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Generation Z and millennials prefer these ‘alternative’ investments

Posted on by Vaseline

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Older investors like stocks. Younger investors prefer “alternatives”.

That is the conclusion of a new survey of wealthy Americans, published in June by Bank of America Private Bank.

The bank surveyed 1,007 Americans with at least $3 million in investable assets. When the survey asked them to rank the investments they considered the “greatest opportunities for growth,” the answers varied dramatically by age.

Older Americans, 44 and older, chose stocks, stocks and more stocks. Their highest-ranking investment was domestic stocks. Emerging market equity and international stocks came in third and fourth, behind real estate.

Younger Americans, ages 21 to 43, ranked six alternative investments above stocks. “Alternative” in this context means anything but stocks and bonds, the bread and butter of traditional investing.

According to Bank of America research, these are the five best investments for Gen Z and Millennial investors:

  • Real estate (31%)
  • Crypto/digital assets (28%)
  • Private equity (26%)
  • Personal company/brand (24%)
  • Direct investments in companies (22%)
  • Companies focused on positive impact (21%)

The findings suggest that wealthy millennials and Gen-Zers have different financial priorities than older investors. Some young millionaires made their money by launching a business or app. Others got into cryptocurrency early, a move that has paid off exponentially for a small group of mostly young, male investors.

Average wealth by age: See how you compare

Can you get rich investing in just stocks and bonds?

The research also shows that there is a big difference of opinion between younger and older investors on a fundamental question about investing: can you get rich with just stocks and bonds?

“The survey asks, ‘Where can I get above-average returns?'” said Dustin Wolk, a wealth adviser at Crescent Grove Advisors in Milwaukee. “These people are saying, ‘I don’t think it’s in stocks and bonds anymore.'”

The survey asked whether it is still possible to “achieve above-average investment returns by investing only in traditional stocks and bonds.” A majority of older investors, 72%, said yes. An equal share of younger investors said no.

And younger investors do what they say they will, at least to some extent.

Older investors hold an average of just 5% of their portfolios in alternative investments, the study found. Younger investors have 17% of their holdings in alternative investments.

Nearly all younger investors (93%) indicated that they would likely allocate more money to alternative investments in the coming years, compared to only 28% of older investors.

Older and younger investors also appear to have widely differing views on what constitutes a risky investment.

‘Everyone knows someone who has become a crypto millionaire’

Millennials, born between 1981 and 1996, grew up in an era marked by two stock market crashes, the dot-com bubble of 2000 and the Great Recession of 2008 and 2009.

“I think the Great Financial Crisis, particularly for this generation, was really formative,” said Mike Sullivant, 36, head of investor relations at Aspen Funds, a private investment firm in Kansas City, Kan. “A lot of us were in college or young professionals when all of this happened.”

In contrast, some younger investors have come to view crypto and other alternative investments as “conspicuously risk-averse,” the report said — in other words, safe.

Among millennials, “everyone knows someone who has made money with cryptocurrencies. Everyone knows someone who has become a crypto millionaire,” says Craig J. Ferrantino, president of Craig James Financial Services in Melville, New York.

Yet many financial advisors view crypto and other alternative investments as inherently risky.

“I would tell someone who is investing in these investments that they are not safe investments,” said Monica Dwyer, a certified financial planner in West Chester, Ohio. “They should not invest more in crypto than they can or are willing to lose.”

Young investors get their information from social media and podcasts

Older and younger investors also differ in the way they get their investing information.

When younger investors were asked to rank their top sources of financial content, they said social media came first, followed by online articles and videos.

Older investors indicated that they get news and tips from more traditional sources: online articles, newspapers and television, in that order.

There are many pitches for alternative investments in social media posts, YouTube videos and podcasts, many of which are aimed at millennials or Gen Z.

“There are opportunities and there are voices saying, ‘This is exactly how you can do this,’” Sullivant said.

Rapidly evolving technology has lowered the barrier to entry for alternative investments, he said. Private equity funds, historically the domain of multimillionaires, are now offered for a buy-in as low as $25,000. Cryptocurrency, utterly baffling to many baby boomers, is second nature to tech-savvy millennials.

Here’s a quick introduction to crypto and other alternative investments.

Crypto

Cryptocurrencies are digital currencies. Unlike the money in your wallet, they are generally not backed by a government or bank, nor by a “real” asset. Bitcoin, the most well-known cryptocurrency, came into existence in 2009.

Crypto investors, who are predominantly young and male, previously bought and sold the currency on crypto exchanges, which was a potential deal breaker for those unfamiliar with bitcoin.

“If you look at who was attracted to crypto, it was initially a younger group,” said Peter Lazaroff, a certified financial planner in St. Louis. “It was hard to even understand how to buy it.”

This year, federal regulators cleared the way for ordinary investors to buy and sell bitcoin ETFs, opening up the broader investing public to do so as well.

More: SEC Approves Bitcoin ETFs, Making Cryptocurrency Trading Accessible to Regular Investors

Private equity

Private equity funds are pooled investment vehicles, similar to mutual funds, according to Investor.gov. The funds typically buy, manage and sell companies, increasing their value.

Unlike investment funds, private equity funds typically work with institutional investors, such as pension funds and university endowments, and with high-net-worth individuals.

Direct investments

The term “direct investment” has multiple definitions in the financial world. In Bank of America’s research, the term simply means investing directly in a company, rather than indirectly, such as by buying shares of publicly traded companies.

According to Kiplinger, direct investments allow investors to take stakes in privately held companies whose shares are not traded on the stock exchange, such as a local microbrewery or software developer.

For the young investors in the study, direct investment could also mean having their own company or having invested in a startup.

“These are just successful people who have had their hard work rewarded,” Lazaroff said.