality? Most are far more likely to be automatically saving for retirement in an age-appropriate, professionally managed investment, like a target-date fund, than to be day-trading meme stocks.

• Disengagement is far more common than excessive engagement. The typical young investor is doing nothing to their portfolio virtually all of the time—they’re not logging into their accounts, exploring speculative investments, or trading. And that’s okay. This means the composition of their portfolios is often the result of defaults and automatic enrollment in professionally managed solutions rather than risky speculation. 

• Flying under the radar? Two generational differences have drawn little attention but bode well for the future: Millennial and Gen Z investors at Vanguard are more likely to invest in ETFs and trade less frequently than older generations.¹⁰ The tried-and-true approach of buying and holding a low-cost, diversified portfolio remains alive and well for millions of young people.