What the rise of the millennial investor means for a sustainable world

It’s been a wild ride for financial markets, as Reddit’s WallStreetBets fueled unprecedented frenzy to rebel against Wall Street short sellers. In case you missed it, the Reddit message board was being used by the community to move stock market prices. Their mission was to force established hedge fund investors to lose big on bearish bets they had made against struggling companies (and to also make a healthy profit for themselves in the process). GameStop was one of the WallStreetBets targets, and at one point its stock was up over 2,000% since the start of the year – not bad for a struggling video-game retailer.

The stock price has since crashed, along with $27 billion in market value. As financial market commentators try to get to the bottom of these events, it’s clear that this new wave of investors is changing the game.

A retail investor is a non-professional individual who trades on the market using their own money.

In 2020, retail trading was big. In the US alone, there were an estimated new 10 million individual investors who began investing since the start of the COVID-19 pandemic. This is attributed to improved online brokerage platforms and zero commission trades, making investing in the stock market more accessible than ever.

And these retail investors are trading a lot. On peak days of trade, retail investors account for about a quarter of the volume.

These new investors are being coined “Robinhood investors”. This is not because they are users of the app (although 60% of the new US investors in 2020 were), but references the broader involvement of a new generation now tapping into the equities market. These new entrants are typically first-time investors and are younger, often millennials. They can absorb more risk in their portfolio and are less likely to adopt a buy-and-hold strategy – in short, they’re out there to get rich quick.

Millennials’ share of household wealth is low. There has been a sharp generational divide in wealth, with millennials more likely to be on short-term, temporary or zero-hours contracts, coupled with student debts and high property costs. In the US, only a third of young people surveyed by Gallup said they owned stocks of any kind – the majority of this through 401k plans.

Why does this matter? A 2018 study by Kuhn, Schularick and Steins tracked distribution of income and wealth in the US since 1949. They found that although housing booms led to wealth gains for leveraged middle-class households, stock market booms boosted the wealth for the top-10% of households who owned shares and business equity. While the collapse in house prices during the 2008 crisis meant wealth losses for middle-class households, those with wealth in the stock market saw a quick rebound.

So, with no stock market exposure, the younger generation are on track to have less wealth than previous generations. This is even more pronounced for Black and Hispanic millennials, with large and persistent wealth and income gaps.

Hopefully, but there are some risks. The GameStop saga has shown there are risks to the gamified form of investing. For new retail investors, there will likely be some hard financial losses – particularly when playing with a short-term investment window. Not to mention the potential tax bite that may be triggered by these short-term gains. It certainly indicates that financial education is important for individual investors to ensure the right risk/return balance.

There will also likely be some hard questions for regulators and policymakers, particularly after a number of online brokers restricted trading of GameStop stock temporarily. The combination of social media and the accelerating retail trading trends could upend financial markets putting individual investors at risk. The regulatory response will need to take into account all of these factors.

For the younger generation, there are long-term opportunities as they enter the financial market as first-time investors. This boost in financial inclusion will increase their longer-term wealth accumulation. More needs to be done to ensure that even more millennials, particularly Black and Hispanics, are also able to access financial markets in the same way.

There may also be broader benefits for the global sustainability agenda. Millennials have a more sustainable mindset than previous generations. They are twice as likely to invest in companies targeting social or environmental goals, and 90% of them want sustainable investing as an option within their 401k plans. They also believe that the way they allocate their money can have an impact: 75% of them believe their investments can influence change, and 84% believe it can help lift people out of poverty.

Over the next two decades in the US, baby boomers are expected to transfer $30 trillion in wealth to the younger generation. As this great wealth transfers, what might this mean for wealth inequality and long-term sustainable value creation?