The world took notice when young investors sent GameStop stocks skyrocketing in January, thwarting the shorting efforts of powerful hedge funds.
Vlad Tenev, CEO of the trading platform Robin Hood, said at the time that millennial and Gen Z investors using the app “broke the system to some degree.”
So what types of stocks have caught their eye right now?
To answer that question, the financial site DailyFX topped the 50 most popular stocks on Robinhood, with an average user age of 31. (GME was not included to avoid skewing results.)
Here’s what the new generation of investors are buying and whether you should follow suit.
Tech companies ready for growth
Millennial and Gen Z investors love technology stocks from big names like Facebook, Apple, Amazon, Microsoft, Netflix, Twitter, GoPro, Fitbit, Uber, Snap Inc, DraftKings and Alibaba.
While there are many established names on that list, technology stocks are generally more speculative. They often fall under the “growth” category because of their potential to grow much faster than other stocks, even if the companies’ earnings don’t seem as impressive.
“What has been found in behavioral finance is that people tend to overestimate growth rather than value,” said Alexander Brown, a professor of behavioral economics at Texas A&M University.
A value stock trades at a lower price relative to dividends, profits, or sales. Major banks, such as Bank of America, usually represent value stocks because they tend to: trade with a big discount in the market on a profit basis.
“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 to try to invest in specific stocks – which I wouldn’t necessarily recommend – I might be doing the opposite of what these younger investors are doing. Try investing in these value stocks that you may think have been unfairly beaten up by the pandemic.”
Old reliable household brands
The data also shows that younger investors are pouring their money into some strong household brands, such as Bank of America, General Electric, Coca-Cola and Starbucks.
Entertainment companies are well represented, with Disney, AMC and MGM Resorts on the list, as well as automakers and oil producers, such as Ford, Marathon Oil and ExxonMobil.
While companies usually earn their name recognition through savvy business practices, Brown warns against “life bias”: trusting too much in things that survived a selection process and overlooking those that didn’t.
“The famous names in the 1980s that we can remember are the ones who are successful. Everyone else is gone,” Brown says. “Suddenly we think that 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 that investors still need to research and think about the real potential of a large stock.
Reopening of games and tomorrow’s big bets
Looking to the future, Millennial and Gen Z investors are investing in battered stocks poised for a rebound as post-pandemic trading picks up.
Air travel was a great success. American Airlines, Delta, United Airlines, JetBlue, Spirit, Southwest and Boeing all made the top 50. Travel entertainment companies such as Carnival Corp, Norwegian Cruise Line and Royal Caribbean Cruises also made the list, as well as home entertainment companies such as Palantir.
And it’s no surprise that people with longevity ahead are betting 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 took over rival firm Tilray earlier this year), Canopy Growth and Organigram.
Unfortunately, people aren’t very good at staring into crystal balls, Brown says. It might be safer to cover your base with a broad portfolio and not trying to outsmart Wall Street.
“There are a lot of smart people with hedge funds who are ready to seize any opportunity. If you’re an individual trying to do the same, they’ll probably get ahead of you on these opportunities,” he says.
What is the right approach?
It’s always better to start investing early, especially if you’re committed to a long-term strategy that allows you to take a little more risk.
Still, Brown says, it’s probably unwise to put a lot of your money into individual stocks.
He points to sources such as Callan’s Periodic Table of Investment Returns, which show how difficult it is to make the right investment choices, even with entire asset classes. Some years, large US companies are the way to go; other years they are beaten by property or farmland.
You can always invest the couch potato way by: open an account with a robo-advisor. These are automated investment platforms that build and balance a portfolio designed to meet your risk. Some even allow you to invest your “change”.
If you want to steer the ship yourself, you can open a self-directed account via a no commission app, such as Robinhood. It offers factional trading, so you don’t have to put hundreds or thousands into a single share of Apple or Amazon. That gives you the freedom to spread your money.
Better yet, take a look at index funds and exchange-traded funds (ETFs), assets that only invest your money in a wide variety of companies. To lock in more of your profits, look for a low “expense ratio,” which explains the fund’s operating expenses.
This article provides information only and should not be construed as advice. It comes without any kind of warranty.