Utility

For many, a strong motivational factor could be the potential opportunity cost of advancing towards their financial milestones outweigh the risk of losing that initial principle. The utility benefits provided by a substantial gain is greater for individuals with less disposable income than that of those with more. In the book Mishaving: The making of behavioral economics, Richard H. Thaler provides an easy-to-understand example.

“As wealth grows, the impact of a given increment of wealth, say $100,000 falls. To a peasant a $100,000 windfall would be lifechanging. To Bill Gates, it would go undetected.”
– Richard H. Thaler, Misbehaving: The making of behavioral economics.

The impact and opportunity provided by this theoretically $100,000 is disproportionate for both parties in the example. The peasant here, would gain access to more goods, services and opportunities as a result of this change to his potential spending power. In stark contrast, the surplus of another $100,000 would provide Bill Gates with little to no additional utility.

Longer time horizon and security

Young working adults have a longer time horizon before retirement. This is a privilege not afforded to those with a shorter time horizon. Additionally, it is becoming increasingly common for millennials to continue living with their parents as opposed to moving out before their thirties. This in turn, potentially frees them from certain liabilities like mortgage repayment and the costs associated with homeownership. Knowing their necessities are covered may also play a part in influencing one’s risk-tolerance.

Quick returns

Waiting on a fixed income plan for any number of years can seem like a very long time, especially for a generation that grew up with the luxury of instant gratification. Instant messaging, payments and connectivity has influenced our perception of time. In some sense, our generation is, to a certain degree, more financially savvy. The ease of access to information and abundance of research material available online has made it substantially easier to find and learn just about anything.

Fear of Missing out

Social media and online communities play a large role in the lives of millennials and Gen Z adults. One of the reasons we use social media is to stay connected to our peers, however this looking glass into the lives of others is also perhaps another reason Millennials are inclined to take on high risks. Based on a study, 46% of Millennials are worried they are not able to keep up with their peers. Seeing our peers gain access to certain luxuries and services may influence how we feel about our current financial position.

Sustainability

A key benefit of discretionary investment management is the lower time commitment on the part of the investor. This allows the investor to participate in the markets without committing too much time into their investment portfolio. This lowered time and effort commitment makes investing a lot more sustainable, especially for busy professionals who may not have the time to actively manage their own portfolios.

Geographical Diversification

Each individual country goes through their own market cycles and these cycles are often in different stages. Increasing your exposure to multiple regions serves two main benefits. You are exposed to the opportunities in regions you have limited access to whilst simultaneously protecting yourself from the potential of localized downsides in any one market. This adds a layer of stability to your investments in especially uncertain times.

Asset Class Diversification

Mutual funds like the ones offered by Fundsmith and Baillie Gifford have components in various asset classes like bonds and fixed income assets. Much like geographical diversification, you have less exposure to downturns in any one particular asset class.

The perils of taking too much risk are well documented and understood. However, an important risk factor commonly overlooked by younger investors is their inability to recognize the current stage of the market cycle they are in. This is largely because younger investors may not have the experience and point of reference to identify or interpret micro and macro trends. Taking on higher risk investments that require timing the market is reliant on too many unknown variables.
That is not to say one should not invest in higher risk asset classes. There is a case to be made for chasing the high gains. There are strategies you can employ to help manage your portfolio’s exposure to risks, shielding you from the downside whilst still exposing you to the potential of sizeable gains. If this is something you find difficult to undertake alone, speak to a financial consultant to learn more.

Contact Jarrod Wong at:

Corporate E-mail:
jarrodwong@ippfa.com