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Young, wealthy investors don’t want their parents’ investments.
If you’re between the ages of 21 and 43 and have at least $3 million in investable assets, your go-to investment may not be a traditional mix of stocks and bonds. new research From Bank of America.
Mike Pelzar, head of investments at Bank of America Private Bank, said that nearly one-third of the portfolios of young wealthy investors are in alternative assets such as hedge funds, private equity, cryptocurrencies and digital assets.
At the same time, less than half of their portfolios are in traditional stocks and bonds.
Where wealthy investors aged 21 to 43 see the greatest growth opportunities
- Real estate investment, 31%
- Crypto/digital assets, 28%
- Private equity, 26%
- Personal company/brand, 24%
- Direct investment in companies, 22%
- Companies focused on positive impact, 21%
Source: Bank of America
That’s in stark contrast to wealthy investors aged 44 and older, who have about three-quarters of their portfolios allocated to stocks and bonds, and only about 5% to alternative assets such as hedge funds, private equity and real estate, he noted.
“These two different groups have very different views on what the greatest opportunities for investment growth are,” Pelzal said.
Research from Bank of America found that interest in alternative investments among young investors is not expected to wane, with 93% saying they plan to use more of these investments in the next few years.
Why young investors think differently
Pelzal explains that the difference between the prospects of younger and older wealthy investors largely depends on the types of investments they made when they were growing up.
“Younger generations have grown up with greater access to a wider range of asset classes than older generations,” Pelzal said.
Younger generations may also have less trust in traditional stocks and bonds after the financial crisis and dot-com bust. The recent increased correlation between equities and fixed income may prompt them to diversify their assets.
“They want to spread the risk,” Pelzal said.
Where wealthy investors 44 and older see the biggest growth opportunities
- Domestic stocks, 41%
- Real estate investment, 32%
- Emerging market stocks, 25%
- International stocks, 18%
- Private equity, 15%
- Direct investment in companies, 15%
Source: Bank of America
At the same time, the study found that younger, wealthier investors also have higher cash allocations. Some experts worry that having more cash could result in missing out on greater market returns, even though today’s high interest rates keep cash interest rates at their highest levels in more than a decade.
“Underinvestment is a risk that I think more younger investors are more susceptible to,” Callie Cox, chief market strategist at Ritholtz Wealth Management, recently told CNBC.com.
But Pelza said it may make sense to increase cash allocations for younger, wealthy investors who have much of their net worth invested in less liquid alternative investments or who plan to make large purchases. For example, buying a house.
What to consider when planning
Another reason young, wealthy investors may turn to other options is that they have more choices.
“There have never been so many opportunities to invest your money,” said Douglas Boneparth, certified financial planner and president. sincere wealtha New York City-based wealth management firm.
Bonepas, who also sits on CNBC’s FA committee, said when looking for alternatives it is important to be aware of the potential costs involved.
Alternative investments may require your money to be locked up for a period of time, he said.
Alternatives may also come with unique costs, such as 2 and 20 fee structures. This is a standard fee arrangement in the hedge fund industry, also common in venture capital and private equity, in which assets under management charge an annual management fee of 2% and a standard performance or incentive fee of 20% on profits earned. above a certain predetermined benchmark.
Bonepas noted that expense ratios (management fees charged by investment funds) can also be higher in alternative investments.
If you invest in something like collectibles, he said, the bid-ask spread — or the difference between bids and offers — can be larger or less predictable.
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