LA Post: Gen Z and millennial investors ditch traditional strategies

Young investors are seeking fortune through unorthodox portfolios. They are reconsidering asset accumulation techniques and rejecting traditional investment tenets. Gen Z and millennial investors are shifting away from the conventional path of purchasing stocks and bonds and toward various alternative investments, including real estate, private equity, and cryptocurrencies. According to a recent Bank of America Private Bank survey, the younger generations' viewpoints on investing and portfolio management have greatly altered. 72% of respondents between the ages of 21 and 43 who participated in the study involving over a thousand high-net-worth individuals said they no longer thought traditional stocks and bonds could generate returns above average. In stark contrast, only 28% of investors over 44 shared this sentiment. The data shows that this contrarian view is reflected in their portfolio allocations. While older investors have an average of around 55% in stocks, the figure plunges to just 28% for the younger crowd. Instead, the under-44 set has stuffed a whopping 31% into alternative investments—crypto, hedge funds, private equity, art, wine, and other unconventional assets. Compare that to just 6% for the over-44 group. So, what's motivating this generation to ditch the investment roadmap followed by their parents and grandparents? Insights from wealth management mavens point to several pivotal factors. "Millennials witnessed two big market corrections in their formative years," said Michael Pelzer, head of investments at Bank of America Private Bank. "That impacts their view of asset allocation, diversification, and risk tolerance compared to older generations with a more lengthy data set of market cycles." These firsthand experiences of severe market dislocations have made younger investors more wary of overexposing their portfolios to the risks and volatility of public stock markets. Another significant element is the growing mainstreaming of alternative asset classes such as art, jewels, fine wines, and farms. These previously exclusive offerings to the wealthy are now available to the general public. Furthermore, investors are drawn to completely new asset classes, like bitcoin, that have emerged on the market. With mobile trading apps and powerful platforms, the fintech boom has "democratized" access to obscure asset classes previously limited to the uber-wealthy. Things like fractional investing, crypto exchanges, and online art markets have cracked open a whole new world of alternative investing. At its core, Gen Z and millennials' embrace of alternative assets may be driven by an insatiable appetite to generate meaningful investment returns—or, as Wall Street terms it, "alpha." Coming of age in an era of low interest rates and lofty stock valuations, they could be seeking an edge through non-traditional investments less influenced by broader market forces. Crypto assets like bitcoin, high-risk plays like penny stocks, or lucrative but illiquid investments like private equity or pre-IPO startups all carry the potential for outsized gains compared to vanilla public equities and bonds. For investors with a higher risk tolerance, modest allocations to alternatives present an alluring opportunity to potentially turbocharge portfolio returns. Rather than inheriting and mimicking the standardized asset mixes of the Baby Boomers and Gen Xers before them, Gen Z and millennials may seek to actively design dynamic, diversified portfolios tailored to their financial goals and risk profiles. They could conceive of their investment holdings as a customized startup business venture, with allocations to new frontiers representing venture bets on disruptive income streams. While this campaign for diversification, disruption, and differentiated returns is understandable, advisors still caution about the elevated risks involved with many alternative assets. Cryptos, penny stocks, and other speculative plays are extremely volatile, and most investors see their holdings in these areas deteriorate in value over time. Pelzer states, "The use of alternatives is only concerning if deployed the wrong way, which points to the importance of financial professionals in making investment allocation decisions, particularly to complex asset classes with unique risks." Younger investors would be wise to partner with seasoned advisors who can help them construct robust portfolios diversified across asset classes and risk levels to pursue their financial goals. With access to more investing avenues than ever before, professional guidance is key to ensuring these new frontiers don't lead them astray from the ultimate path to long-term prosperity.

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