Investing with Risk, not Recklessness

2024 has had some nice surprises: a bull market, outsized performance by mega cap tech, and an AI boom. However, some pretty ominous threats are still looming, like higher interest rates for longer and geopolitical unrest. Despite this uncertainty, investors may be eager to take on more risk – especially younger investors. Nasdaq’s Retail Investor Survey, published in June 2023, revealed that 50% of Millennials and 71% of Gen Z investors are taking a more aggressive investment approach.

Prevailing industry assumptions are that during times of volatility, investors seek refuge in traditionally safer investments, like fixed income. While this increased risk appetite is a surprise, it’s not necessarily unwise: between 2003 and 2022, seven of the 10 best days in the market occurred in bear market territory. Investors, especially ones with a longer time horizon, are perhaps seeing market choppiness as an opportunity to achieve higher returns.

But a healthy risk appetite doesn’t necessarily mean investing recklessly: investors can capitalize on opportunities to take on more risk in a thoughtful and strategic way.

Gen Z: The new ETF investor

Of the 2,000 retail investors polled by Nasdaq in the Retail Investor Survey, 64% of participants indicated they were “somewhat” or “very” familiar with Exchange Traded Funds (ETFs). Familiarity with ETFs is highest among younger investors, with 83% of Gen Z investors and 82% of Millennials reporting they are “somewhat” or “very” familiar with ETFs. Comparatively, 64% of Gen X and 45% of Baby Boomer investors reported familiarity. 

While ETFs aren’t without risk, generally speaking, funds are less risky relative to investing in a single stock. ETFs can be highly diversified; risk is spread across all underlying securities. For example, if a single company within an ETF went bankrupt, your losses would be less severe than if you had invested directly in that stock. ETFs are especially beneficial for younger investors, or investors without a lot of capital: if an investor only has enough money for one product, it’s ill-advised to invest all of it in a single stock.

Thematic ETF Opportunities

In Nasdaq’s Retail Investor Survey, investors of all ages expressed interest in thematic ETFs, which are funds with a niche focus. Investors of all ages were interested in FinTech and real estate ETFs, but there were distinct preferences among the generations, with Gen Zs and Millennials’ highest interests shifting into robotics and autonomous technology.

For emerging trends or new types of technology, ETFs are particularly advantageous over a specific company, especially when the territory is less well-trodden. Sure, retrospectively, it seems like a good idea to have invested in Amazon after its IPO, but there were many more companies similar to Amazon that went bankrupt during the dot-com bubble (anyone remember Webvan?). Keep in mind that investing in an individual sector of the market is typically riskier than a diversified ETF that invests across various sectors.

Sharpen your tools

Investing is always a balancing act of trying to maximize returns while minimizing risk, and ideally, when you take on a riskier investment, your hope is to achieve higher returns. Fortunately, there’s a way to quantify this risk/reward relationship, called the Sharpe ratio. But surprisingly, 54% of participants in Nasdaq’s Retail Investor Survey said they weren’t familiar with, or didn’t use the Sharpe ratio, even though it’s one of the most crucial tools for helping you understand whether or not you’re being adequately rewarded for your risk. 

The Sharpe ratio measures how well an investment is performing relative to its risk. A higher Sharpe ratio indicates more attractive returns per unit of risk. Many investors might consider investments with a Sharpe ratio less than 1.0 to be too risky and/or only consider investments with a Sharpe ratio of 1.0 or greater to be attractive. Keep in mind this is only one way to measure risk – you can learn about additional ways to measure in our ETF 203: The Ins and Outs of Market Risk learning module. And of course, the Sharpe ratio is not a guarantee that a given investment will perform better.

Do your homework 

If you’re one of the investors who’s willing to take on more risk, remember that risky investing isn’t necessarily akin to gambling, but… it’s crucial to do your research before you invest. Nasdaq’s Retail Investor Survey found that 40% of investors spend less than a day researching an investment before placing a buy or sell order and 24% of Baby Boomers say they don’t spend any time at all researching investments (although we suspect that may be because many of them are working with financial advisors that do the research for them).

Remember, the riskiest thing of all is investing in something you don’t understand. So take the time to fully understand what you’re investing in, and make sure it aligns with your personal risk tolerance and investing goals. 

Check out the full Nasdaq Retail Investor Survey here: Unlocking Investor Potential for Every Generation.

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