In a recent study conducted by Bank of America, it was revealed that young, wealthy investors between the ages of 21 and 43 have a different approach to investing compared to their older counterparts. Rather than sticking to the traditional mix of stocks and bonds, these individuals are increasingly turning towards alternative assets such as hedge funds, private equity, and crypto and digital assets. According to Mike Pelzar, head of investments at Bank of America Private Bank, nearly one-third of young, wealthy investors’ portfolios are now allocated to these alternative assets, while less than half is invested in traditional stocks and bonds. This marks a significant departure from older investors aged 44 and above, who typically have about three-quarters of their portfolios in stocks and bonds, with only a small percentage allocated to alternative assets.
Generational Divide
The divergence in investment preferences between the two age groups can be attributed to a variety of factors. Pelzar suggests that the younger generation has grown up with greater access to a wider range of asset classes, leading them to seek out more diverse investment opportunities. Additionally, the younger investors may have less trust in traditional stocks and bonds, given their experiences with events like the financial crisis and dot-com bust. The recent correlation between equities and fixed income has also made them more inclined to diversify their assets as a way to mitigate risk and safeguard their wealth.
Despite concerns about the potential risks associated with alternative investments, young, wealthy investors are showing a growing interest in this asset class. Bank of America’s research indicates that 93% of these investors plan to increase their allocation to alternative assets in the coming years. This shift can be partially attributed to the increasing number of choices available to investors in the current market environment. Douglas Boneparth, a certified financial planner, points out that there has never been a greater variety of investment opportunities for individuals to choose from.
While alternative assets offer the potential for higher returns, they also come with unique costs and risks that investors need to be mindful of. Alternative investments often require a longer-term commitment, as funds may be locked up for a specified period of time. Additionally, alternative investments typically have higher expense ratios, which can erode returns over time. The fee structures associated with alternative investments, such as the 2 and 20 model common in the hedge fund industry, can also eat into profits. In addition, investments in areas like collectibles may involve larger bid-ask spreads, making it more challenging to accurately assess the value of the asset.
The investment landscape is evolving, with young, wealthy investors showing a preference for alternative assets over traditional stocks and bonds. This shift is driven by factors such as greater access to diverse asset classes, a desire to diversify risk, and a wider range of investment opportunities available in the market. While alternative investments offer the potential for higher returns, investors must carefully weigh the costs and risks associated with these assets before making investment decisions. As the investment landscape continues to evolve, it will be important for investors to stay informed and adapt their investment strategies to meet their financial goals.