Trading for kicks is a high-cost hobby, but increasingly gamified markets are conditioning the next generation to treat financial risk as a sport.

Recently, I gave an induction presentation to around 60 graduates who have just joined the Bank. Everyone was asked to share one word for how they were feeling – I said ‘old’. Part of this was just a bit of fun, as I joined the Bank well before any of them were born. However, I am also getting more worried about the outlook for the next generation. I am not sure how much of this is due to me getting older and worrying about new-fangled technologies, in general, and how much reflects justified concerns for what lies ahead.

The four facets of fear

If I were to split my worries into four buckets, the first three are rather predictable: geopolitics (US-Iran, Russia-Ukraine, China-Taiwan, North Korea and World War III risks), macro factors (fiscal/debt excesses, AI, energy security and cyber security) and the environment (climate change and water/food security). The fourth group is less obvious: the accelerating monetisation of brain chemicals such as dopamine, cortisol, endorphins and serotonin, driven by social media, gambling, meme investments and activities that encourage or facilitate extreme risk-taking in society.

You probably guessed the first three buckets, but the fourth seems a strange bedfellow. Yet, it is this one that worries me the most when it comes to hindering people’s ability to achieve their long-term financial objectives.

Despite periodic setbacks, the long-term trajectory of human and economic progress has been upward. While the future is never certain, history suggests this enduring trend is an investor’s ally.

The monetisation of brain chemistry

Progress always throws up challenges. Research into how our brains work still leaves a lot to be discovered, but technological advancement has made it far easier for companies to profit from manipulating our neurochemistry. For instance, social media companies understand how to keep people constantly engaged with their content. The algorithms are constantly learning and personalising the triggers that will keep you scrolling. This is leading to masses of youths who live their lives online, have lost connections with the real world and face increasing mental health challenges.

Elsewhere, every casino knows that a near miss is a powerful stimulus for extending somebody’s stay in the hope of getting lucky, only to lose more money over the long run. Slot machines are engineered for profit maximisation, albeit in compliance with regulatory standard, but with the potential side effect of creating problematic gambling behaviours.

Worryingly, we are seeing more and more financial market activities and solutions that are gambling-like.

The most obvious examples are platforms that offer the ability to gamble on pretty much anything – sports events, military attacks, elections and even rainfall – under the guise of being a futures contract.

Other forms of financial innovation also tell a similar story. The rising availability of leveraged single-stock exchange-traded funds allows retail investors to increase their leveraged stock positions significantly.

Of course, this is exciting. The chance for high returns is in plain sight, which can be particularly appealing to younger investors who may lack adequate financial experience. Indeed, a recent US survey showed that the majority of respondents answered basic financial literacy questions incorrectly – a trend that was especially pronounced among Gen Z.

Resisting the rush – the blueprint for long-term wealth

Taken together, the current environment can breed a culture of seeking the next financial thrill or dopamine hit, regardless of its source. However, this mindset is the exact opposite of what long-term wealth accumulation requires.

While trading apps want you to commingle trading with investing, we draw a distinct line between the two. At its heart, a resilient portfolio should consist of diversified, long-term investments designed to grow well above inflation over time and take care of your longer-term goals. We call this a Foundation portfolio, which is simple both in construction and in action – you should continually add to this portfolio over time, selling only when it is needed to cover essential expenses.

At the other end of the spectrum lie opportunistic trades. These are shorter-term, highly focused and volatile assets. They can go up sharply, but they can fall just as fast. Moreover, while a diversified portfolio is highly unlikely to experience semi-permanent or permanent losses, that is not necessarily true here – companies can go bust and sectors can go through very long and severe recessions.

To be clear, I am a realist. I understand that some people want financial entertainment, and there is nothing wrong with that. However, core investments will almost certainly outperform such speculative trading activities over time, simply because emotional and behavioural biases have a much bigger – and potentially adverse – impact on decision-making when assets are more volatile.

Viewed realistically, trading is a hobby, and hobbies usually cost money – in this instance either a loss of money or at least underperformance versus what a simple Foundation portfolio will achieve. The more you acknowledge this, the more likely you are to achieve your financial goals, even if you dabble in trading.

I understand that this article may come across as a bit of a rant, but thanks for humouring me – I’m getting old.