19/06/24

US: Younger Investors Prefer Crypto, Private Equity, and Hard Assets to U.S. Stocks, Study Finds

As published on: barrons.com, Wednesday 19 June, 2024. 

Wealthy, younger investors have a very different view of the best way to invest than their older peers, preferring real estate, cryptocurrencies and digital assets, and private equity to U.S. stocks, according to a new study from Bank of America Private Bank.

Nearly three-quarters of investors aged 21-43 believe “you can’t achieve above-market returns strictly using traditional investments—stocks and bonds,” says Michael Pelzar, head of investments at the private bank. “That contrasts to the older generation [aged 44 and up] who believe you can achieve outsized returns just with stocks and bonds.” 

“They’ve been through a couple market crashes—the financial crisis, the dot-com bubble—and for the first time, they’ve seen a much higher correlation between stocks and bonds,” he says. Those experiences appear to have influenced their preference to spread risk by diversifying more extensively into different asset classes throughout their portfolios. 

The survey responses reflected views of just over 1,000 individuals with least US$3 million in investable assets who are not necessarily clients of the bank or its wealth and investment management divisions, a strategy that Pelzar says provides “better insights to what’s going on more broadly and what that means for how Americans are approaching their wealth.”

According to the study, 18% of those surveyed have assets between US$5 million and US$10 million, and 15% have assets above US$10 million. 

Younger investors, instead, allocated 17% of their assets to alternatives, such as private equity and venture capital, and 14% of their assets to cryptocurrency and digital assets. Older investors allocated only 5% to alternatives and 1% to crypto, the survey found. 

In the next few years, 93% of younger investors surveyed expect to allocate more of their investments to alternatives compared with only 28% of those 44 and older. 

The two groups of investors have even starker differences when asked, “where do you foresee the greatest opportunity to create wealth.”

Those aged 44 and older view U.S. stocks as the best opportunity (41%), followed by real estate (32%), emerging market stocks (25%), and international stocks (18%). Those 43 and under put real estate on top (31%), followed by crypto and digital assets (28%), private equity (26%), and then their own personal company or brand (24%).

The latter refers to the confidence younger investors have in being able to grow their wealth through privately owned businesses or family enterprises. “A lot of this generation has faith in their ability to add value, to generate capital appreciation through their own actions,” Pelzar says. 

Overall, younger investors gave more weight to the ability of a larger number of investments to create future growth than older investors, with their heavier weighting to U.S. stocks. Other categories winning at least a 20% share from younger investors included direct investments (22%) and investments into companies focused on positive impact (21%). 

The fact that younger respondents showed relatively little interest in emerging market or international stocks also reflects their time as investors. Over the last decade, U.S. stocks and other asset classes, including real estate and private equity, have outperformed those asset classes. 

“If you look at growth opportunities for the younger generation, even in the alternatives space, there’s more of a tilt to private equity and venture capital, and less to hedge funds,” likely because hedge funds have underperformed in recent years, Pelzar says.

Younger investors also prefer owning physical gold (versus owning funds that are invested in gold-mining stocks, for instance), with 45% owning it today and another 45% expressing interest in owning it. 

“The younger generation pays more heed to hard assets as part of their overall investment and wealth management strategy than the older generation,” Pelzar says. In addition to gold, they are working assets such as real estate, art, and collectibles into broader investment strategies.

Many also view gold as an inflation hedge, which continues to be a concern even as inflation has come down. “It reveals a deeper lack of trust in traditional assets,” he says. 

These sharply divergent investment views have “real implications for wealth managers and advisors in terms of how they interact with different generations,” he says. “It’s important we take these different preferences and desires into account.” 

What that will look like remains to be seen. It’s unclear, for instance, how assets such as cryptocurrency will perform in relation to more traditional assets within a portfolio. Advisors will have to be clear about the risks for investors who have a predilection for unconventional assets. “Time will tell how this plays out,” Pelzar says. 

Among other major insights, the study found that half of all wealthy individuals in the U.S. don’t have the basic elements of an estate plan in place. 

That could spell trouble as an estimated US$84 trillion in wealth is passed down to individuals and nonprofits between now and 2045, according to figures from Cerulli Associates, a Boston-based market intelligence firm. Last week, London-based data firm Altrata said US$31 trillion will be passed down within the next decade, globally, to those with US$5 million or more in investable assets. 

“Families are surprisingly underprepared for the wealth transfer,” Pelzar says. 

It’s easy to understand why, he says. Not only is estate planning an emotional topic that’s easy to push away for another day, there are also the practical aspects of getting the documents in place, he says.

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