When millennials—young adults also known as Generation Y—finally decide to overcome their skepticism about financial markets and invest in stocks, many of them are chasing the wrong names with costly consequences, said Patrick O'Shaughnessy, a 30-year-old portfolio manager at O'Shaughnessy Asset Management.
"Here is the biggest mistake they're making as investors in public equity markets: They're buying all the expensive, exciting names like GoPro and Twitter, and Tesla," O'Shaughnessy told CNBC's "Squawk Box" on Monday, rather than taking a more conservative approach that will pay off over time. ( Tweet This )
That's if they're investing at all. A recent survey by Bankrate.com found that just 26 percent of Americans under age 30 are investing in the stock market, compared to 58 percent of people between ages 50 and 64 who invest. In surveys, they cite a dearth of financial knowledge, a lack of money and distrust of Wall Street among reasons for their skittishness about stocks.
"They don't know enough about the stock market. They are skeptical of stock brokers. Or they're just skeptical of markets in general," said O'Shaughnessy, whose father, Jim O'Shaughnessy, started the investment firm that bears the family name.
But by staying on the sidelines, millennials—loosely defined as people born in the early 1980s through the late 1990s—can miss out on their biggest advantage: time. Young investors' biggest value proposition, said O'Shaughnessy, is the power of compounding interest. "The best advantage in investing is a long, long time horizon," he said, noting that the market is up about 2,000 percent since he was born in 1985.
"That's a huge return over 30 years, which is roughly what we're facing between now and retirement," he added, but acknowledged, "you have to live through a lot of downturns." That's something millennials know all too well. They experienced the shock of the 9/11 terrorist attacks and the resulting economic downturn, followed closely by the Great Recession sparked by the 2008 financial crisis.