New investors are older and riskier: Investopedia

Caleb Silver, Editor-in-Chief of Investopedia, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss mistakes new investors are making.

Video Transcript

KRISTIN MYERS: Now when we think about investors, we typically think-- or at least new investors anyway, we typically think of them as younger. But a new survey is showing that they're actually older and taking on more market risk. Let's bring on Caleb Silver, editor-in-chief of Investopedia. So Caleb, as I was mentioning, we typically think of those riskier, newer investors as being fairly young. Why do you think it is that we're seeing some of these older investors getting involved?

CALEB SILVER: Well, it's great to be with you. And we've been serving our readers because we know that millions of new investors started investing and trading for the first time in 2020 amid the pandemic. Maybe they were home from work. Maybe they were out of work. Maybe there was no sports to bet on. Maybe they were putting their stimulus checks to work. For whatever reason, we know that over 10 million new investors started for the first time.

So we wanted to find out who they were and where they learned to invest and what their habits were. And what we found out is that a lot of them are GenX and older. About 60% of those that responded to our survey-- and this is Investopedia, so this is active investors of every age-- said that they were Gen X or older. A lot of them were teaching themselves how to invest. And a lot of them were taking on risks that experienced investors would never take on.

ALEXIS CHRISTOFOROUS: Yeah, speaking of taking on risk, I want to talk about some of the common mistakes these new traders are making. And I wonder if it falls along demographics or age, the kinds of mistakes they make. You point out some of them are trading on margin. And of course, an oldie but a goodie, they're trying to time the market.

CALEB SILVER: Right, we always say time in the market is better than timing the market, but who hasn't tried to time the market or traded with a gut feeling? They're admitting to these mistakes. A lot of them are new, as I said. So they're teaching themselves how to do it. And there was so much volatility, especially in the late spring or the early spring of 2020, that they were trying to catch the bottom of the market, or trying to catch it on its way up, or trying to catch individual stocks that were catching fire, like a GameStop, like a Tesla, like some of the other stay-at-home stocks.

So a lot of them tried to do that. A lot of them traded on margin and didn't know what they were doing. A lot of them traded in and out of stocks without thinking of the tax consequences. And a lot of them, again, traded with their gut feeling, admitting to mistakes. A lot of them said they made money, but about 50% said they lost money in a year where it was tough to lose money at all.

KRISTIN MYERS: I know you mentioned, Caleb, you know, the pandemic being part of the reason so many folks are really getting into the market. I want to know, however, about that component about being self-taught. If you think that the access, almost limitless now, with the internet of free knowledge of resources, websites like, you know, even ours, YahooFinance.com, where everyone can watch, you know, free bell to bell coverage, if that at all is-- and even your website, Investopedia-- is that at all serving to get more and more folks involved? Because they don't feel like they need a, you know, advanced degree or advanced knowledge to really get involved in the market.

CALEB SILVER: Great question. Well, it's never been easier to learn. Thank you, Yahoo Finance. Thank you, Investopedia. We've both been around a while. So when they say they're self-taught, I think that they're using websites like ours and other resources like ours. But it's also-- there's no Trading Commission, so it's never been cheaper to start trading or start investing. It's never been easier to sign up for one of these online platforms. Most of them are connected to your bank or to people's banks. So it's never been easier. There's no trading fees.

The access with fractional shares makes it so you don't have to afford Berkshire Hathaway, an A share. You can buy a little piece of it. So the access has never been more open. And I think that's what pushed people in as well. Easy technology-- plus, people were home. They weren't at work where somebody could see them trading over their shoulder. And there was no sports to bet on. People were looking for something to do. It was also an incredible year for the stock market. So it seemed like that was an easy place to make money. And a lot of them did, but again, a lot of them admitted to losing money last year in a year where you almost couldn't miss.

ALEXIS CHRISTOFOROUS: Yeah, how active are these new traders? I mean, in terms of-- would you characterize the majority of them as day trading? And I wonder if they realize the tax consequences that go along with moving in and out of positions so frequently.

CALEB SILVER: Yeah, we asked them that question. And about more than 30% said they had no idea about the tax consequences of day trading and about those short-term tax gains. And about 20% said they were turning over their portfolio pretty frequently. Not only that, Alexis, they were concentrating in just a few stocks. So they broke the rules of diversification. They broke the rules of long-term buy and hold investing, or dollar cost averaging your way in. And they broke the rules of sort of building that long-term investing plan because I think many folks who get in for the first time don't know the difference between investing for the long-term and trading.

And, you know, you could do a little bit of both. But if you're investing for the long-term, you want to be building these positions. You want to be diversifying your portfolio. And you want to be dollar costing your average, averaging your way in while it goes up and while it goes down. And a lot of them were learning those lessons for the first time. Hopefully, they have them now, and they have a long career of investing in front of them. Because that's the point-- not to get in and make the quick buck, but to build wealth long-term with a real investing plan.

KRISTIN MYERS: I know you're highlighting some of the mistakes, some of the pitfalls, some of the downfalls. But are you getting a sense at least overall how their portfolios are doing? Perhaps after they made some of those, you know, more rookie mistakes at first, are they now doing much better with some of their investments?

CALEB SILVER: Yeah, a lot of them, again, 85% said they were able to make some money and book some gains in the last 12 months. I would hope so because it was really hard to not be able to do that. But I think a lot of them are learning for the first time what it really means to be in the market long term and what it really means to, you know, book your gains at the top or invest-- you know, going forward with a real plan that takes them out 10, 20 years. So the good news is, a lot of people are in the stock market. A lot of people are investing. It's a great path to wealth.

The bad news is, if you don't learn the right way right off the bat, it's easy to lose money and get discouraged. What we hope is that people learn some lessons, they take those lessons with them, and they have a long career of investing in front of them that's good for them and good for everybody.

KRISTIN MYERS: Well, that's about one of the best endorsements that I can think of for a place like Yahoo Finance and for a place like Investopedia. Caleb Silver, editor-in-chief of Investopedia, thank you so much for joining us today.