Young investors are betting on these stocks — should you join them?

Young investors are betting on these stocks — should you join them?

Young investors are betting on these stocks — should you join them?

The world took notice when young investors sent GameStop stock soaring in January, thwarting the shorting efforts of mighty hedge funds.

Vlad Tenev, CEO of the trading platform Robinhood, said at the time that millennial and Gen Z investors using the app “broke the system to some degree.”

So what kinds of stocks have captured their attention now?

To answer that question, the finance site DailyFX pulled up the 50 most popular stocks on Robinhood, which has an average user age of 31. (GME was not included to avoid skewing the results.)

Here’s what the new generation of investors is buying and whether you should follow suit.

Tech companies poised for growth

FAANG stock apps

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Millennial and Gen Z investors adore big-name technology stocks like Facebook, Apple, Amazon, Microsoft, Netflix, Twitter, GoPro, Fitbit, Uber, Snap Inc, DraftKings and Alibaba.

While there are plenty of established names on that list, tech stocks on the whole tend to be more speculative. They often fall under the “growth” category, due to their potential to grow much faster than other stocks, even if the companies’ profits don’t seem that impressive.

“What has been found in behavioral finance is that people tend to overvalue growth instead of value,” says Alexander Brown, a behavioral economics professor at Texas A&M University.

A value stock trades at a lower price relative to dividends, earnings or sales. Large banks, like Bank of America, usually represent value stocks because they tend to trade at a significant discount to the market based on earnings.

“I think it’s nice to believe that we can predict the future, and often that leads people to look for the potential in stocks,” Brown tells MoneyWise.

“If I were trying to invest in specific stocks — which I wouldn’t necessarily recommend — it might be to do the opposite of what these younger investors are doing. Try to invest in these value stocks that maybe you think have been unfairly beaten up from the pandemic.”

Old reliable household brands

Coca Cola bottles

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The data also shows that younger investors are pouring their cash into a variety of strong household brands, like Bank of America, General Electric, Coca-Cola and Starbucks.

Entertainment companies are well represented, with Disney, AMC and MGM Resorts making the list, as are car manufacturers and oil producers, like Ford, Marathon Oil and ExxonMobil.

While companies usually earn their name recognition through smart business practices, Brown cautions against “survivorship bias” — putting too much faith in things that survived past some selection process and overlooking those that did not.

“The household names in the 1980s that we can remember are the ones that are successful. All the others disappeared,” says Brown. “Suddenly we think investing in household stocks is deterministic: Since they’ve done well in the past, they’ll continue to do so.”

That doesn’t mean Coca-cola or General Electric are bad bets; it just means investors still need to investigate and think about the real potential of any big-name stock.

Reopening plays and tomorrow’s big bets

Royal Caribbean cruiseship

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With their eyes on the future, millennial and Gen Z investors are investing in beaten-down stocks poised for a resurgence as commerce picks up after the pandemic.

Air travel was a big hit. American Airlines, Delta, United Airlines, JetBlue, Spirit, Southwest and Boeing all made the top 50. Travel entertainment companies like Carnival Corp, Norwegian Cruise Line and Royal Caribbean Cruises also made the list, as did home entertainment companies like Palantir.

And it’s no surprise that people with long lives ahead of them bet on fledgling industries like electric cars and cannabis. Tesla, Nio, Nikola, Workhorse and PlugPower were among the top picks, as were Aurora Cannabis, Aphria (which rival firm Tilray acquired earlier this year), Canopy Growth and Organigram.

Unfortunately, humans are not great at gazing into crystal balls, says Brown. It may be safer to cover your bases with a broad portfolio and not try to outsmart Wall Street.

“There are a lot of very smart people out there with hedge funds who are ready to catch every opportunity. If you’re an individual trying to do the same thing, they will probably beat you to these opportunities,” he says.

What’s the right approach?

Image of concentrated nice woman in eyeglasses using cellphone while sitting on sofa at living room

Dean Drobot / Shutterstock

It’s always better to start investing early, particularly if you’re committed to a long-term strategy that allows you to take on a bit more risk.

Still, Brown says, pouring a lot of your money into individual stocks is probably unwise.

He points to resources like Callan’s Periodic Table of Investment Returns, which shows how hard it is to make the right investing picks, even with entire asset classes. Some years, large U.S. companies are the way to go; other years, they’re trounced by real estate or farmland.

You can always invest in the “couch potato” manner by opening an account with a robo-advisor. These are automated investment platforms that build and balance a portfolio designed to suit your risk. Some even allow you to invest your “spare change.”

If you do want to captain the ship yourself, you can open up a self-directed account through a zero-commission app, like Robinhood. It offers factional trading, so you don’t need to sink hundreds or thousands in a single share of Apple or Amazon. That gives you the freedom to spread your money around.

Better yet, look into index funds and exchange-traded funds (ETFs), assets that invest your cash into a broad variety of companies all on their own. To hold on to more of your profits, look for a low “expense ratio,” which accounts for the fund’s operating costs.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

Roy Walsh

Roy Walsh

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