First-Time Investors: Exploring Investment Habits, Strategies & Knowledge

KEY TAKEAWAYS

• First-time investors associate the stock market with the most short-term, most profitable, and favorite form of investment, while they associate bonds with the most long-term and cryptocurrency with the most volatile.
• Two in 3 first-time investors are aware of capital gains tax and understand how it works.
• Roughly 43% of first-time investors utilize growth investing (seeking investments with strong potential upside) as their primary investment strategy.
• The top 3 forms of investments recommended by seasoned investors for first-time investors were the stock market (68.5%), index fund (58.4%), and exchange-traded funds (ETFs) (40.1%).

Entering the World of Investing

Sticking the first toe in the pool of investing today can be a daunting experience. After all, that pool is much bigger than it used to be: Opportunities like crypto and NFTs and minimum-fee trading apps are all options only available within the last two decades. Even older options like the stock market are now subject to influences like the pandemic or the subreddit, Wall Street Bets. In short, getting started can be scary.

Wanting to know how new investors are thinking and behaving in 2021, we surveyed 800 of them, as well as 200 seasoned investors. We asked about their strategies, their levels of trust, and even quizzed them on their knowledge. With both more to know and more places to find that knowledge, new investors revealed some pretty interesting trends. In fact, after speaking to seasoned investors, newcomers may be smarter investors than they’re given credit for. Keep reading to see their insights.

Demographics of First-Timers

First, we wanted to know what a first-time investor looks like today. Are the people just now getting involved mostly men or women? How old are they? How educated? And exactly how much are they investing to get started? The first component of our study answers these questions below.

Though the gender wage gap corners much of the conversation, there’s a gender investment gap that may be hurting women more. According to a report by SoFi, on average, women hold 71% of their assets in cash, while men hold just 60%. Our study revealed, however, that this gap may be showing signs of closing. Our findings showed that roughly the same percentage of new investors are men and women, though first-timers are still skewed slightly male.

As far as age is concerned, first-time investor respondents are relatively old (33 years of age) and have presumably been in the working world for about a decade. That said, 20% of respondents getting involved in investing today are between the ages of 18 and 24 and may not even be financially independent yet. It’s also important to note the importance of starting early, especially for goals like retirement and longer-term growth.

First-time investor respondents also revealed a tendency to “go big.” In other words, they were averaging an investment equivalent to 23.4% of their monthly income. That said, higher earners were investing closer to 35%, or over a third of their monthly salaries. The younger a first-time investor was, generally the higher their percentage investment to income would go as well.

Newbie Knowledge

Next, our study dug into the knowledge base of people just getting started with investing. We asked them which forms of investment they understood, what associations they had with each form of investing, and what tax-related practices they preferred.

According to self-reported data among first-time investors, the stock market was the most readily understood form of investing. Nearly three-quarters of this group claimed to have an understanding of the stock market, while just 29.9% understood exchange-traded funds (ETFs), despite the fact that ETFs tend to have a large basket of investments to allow for greater diversification. In spite of its newness and volatility, cryptocurrency was understood relatively often – 42.7% said they understood this form of investment.

Digging into more detail, we found that first-time investors seemed to be associating that understanding of cryptocurrency with volatility. As a result, respondents perceived that these fluctuating coins, like Bitcoin, were better associated with shorter-term investments (21.0%) rather than longer-term investments (11.8%). Stocks, on the other hand, were more often associated with “short-term” investments.

While a majority of new investors didn’t choose investment types based on how tax-efficient they were, they still made an effort to contribute to tax-efficient accounts. In other words, more than half (51.5%) of the respondents were contributing to their 401ks or IRAs, but only 37.4% chose tax-efficient investments.

Capital Gains Knowledge

A capital gains tax is a tax on the growth in value of investments incurred when selling those investments. You only owe these taxes if you realize a profit from the sale. Do you think first-time investors knew this? This next part of our study answers that question.

Most, but certainly not all, first-time investor respondents understood how the capital gains tax worked. The more money a person made, the more this understanding increased, likely due to increased experience with actually paying those taxes. Education also helped increase capital gains knowledge considerably.

We were pleasantly surprised to see the educational opportunity that respondents were finding in personal finance blogs. In fact, those who used personal finance blogs to do their finance research were more likely than even those who read financial news websites to understand the capital gains tax. With the influx of new investors, it would logically follow that new sources of information, like personal finance blogs, would also come on the scene.

Newcomer Strategies

What are the strategies of an investing newcomer like? And where are they finding this information? Do particular information sources encourage particular types of investment? This next piece of our study seeks to find out.

The favorite strategy of first-time investor respondents was growth investing or seeking investments with strong potential upsides. Roughly forty-three percent of newcomers chose this option. That said, 18% demonstrated interest in momentum investing, or buying stocks experiencing an uptrend. Roughly the same amount started with dollar-cost averaging (DCA), which means making regular investments in the market over time. Of course, these strategies can overlap in terms of actual investments.

Financial news websites were still the No. 1 informational source of choice for most investment types, with one key exception: NFTs. NFT, which stands for non-fungible token, is essentially a digital asset that represents tangible things like art or videos. Even in the words of Forbes Magazine, “they exploded out of the ether this year.” To get education on NFTs, first-time investors were shying away from news websites in favor of YouTube. Those who chose to invest in NFTs were more likely to have gained their information from YouTube than any other platform.

Preferred Platforms

And speaking of platforms, the next part of our study looks at which platforms were being used for actual investment transactions among newcomers. We asked which platforms they used and which platforms they trusted. We also asked how much they were investing with each particular strategy employed.

Retail investing platforms were the most popular choice. Retail investing essentially enables nonprofessional investors to purchase assets. Institutional exchange platforms, which make decisions on behalf of individuals or shareholders instead of themselves, were also a popular choice: 51.1% of first-time investors chose this option.

Even though more people chose retail investing, institutional exchange platforms demonstrated a much higher level of trust among respondents. Following the GME shorting situation in January 2021, 48.6% of first-time investors maintained a positive perception toward commission-free trading platforms, while 19.1% developed a negative perception. More than a quarter of first-time investors felt the platforms they use handled it well, while 28.2% of first-time investors weren’t impacted by this occurrence.

Overall, the stock market still garnered the largest percentage investment from first-timers ($2,494, on average) followed by index funds ($2,310, on average). Only 5.4% of first-timers picked NFTs, but the average investment amount wasn’t the smallest. Bonds, which were chosen by 39.1% of first-time investors, only received an average investment of a little over $1716.

Seasoned Investors Weigh In

Our study wraps up with an analysis of more than 200 seasoned investors. We asked them what they recommended for first-time investors specifically in terms of both strategy and specific investments. They also shared their sentiments surrounding things like cryptos and NFTs, and they even admitted to the mistakes they made when starting.

Institutional exchange platforms, which most first-timer respondents trusted but did not ultimately choose, were the top platform recommendation among seasoned respondents. That said, more than half still recommended retail investing platforms, which we saw that first-timers were particularly drawn toward. Seasoned vets and newbies also overlapped in their choice of strategy and investment: Growth investing and stocks were the No. 1 choice for both groups.

Looking back, most seasoned respondents agreed that their biggest mistake was seeking a fast profit instead of patiently waiting for gains over time. They also lamented having invested without doing adequate research (52.2%) and committing a lot of money at once (49.3%).

Many seasoned respondents were still skeptical about NFTs and cryptocurrency. Only 47.3% of this group felt positive about crypto as an investment, and only 38% felt positive about NFTs. Fear not, as time will ultimately tell. Surprisingly enough, seasoned investors maintained a more positive sentiment towards Wall Street Bets (52.7% positive), the controversial subreddit, than cryptocurrency or NFTs.

Takeaways From First-Time Investors

As evidence and our seasoned respondents revealed, first-timer respondents aren’t getting much wrong.  Both groups of respondents most often chose growth-oriented strategies, stock picks, and ETFs. Seasoned respondents were also relatively trusting of some newer sources of information, like Wall Street Bets, and even those who read blogs over trusted news sources were often the most informed.

About half of seasoned investor respondents recommended working with a financial advisor, while fewer than 2% of new investors did so. But we believe blending financial advisors with tech is an even more promising (and more affordable) option for new and seasoned investors alike. At Personal Capital, every client gets a free dashboard to link all their accounts and keep accurate track of their network. Personal Capital also provides a free analysis to work with an advisor to create a personalized plan for you to keep. Should you decide to work on that plan, Personal Capital pairs you with a professional financial expert to help you reach your goals. Get started at Personal Capital.

Methodology and Limitations

For the first half of the study, we collected responses from 800 first-time investors, defined as retail investors with 0 to 3 years of investing experience, via Amazon MTurk. Of the 800 first-time investors surveyed, 47% were women, 52.9% were men, and 0.1% identified as nonbinary. Additionally, the average age of these respondents was 33.3 with a standard deviation of 9.7 years.

For the second half of the study, we collected responses from 205 seasoned investors, defined as retail investors with over 5 years of investing experience, via Amazon MTurk. Of the 205 seasoned investors surveyed, 29.8% were women, 69.8% were men, and 0.4% identified as nonbinary. Additionally, the average age of these respondents was 40.1 with a standard deviation of 11.1 years.

The main limitation of this study is the reliance on self-report, which is faced with several issues such as, but not limited to, attribution, exaggeration, recency bias, and telescoping.

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