Millennials Are Falling for Young Stocks. Will It End in Tears?

Brokers, Investing, Investing Data
Millennials Are Falling for Stocks. Will it End in Tears?

Despite a bumpy month for stocks, millennial investors remained bullish about the market in August — especially with regard to some relatively young companies — according to data provided to NerdWallet by TD Ameritrade.

The numbers, which come from TD Ameritrade’s monthly Investor Movement Index, or IMX, show that millennial investors increased their stock holdings more sharply than the average investor in August. They also show that millennial investors were more likely than the average stock-buyer to buy shares from Facebook, Ford, Snap (phone app Snapchat’s parent company) and Redfin, a web-based real-estate broker.

The market is nearing all-time highs, but that won’t last forever. And when the market tumbles, could millennials’ increasing excitement for these and other stocks end in heartbreak? Here’s a closer look at the numbers and tactics millennials might use to help manage their risks.

How millennials traded in August

Millennials — those born between 1981 and 1998, in TD Ameritrade’s survey — seized on market choppiness to add more stocks to their portfolios in August. Millennials’ IMX reading — a metric TD Ameritrade uses to gauge investors’ outlook based on holdings and trade activity — jumped 6.8% to a reading of 7.72 in August.

Sentiment among all retail investors rose 5.1% during the month, climbing to a record high of 7.45. Still, August marked the biggest differential in monthly changes between millennial investors and the overall investor group since TD Ameritrade began separately analyzing millennials this spring.

The Standard & Poor’s 500 Index fell more than 1% twice in a span of six days in August, but that didn’t faze young investors. “Millennials are using any periods of temporary weakness as a buying opportunity,” says Joe “JJ” Kinahan, chief market strategist at TD Ameritrade.

Such behavior counters suggestions millennials are resisting the stock market, according to Kinahan. Rather, he says they’re trading like traditional investors have for decades.

However, even with some dips in the market, the S&P 500 sits close to all-time highs. But millennials have opted for some of the market’s still-unproven stocks, which could be costly in a downturn.

Millennials turn toward recent IPOs

In August, millennial investors gravitated toward Redfin and Snap, two companies that held initial public offerings during the last year.

Redfin is up more than 15% since its July IPO, while Snap shares fell in August to below 50% of their March debut price. Stocks can turn into fantastic performers even after a rough start — Facebook, for example — but investors should heed certain lessons to maximize their chances of profiting on individual companies.

And investors of all ages should carefully consider the risks of buying early-stage growth companies. Both Redfin and Snap were unprofitable over the last year. This doesn’t always translate into a declining stock price in the short term, but it will over the long term.

Among millennials’ top sells in August? Telecom giant Verizon and oil company Chevron. Both companies are profitable and rebounded during the month after hitting multi-month lows in July.

“Millennials are selling stocks with higher yields,” Kinahan says. Relative to other investors, they’re willing to take on more risk via capital appreciation (when an asset’s value increases) rather than focusing on a safer dividend yield (or cash payments to shareholders), he says.

How millennials can manage their risks

With the move to riskier — but potentially higher-return — stocks and the market near all-time highs, millennials are wagering on bright days ahead. When the market turns, though, growth stocks may feel the brunt.

To soften the potential blow, investors should consider:

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