Differences In The Investment Behavior Of Generations

* Millennials and Gen. Z prefer risky and non-traditional investments, while Gen. X and baby boomers are more cautious.   Understanding how investor behavior changes over time is crucial, as it provides insights into potential shifts in the markets. It is estimated that over the next twenty years, approximately 72 trillion dollars in assets will be transferred in the United States alone from the baby boomer generation (born between 1946 and 1964) to younger generations.   The management of these assets by those who will inherit them will impact the performance of the stock market, the real estate sector, commodities, and small and medium-sized enterprises.   According to a study conducted by Bank of America, which included over 1,000 individuals in the United States with a net worth of more than three million dollars (excluding personal property), significant changes have been observed in how Millennials (1981 – 1996) and Gen. Z (1997 – 2012) approach asset allocation compared to Gen. X (1965 – 1980) and baby boomers.   72% of younger generations believe that it is no longer possible to achieve above-average investment returns using only stocks and bonds. In contrast, only 28% of older investors share this view.   This belief among Millennial and Gen Z. investors is reflected in how they allocate their funds across different assets. On average, stocks and bonds make up only 47% of their investment portfolios, compared to 74% for those aged 44 and older. Younger investors believe that other instruments, such as cryptocurrencies—toward which they allocate an average of 14% of their portfolios—and alternative investments—averaging 17% of their allocations—are more profitable than traditional investment vehicles. By “alternative investments,” we refer to various forms of art, collectibles, commodities, jewelry, and even businesses in the form of private equity investments.   The older generation allocates only 6% of their portfolio to cryptocurrencies (1%) and alternative investments (5%) combined, with equities (55%) accounting for the largest share of their investments.   “Given the higher risk exposure through cryptocurrencies, coupled with exposure to gold, younger generations are directly trying to stake their overall wealth growth while having allocations to one of the safest assets in the world – gold. The price of the precious metal has risen by 25% in the last two years. And the above-mentioned study shows that 90% of millennials and Gen. Z investors said they either own gold or are interested in buying gold. This percentage is two and a half times higher than older investors who already own gold or are interested in investing in gold (only 34%). This way of balancing your investment portfolio can prove to be very profitable, especially considering that in September we will witness the first interest rate cut since March 15, 2020 by the US Federal Reserve (Fed)”, says Victor Dima, Manager of the Treasury Department of Tavex Romania. In terms of gold price performance, whenever the Fed starts to cut interest rates, the price of gold increases, on average, by 8.3% over the next twelve months after the rate cut begins. That is because newly issued government bonds have lower yields once interest rates are cut, which pushes investors toward gold as a safe alternative investment to government bonds.   However, the younger generation’s interest in gold is in antithesis to their sentiment regarding both the US and global economy. According to the Bank of America survey, about half of these investors believe that the US economy is doing “very well” and are much more optimistic than the older generations (only 24% of them believe the same). “Our view on the percentage that the average investor should allocate to gold (or silver) is around 5%-10%, to balance the various shocks that the stock markets suffer, but also to create a portfolio that is almost immune to inflation and interest rate changes”, added Victor Dima.   The shift in how younger generations allocate their wealth compared to older generations is obvious. Millennials and Gen. Z investors have a higher appetite for risky and non-traditional investments, while Gen. X and baby boomers are more reluctant to take bigger risks. This is, of course, natural, as the older an investor gets, the more circumspect he or she becomes about the various risks he or she exposes themselves to, as they want to preserve their wealth, not endanger it.