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Gen Z takes on debt to invest in market boom: Here are the risks

Young investors flock to stocks, day trading as cryptocurrencies boom. Are the risks worth the reward?


Gen Z takes on debt to invest in market boom: Here are the risks

Stock Market 101: Basic strategies investors use to profit off stocksBefore jumping into the market, here’s what first-time investors should know about stocks, capital gains and mistakes to avoid.For My Money, USA TODAYAbout 4 in 10 investors say they have taken on debt to invest, including 80% of Gen Zers and 60% of millennials, according to a recent survey from MagnifyMoney.New investors in 2020 were much more likely to exhibit low levels of investing knowledge than their more experienced counterparts, at 60% versus 44%, respectively, FINRA data shows.Buying on margin means investing with borrowed money and amplifies both gains and losses.Many Americans – led by Generation Z investors – have taken on debt to invest in the pandemic stock market boom after young investors were hamstrung by the second recession in their lifetimes and prime earning years, according to a study by personal finance site MagnifyMoney. This comes at a time when headlines from Reddit to Twitter are ablaze with excitement for everything from cryptocurrencies to meme stocks to non-fungible tokens, or NFTs. That has left some younger investors feeling like they’re missing out on making easy money after seeing their friends, family and even strangers on social media post about the hefty profits they’ve made trading. But low levels of financial knowledge coupled with taking on debt threaten to leave these Americans at risk of losing more money than they can spare when markets turn volatile or crash, financial experts say.That’s especially true for assets like cryptocurrencies, which can see wild swings within a day or even minutes.”Crypto is a disruptive technology that will significantly change how the financial system works over the next 10 years and young Americans have time on their side to invest,” says Matt Hougan, chief investment officer of Bitwise Asset Management, the largest crypto index fund manager globally. “But young investors should think twice, three times and then think again before they take out loans to invest in any risky asset.”Younger generations take on debt to investAbout 4 in 10 investors say they have taken on debt to invest, including 80% of Gen Zers and 60% of millennials, according to a recent survey from MagnifyMoney. Their elders were significantly less likely to do so, with just 28% of Gen Xers and 9% of baby boomers reporting the same. The survey was conducted from March 30 to April 6, polling 2,046 U.S. consumers. Gen Z investors were the most likely (29%) to turn to friends or family for a loan, while millennials (45%) and Gen X (36%) investors were more likely to take out a personal loan, data from MagnifyMoney showed. Overall, 1 in 10 investors says they took on debt to buy cryptocurrencies, according to MagnifyMoney. Cryptocurrencies are essentially digital coins created and exchanged over a decentralized computer network where transactions are secured and verified through coding. Borrowing money from friends and family is tricky: It can potentially cause strain in those relationships and other unforeseen financial risks, says Callie Cox, a senior investment strategist for Ally Invest. “It adds an extra layer of complexity because you have a financial relationship with people you love,” Cox says.  “The key to borrowing money from someone you love is to ask yourself if you want to get into business dealings with your family because that can get really messy.”►Take our financial literacy quiz: How high can you score?Cox added that if someone wants to borrow money from friends or family then “draw up a contract on paper. But really think it through.”Many people are taking on debt to invest for the future, with more than a third who said they did to invest in a retirement plan, according to MagnifyMoney. The stock market is the other major factor, with buying a particular stock and day trading following closely behind as reasons for taking on debt. Young investors face financial literacy issuesAlthough most Americans may think they’re financially literate, new investors are less likely to have high levels of financial literacy compared with their more experienced counterparts, according to data from the brokerage watchdog Financial Industrial Regulatory Authority. That data indicates most younger investors exhibited low levels of investing knowledge, including 57% of 18- to 29-year-olds and 53% of 30- to 44-year-olds. New investors in 2020 were much more likely to exhibit low levels of investing knowledge than their more experienced counterparts, at 60% versus 44%, respectively, FINRA data shows. Overall, FINRA found very few 2020 investors correctly answered questions about margin trading (28%), options (11%) and short selling (23%) – all considered high-risk investments and an issue for investors making hefty bets.In 2020, 23% of investors whose accounts allowed purchasing on margin reported buying on margin, according to FINRA. Buying on margin is when an investor borrows money from a broker to purchase a security.The figures were similar for new and experienced investors. Among investors who bought on margin, fewer than one-third (28%) correctly answered the margin-related investing knowledge question, according to data from FINRA.Taking on debt to buy volatile assets like cryptocurrencies can be extraordinarily risky, financial experts say. “Debt is a tool, but if you use too much of it or don’t use it properly, it can be dangerous,” says Cox. And margin trading, or the practice of using borrowed funds from a broker to trade a financial asset, doesn’t come without risks. Buying on margin means investing with borrowed money and amplifies both gains and losses. That means if an investor is wrong, they can lose the majority of their investment. “I like crypto as an investment for young investors who are looking to put extra money into something meaningful,” says Hougan from Bitwise Asset Management. “But anyone who takes out loans, debt or margin to access a volatile asset class makes me shiver a bit. You can get into a lot of trouble financially.”In 2020, 11% of investors reported trading options, according to FINRA. This included 16% of new investors and 9% of experienced investors.While relatively few, more younger investors reported trading options (9% of 18-29 year-olds) than older investors (4% of 45-59 year-olds, 5% those 60 or older).Among all groups who reported trading options, only 24% correctly answered the options-related investing knowledge quiz question.Robinhood, in a Securities and Exchange Commission filing prior to its initial public offering, said it had settled a wrongful death suit after Alex Kearns, a 20-year-old customer, died by suicide after believing he lost a significant amount of money by trading in options on the investment platform. Gen Z reevaluates careers Gen Zers, born between 1997 and 2012, began entering the workforce shortly before the COVID-19 pandemic hit and when unemployment rates were at historic lows. Jobless rates subsequently skyrocketed and then have leveled off.Similar to millennials, born between 1981 and 1996, these young Americans are saddled with student loans and credit card debt.To be sure, Gen Z can more easily access the stock market and other investments than previous generations with the rise of online trading platforms like Robinhood. And those workers are starting to save for retirement at an unprecedented young age, according to Transamerica Center for Retirement Studies, a nonprofit organization. It aims to educate the public on emerging trends surrounding retirement security in the United States.Story continues below gallery. Gen Z will likely change employers many times throughout their careers and spend time in self-employment, which will require diligence on their part to manage and potentially consolidate their retirement accounts during these transitions, an annual retirement report from Transamerica Center for Retirement Studies said in early August. But there are other challenges on the horizon. Gen Z will be entering its mid-30s in the 2030s when the Social Security trust fund is estimated to be depleted unless Congress implements reforms. Most are concerned that Social Security will not be there for them when they are ready to retire, according to Transamerica Center for Retirement Studies. The timing of the pandemic hit the youngest working generation particularly hard. Gen Z, for instance, is just beginning to graduate from high school and college and enter the workforce for the first time.Almost 6 in 10 Gen Z workers indicate their employment situation has been negatively affected as a result of the pandemic, which is significantly more than among millennials (51%), Gen X (39%) and boomers (30%), according to Transamerica Center for Retirement Studies. Boomers were born between 1946 and 1964.One Gen Zer going against the trend But not every Gen Zer is taking out loans to invest. Some teens have plowed money into popular speculative assets like cryptocurrencies and digital assets like NFTs, with the money they’re making from part-time jobs. They’re hoping to boost their wealth in the coming decades by jumping into investing now. Randi Hipper, 18, is one of those young Americans.The Brooklyn, New York, native graduated from high school a few months ago and works part time as an assistant at a dentist office.But she has found a passion project in the COVID-19 pandemic: teen crypto influencer.Hipper, known by @MissTeenCrypto on Twitter, began making educational content on cryptocurrencies and digital art just after the pandemic began last year in an effort to provide more educational content for Gen Zers.Now she has thousands of followers across her social media platforms.She first started to invest in cryptocurrencies at 16, after her father introduced her to bitcoin.At the time, she couldn’t open her own account to trade crypto because she was under 18, so her dad opened an account for her. She would then use the money she earned from working to invest. Now that Hipper is 18, she has opened a Coinbase account. Hipper considers herself a crypto HODLer, or “hold on for dear life,” which essentially means she is using a buy-and-hold strategy and is holding her crypto assets for a long time instead of selling them. She dollar-cost averages, which is a strategy where an investor divides up the total amount to be invested across periodic purchases of an asset at regular intervals.“Graduating in these times is unique, but it also granted me this opportunity to create my own brand. I created my Twitter account in the midst of the pandemic because of the lockdown. I saw the opportunity to go out and create my own business by creating NFTs and teaching Gen Z about crypto,” she said. Gen Z still the ‘disruptive’ generation That said, because of their relative youth, those in Gen Z have time to make up for any losses, compared with investors in their 50s, 60s and 70s. Gen Z will be the “most disruptive generation ever,” according to a Bank of America report released in 2020.Gen Zers, some 2.5 billion people, make up 32% of the global population. The bank predicts Gen Z’s entry into the workforce will disrupt markets and economies.And financial confidence is on the rise for young Americans.Almost 6 in 10 Gen-Z and millennials feel more financially confident now than before the pandemic first began, and have become more financially responsible, according to a survey this week from Laurel Road, a digital banking platform of KeyBank.Still, it’s important for young Americans to aim to save 20% of what they earn so that they benefit from compound interest, where their savings can grow faster over time, according to Christina Klenotic, senior vice president and head of brand and strategic partnerships at Laurel Road.►Take our financial literacy quiz: How high can you score?”When you’re just starting out, you may not be making that much money, but it does compound over time,” says Klenotic. “It’s really important to start early and trust that your money will work harder for you over time.” Since 1950, the S&P 500, the benchmark for most mutual funds, has averaged an 8% annual return, according to Cox at Ally Invest. It’s gone through 32 drops of 10% or more in that span. That means that the stock market can recover from even the most severe market downturns.So even if young investors experience losses in the near term, it’s likely they will still earn favorable returns over a few decades, based on historical returns. “Stocks tend to rise and fall, but over time they follow society,” says Cox. “If you believe in society and its ability to rebuild after crises, then you are bullish long term on the stock market.”It may be tough for some young Americans to scrounge up money to invest early, but it’s important that they put a portion of their long-term savings into the stock market since it could be years or even decades until they need that money, Cox added.“If you’re young and thinking about investing, pat yourself on the back,” says Cox. “You’re taking the first step forward in what will hopefully be many steps. Investing is the key to building wealth.”Have a tip on personal finance or market stories? Reach the reporter at or on Twitter @JessicaMenton.GRAPHICS: George Petras/USA TODAYSupport local journalism. Subscribe to

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