Older investors cling to stocks as younger generations seek alternatives

By LIAM GIBSON

Wealth of Geeks

According to a new study by Bank of America Private Bank, there is a huge generation gap around the value of the United States stock market. When asked about the most significant opportunities for growth, investors aged 21-43 ranked real estate (31 percent) as number one, followed by crypto (28 percent), private equity (26 percent), personal brand (24 percent), direct investment (22 percent), positive impact investing (21 percent), and bonds (17 percent) all ahead of U.S. stocks (14 percent).

Meanwhile, the older generations (aged 44+) ranked U.S. stocks as hands-down the best opportunity for growth (41 percent), with real estate (32 percent) following in a distant second.

Stocks have historically performed well over the long term and are considered a reliable engine of wealth. The data tells the story. Take the S& P 500 – one of the most popular indices. It has experienced annual losses in only 13 of the last 50 years, dating back to 1974, meaning stocks yield returns much more often than a loss. Over time, with compounding, a stock portfolio can double its value many times over.

What fuels the enthusiasm among younger investors for alternatives, and why are older investors sticking to equities in hopes of a happy retirement?

Financial advisors give their take on what is driving this intriguing generational phenomenon.

The Long Game

Patience is a virtue in investing, including stocks. Many investors take years to enjoy a strong return, often observed in the growth of 401(k) plan assets. When it comes to young investors, time may be on their side, but experience is not.

“Older generations have witnessed the ‘power of compounding’ at play in their equity portfolio,” says Josh Radman, principal and owner of Presidio Advisors. “Younger generations simply haven’t had enough time in the market to understand how powerful annualized returns of ~8 percent can be over a period of 30+ years.”

Millennials and Zoomers underestimate stocks while overestimating other assets.

“Younger investors also suffer from ‘recency bias’ … what is fresh in their minds is the real estate boom of the past few years that is unprecedented (and likely won’t ever happen again),” says Radman. “Combine that with the fact that many are too young to remember the 2008-09 financial crisis, and it seems like real estate can only go higher.”

A broader macro view can reveal stocks’ value as an asset class and identify top performers.

“The young don’t look at investments from a historical perspective,” says Michael Rosenberg, managing partner and founder of Diversified Investment Strategies. “We have data that goes back to 1926 … and one can see that equities have outperformed bonds, and within equities, small companies outperform large companies. Within both small and large … value companies perform better than growth companies, etc.”

The Power of Me

Another factor is the broadening of what younger players consider investing. The internet and social media have enabled a plethora of different side hustles and investment options. Online business success stories abound, nudging younger investors to move the needle themselves. The comparatively passive hold-and-wait logic of stock investing may bore.

Economic uncertainty and a desire for flexibility increasingly drive younger generations to start side hustles and small businesses. Plus, there’s a growing appetite among them to turn passions and hobbies into high-income skills to avoid corporate careers.

According to the recent 2024 Entrepreneurial Index, 36 percent of Gen Z and 39 percent of millennials consider themselves entrepreneurs, substantially higher than the national average.

“Online where young investors are getting most of their information … there are a lot of influencers and commentators talking about investing in your own personal brand, owning real estate, becoming your own boss, etc.,” says Carman Kubanda, financial planner at Innovative Wealth Building. “That is a very attractive offer to younger people and is more exciting than consistently investing in the market with a long-term approach.”

Crypto Crypto is another area where old and young diverge. In the Bank of America Private Bank survey, 28 percent of young investors saw crypto as having the most significant growth opportunity, while only 4 percent of older investors said the same.

“I think many younger investors are attracted to the shiny object … I think this is especially true with crypto. They see these huge gains and believe they can also get them,” says Mike Hunsberger, owner of Next Mission Financial Planning.

“I tell clients that it’s okay to put a small percentage of their assets in crypto … even if they’re convinced it’s going to shoot to the moon. I explain it like this, if it takes off like you think you only need a little, and if it goes the other way you only want a little.”

This article was produced by Media Decsion and syndicated by Wealth of Geeks.

Wealth of Geeks