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Heading into the new year,  a conversation with Julie O'Brien and Rob Haworth on strategies to kick-start long-term investing

U.S. Bank recently surveyed investors of all ages to better understand their behavior and attitudes. The survey uncovered several insightful findings, including the fact that young investors in particular feel overwhelmed by recent economic news and unsure how to begin investing.

Dr. Julie O’Brien, head of behavioral science at U.S. Bank, and Rob Haworth, senior investment strategist, recently sat down to talk through how Gen Z – or any aspiring investor, for that matter – can break through the uncertainty and chart a strategy for long-term investing.

During the last three years, prices have increased for almost everything: gas, groceries, utilities, cars, rent. The Fed has hiked interest rates 11 times – making mortgages, auto loans and credit-card bills uncomfortably high. Last year was the worst year for both stocks and bonds since 1969. What tips do you have for people who want to begin investing but aren’t sure where to start?

O’Brien: There are two general rules of thumb that behavioral science provides to help there:

1. Focus on behaviors, not outcomes. In the context of saving for retirement, there will always be stock-market volatility -- and that creates emotions. You don’t want to be subject to the emotions you might have around volatility, but you do want to be consistent in your behavior regardless of emotions. Think about the behaviors you can take right now that will be healthy and sustainable in the long run. For example, easy things like contributing to your 401K, or pre-committing in advance when you get a raise to increase your contributions. Those are actions that are in your control.
2. Take those big, long-term outcomes and turn them into short-term outcomes that make you feel good when you measure your progress. If you’re saving for college, you could reinterpret your contributions in terms of semesters rather than the full amount you’re trying to reach. Taking those long-term goals and chunking them into smaller, more attainable goals psychologically allows you to feel like you’re making progress faster.

One more thing, especially early on when you’re just starting, is to celebrate those behaviors. The more likely you are to think of that behavior as part of your identity, the more likely you are to be consistent.

As you’re thinking of a goal in the future, there are ways to make the future feel more concrete. There have been some really interesting studies looking at if you show someone an image of their face aged to look how they’ll appear at retirement age, it makes their “future self” feel more concrete and it becomes easier to be motivated to think longer term. People in these studies actually increased retirement contributions because it no longer felt abstract, which made it much easier to take a short-term sacrifice today in service of that long-term goal.

Can you share some day-to-day tips people can use to combat the short-term impulse to buy something now and start working toward a long-term goal that might feel overwhelming?

O’Brien: That’s the hardest and biggest challenge we all have for our financial wellbeing. Our economy thrives on consumption, so all of the incentives for everyday decision-making are stacked against what’s good for you in the long run. What we know from behavioral science is anytime you are faced with a temptation, it’s too late. If there’s chocolate in front of you, you’re going eat it. It’s just too hard to avoid things that feel good right now.

The best strategy is to design your environment so you aren’t exposed to temptations. That’s really hard in a world where there are so many opportunities to consume.

One thing people can do is look at what things in their life they are tempted by and the places they are exposed to them. Then you design them out of your life: unsubscribe from the email list of the retailer where you spend too much, and change the kind of social media you’re exposed to. People think we’re victims of social media, but we can control it.

We can also increase the salience of good behaviors. Often on social media or even in conversations with friends, we talk about what we’re buying but not what we’re saving.  There’s a social reward for consumption: you buy a car, and everyone sees it; you have people over for book club, and they admire your nice furniture. No one is talking about the good, positive long-term financial behavior we want to have. This is something you have to do for yourself, and it’s not something that happens automatically in our society.

One of the things this survey found is Gen Z investors overwhelmingly compared themselves to others on social media for their investment goals, and often feel disheartened as a result. What is a realistic way for Gen Z to know how they are tracking on their wealth and investment goals?

Haworth: Your plan has to be sized for you. It has to consider your level of wealth, and the time horizon you want to achieve this goal. If you need to buy a car in the next year, that’s very different than if you have a longer-term goal like buying a house, or retiring. Then there is risk tolerance, and that’s very hard for people to understand. But what I’ve seen in working with clients throughout my career is that’s actually the most important consideration. If you can appropriately identify your tolerance for risk - and let’s just call it your tolerance for losing money - then you can find the right portfolio mix, using investment tools, to stay in your plan much longer. 

What are some simple ways to get started as a young investor?

Haworth: We’re in an industry where it is just a matter of jumping over a small hurdle, and we’ve made it easier and easier.

Many companies are doing immediate enrollment and matching on 401ks, which is a good way to get exposure and experience, and they’re defaulting people into target-date funds so they’re getting exposure to appropriate investment diversification.

The harder part can be starting on your own on the smaller things. However, options like robo advisors have made this easier. Many require just a small amount to get started and offer simple tools to identify your risk tolerance and objectives and get you into a portfolio you don’t have to think a lot about.

The best way to get started is to find the “easy” button that points you to a goal and helps align you with it, then you’re done. As opposed to investing as a fad, which becomes speculation rather than creating a plan and strategy.