No matter who you talk to, the consensus is that the investment strategy of young investors today is not the same as their father’s or mother’s.
A Bank of America Corp. BAC study found that 75% of young investors say it’s impossible to achieve above-average returns solely with traditional stocks and bonds. Whether that strategy is related or not, they’re also going to have to wait longer for any disbursement of family money, according to the report.
The 2022 Bank of America (BOA) Private Bank Study of Wealthy Americans found some pretty stark differences between generational investment, giving and wealth planning.
“Financial behaviors and values take shape early in life and live on in the legacies passed from one generation to the next,” Private Bank at Bank of America President Katy Knox said. “These research findings point to a larger role wealth advisers and the financial services industry play in helping families transition wealth and meet the needs of the next generation.” And that transition for many will skip traditional stock market investment.
The report found that 75% of investors between the ages of 21 and 42, compared to 32% of investors over age 43, do not think it’s possible to achieve above-average returns solely with traditional stocks and bonds.
Eighty percent of young investors are instead looking to sink money into private equity, commodities, real estate and other tangible assets, allocating three times more of their investment portfolios to alternative strategies (16%) and half as much to stocks (25%) than older investors (5% and 55%, respectively).
As for the family talk regarding passing wealth along to the younger members, it’s starting later, with 68% of parents surveyed saying they have talked with their children about their family’s wealth. But they’re waiting until the younger members of the family are at least 27 years old, with just more than half believing their children are well prepared to handle family money or any inheritance they stand to receive.
One of the reasons may be that their alternative investment bets have not worked out so well lately. Most millennials have invested in cryptocurrency, with Bitcoin now worth around $20,000 after beginning 2022 at $45,000. The market wouldn’t have been a suitable replacement investment this year either, with the S&P 500 Index down more than 28%.
But some critics believe millennials and younger investors are not looking at the long-haul returns that mark stock investments. NerdWallet recently studied the last 40 years of market returns and interest rates to determine how much a 25-year-old who today earns a median annual income for that age ($40,456) and saves 15% would accumulate over the next 40 years if conditions were similar to those of the past four decades. They point to the fact the S&P 500 had an average annual return of 10.96% during the last 40-year period analyzed before inflation. Alternative investment decisions, such as buying three-month Treasurys, had an average return of 4.61%.
As for the habits of generational philanthropy, the BOA report showed that only 41% of older generations think the next generation’s philanthropic efforts will be equally effective as their own, compared to 87% of the younger generation believing their giving will be more effective than earlier generations.
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