How Risk Appetite Changes in Your 20s and 30s

For a moment, think of yourself as a 23-year-old. You are probably just out of college, tasting your own money for the very first time. You don’t have any big financial responsibilities.? The first few months of your job fly away while you settle in with your newfound friends and a designated work routine. Every month, the salary keeps getting credited to your bank account and weekends whisk away in exploring the city with friends and colleagues. Office pantries and canteens become your go-to place to discuss all things new - the office culture, that new project, the friendly boss, and ways to quickly grow your money. Your colleague tells you how he doubled his money in stocks and more than 5X(ed) his money in Crypto in the last seven months. And bam. You just realize that your money is sitting in your bank account, funding your dinners and drinks. You quickly google about stocks and Crypto. You start investing with Smallcase and buy a few coins. You call back your parents and happily inform them that you have started investing.?

When we are young and have no material responsibilities, our ability to take risks is very high. We tend to dislike safety and some of us also laugh about how our parents have been so conservative with the age-old Bank FDs. A few years back, when our Founder was conducting a Women’s Day Workshop at one of the Corporates, a 25-year-old girl asked her why she should save for her retirement when she is not even sure if she will live till 60. She wanted to live a king-size life NOW and get rich quickly. She is 29 now, married, and expecting a baby. Her stand is quite different today. She called us last week to take some help with investing her money and map the same to some goals she had in mind.

This is not uncommon. We see this difference crystallizing in most of our clients as they transition from singlehood in their early 20s to having some clarity of life goals as they start hitting their mid-30s. And this happens because, by the time you are 30, you are perhaps working for more than 5 years. You suddenly realize that you still don’t have significant savings and neither do you feel comfortable anymore to continue depending on your parents. Parents start getting older which means you start thinking about their medical bills. If you are married, you start thinking about buying your house to live in in the next few years. And as you see new babies on the block, you start getting a hang of how expensive it is to raise kids now. With all this, the global rage of FIRE (Financially Independent and Retiring Early) catches up to you too.?

The tendency to take higher risks when young has both sides to it. We witnessed more than 2cr Demat accounts being opened in the last two years. While we do not know how many of these account holders were in their 20s, what it does indicate is that the bulk of these is definitely first-time stock investors/traders. And it is great to finally see young people and first-time investors warming up to the concept of risk and higher returns. A truly democratized investing environment would be one where one does not wait till turning 35 to start a mutual fund investment.?

But the other side to this is that a lot of these new young investors might be in it because all they have seen is that stock markets make money. They have witnessed Bitcoins make people around them multi-millionaires overnight. And since they are unable to visualise a long life, getting rich quickly seems the new burning goal of life. Talking to young employees will give you a sense of how many of them have chosen crypto as their first investment. But they flinch at the thought of losing their money. This dichotomy is also not unusual because the concept of risk while known is not understood enough.?

But we all learn from our experiences. Last year, we had a client who came to us when he was 38. He had invested in a residential house and had dabbled with investing in stocks in the past. But he lost so much money with stocks that the flat is his only asset. On delving deeper into how he exactly makes stock investments, we realized he was trading and not really investing.?

We love the fact that the younger generation is in a position to experiment more, take more risks, and in turn take advantage of time which is money, and compounding which is sheer magic. But what we want to caution them against is the concept of trying to make quick money. Unfortunately, the first few attempts at making profits from risky assets tend to put you under a behaviour trap to believe it was your skill that made you the money. It most certainly can be your skill, but luck plays a bigger role in life than we think it does. The thrill of doubling and tripling money in a few days further adds to the misplaced belief. And then a slew of behavioural biases take control of what looks like a vicious loop of taking risks but thinking there is no risk. There is no dearth of Youtube videos with self-proclaimed experts on crypto and stock market trading. Move to Twitter and everyone is sharing their P&L (some fake screenshots) of how their “strategy” is a sure-shot way to make money. Oh, by the way, you can know the strategy by paying a few lacs for his course. There is no end to this comedy.?

So while we are all in for young millennials in their 20s to take more risk, invest and grow their money, here are a few tips from us on how can they avoid blunders as they step into this new journey of moving towards financial independence -?

• Think again about the traditional modes of investment- While an FD is a definite way to not beat inflation, it might still be the best way to park an Emergency Fund.?

• Second, are you putting all your eggs in one basket? Just because one thing is doing well, does not mean all your hard-earned money needs to be bet on that one asset. Instead, balance your portfolio between risky and safe, liquid and long-term assets.?

• It is good to do your own research and educate yourself about the different investment instruments, but if you feel it is too much to handle - do take the help of professional financial advisers who are equipped with the skill and experience to help carve out an investment plan for you that suits your needs and risk appetite.?

She raved about Dogecoin so I invested! Stop getting roped up in trends! Panic selling and buying is a real thing in the stock market where you dance to the tune of the public and end up risking your savings just to do what everyone else is doing. Another phenomenon that is relevant in the age of decentralized financial investment options like Bitcoin and NFTs is that the phenomenon of pump and dump exists. In the era of everything on social media, we have seen cryptocurrency prices rising and dropping at the hat of a tweet.