The old proverb “The apple doesn’t fall far from the tree” takes a hit when it comes to wealthy younger investors. In search of above-average returns, high-net-worth millennials and Gen Z Americans prefer alternative investments over traditional investments. A Bank of America study found this to be the case for 72% of investors aged 21 to 43 compared to just 28% of investors 44 years and older.
Should you consider alternative investments too?
Rise of Alternative Investments Among Younger Generations
Several factors contribute to younger investors taking alternative investments. After the 2008 global financial meltdown, low interest rates offered little return in savings accounts and on bonds as Gen Z Americans worked through grade school and millennials were finding their way into the workplace. This compelled those investing to look for alternatives.
These younger investors also grew up surrounded by advancing technology and online platforms that have opened everyone’s access to investments once considered the domain of institutional investors. Comfort and ease navigating their digital world coupled with skepticism about getting high returns from traditional assets caused younger individuals to begin seeking out alternative investments.
The allure of cryptocurrency and blockchain along with increased access to financial education also helped drive younger generations to pursue investments beyond stocks, bonds and cash.
Millennials and Gen Zers also want more than just high returns. Holding tight to the values of sustainability and ethics, many young investors seek out companies that measure the impact of their environmental, social and governance (ESG) decisions. Through ESG investing, young investors align earning high returns with their social and environmental concerns.
Popular Types of Alternative Investments Millennials and Gen Z Are Making
Here’s a look at five alternative investments that younger generations are buying and that you might want to add to your investment portfolio.
Cryptocurrencies and Blockchain Assets
Cryptocurrency and blockchain technology launched as the oldest millennials were moving into better earning years and younger millennials and their Gen Z counterparts were discovering the world around them. Unsurprisingly, they embraced this technology.
Cryptocurrencies, such as Bitcoin and ethereum, are a subgroup of digital assets that have emerged from blockchain technology for investors to pursue. Other digital assets include NFTs (non-fungible tokens) and other tokens, such as utility tokens, security tokens and governance tokens.
Memecoins — Dogecoin and Shiba Inu are popular — are digital assets and a type of cryptocurrency. While they are often created for fun or as a joke, they have captured the interest of investors.
Digital assets are minted on a blockchain, a ledger that tracks ownership information. Investing in these assets offers the potential for quick, high returns. However, cryptocurrencies and other blockchain assets are highly volatile and lack regulatory certainty.
Real Estate (Fractional Ownership and REITs)
Investors have long sought wealth through buying residential and commercial properties. Younger investors are leveraging the technology of online platforms and virtual and augmented reality to invest in real estate in alternative ways.
Fractional ownership and real estate investment trusts (REITs) are ways to invest in real estate without a huge capital outlay or the need to manage the property independently.
Real estate crowdfunding allows you to pool your money with others to fund projects or buy a fraction of a vacation or rental home. Or much like you buy stock, you can buy into an REIT. This company owns and manages residential and commercial properties and delivers some of its profits as dividends to investors.
You can also invest in virtual real estate – digital properties in the metaverse bought with cryptocurrency and represented by NFTs as a deed. As with physical real estate, you can buy, hold and develop virtual real estate.
Collectibles and Tangibles
Collectibles are tangible assets, such as fine art, luxury watches, trading cards, sneakers, coins, vintage cars and more. Because of their historical or cultural value, collectibles once mostly appealed to ultra-high-net-worth individuals. However, high-end collectibles have become accessible to many through technology. Other collectibles have gained value from drawing the attention of investors.
Investing in collectibles may fall among your diversification strategies. However, there are plenty of reasons to approach collectibles with caution:
- Illiquidity
- Challenges valuing items
- Market volatility
- Transaction costs
- Storage and maintenance costs
- Fraud risks
- Tax implications
Collectibles can be added to your portfolio to spread out risk, but don’t rely on most collectibles to fund your retirement.
Precious Metals
An interesting data point from Bank of America’s study is that 45% of younger investors own gold and another 45% showed interest in investing in the yellow precious metal.
Precious metals, such as gold, silver, platinum and palladium, are alternative investments with intrinsic value. Historically, they have held their value during economic downturns when stocks have dropped.
Some believe that individuals between 21 and 43 are putting their money in precious metals because they grew up through the recession caused by the bursting of the dot-com bubble in 2000 and the Great Recession of 2008.
Precious metals have also become more accessible and usable for young investors. Tokenizing real-world assets (RWA) allows ownership of precious metals to be represented on the blockchain. This has allowed investors to buy, sell and trade assets easily or use the tokenized precious metal as collateral for lending and borrowing among individuals and small businesses.
Startups and Private Equity (via Apps and Platforms)
Millennials and the Gen Z crowd are comfortable with taking risks. They also look for purpose in their investments. Investing in startups and through private equity is high risk with high potential and mobile apps and online platforms now provide easier access to businesses and lower the barrier to investing.
Through crowdfunding apps and platforms, you can contribute to projects, startups or businesses with a large pool of other investors, possibly receiving rewards or discounted products or gaining access to company shares before its initial public offering (IPO). Some platforms require you to be an accredited investor — worth at least $1 million or earning $200,000 per year.
Motivations and Behavioral Trends
The financial landscape is changing. The investing habits of millennials and Gen Z Americans are signs of what’s to come.
The rise of cryptocurrency was a shot across the bow of traditional financial systems. Investors are changing. They are looking for fast, high returns and have a higher risk tolerance. They are educating themselves through the internet and social media and accessing various investments through mobile apps and online platforms.
Ready to Consider Alternative Investments?
Younger investors are leading the change in investing habits in the United States and abroad. Advancing technology and changing attitudes are driving alternative investing into the mainstream. You may consider joining the movement to buy alternative investments.
Frequently Asked Questions
Q
What are alternative investments?
A
Alternative investments are a broad grouping of assets that aren’t traditional investments such as stocks, bonds and cash. They include private equity, real estate, precious metals, collectibles, cryptocurrency and more. They typically have a low correlation to stocks and the potential for higher returns.
Q
Why are younger generations branching out from traditional investments?
A
Many younger investors have turned to alternative investments in search of above-average returns, flexibility and diversification. They are skeptical that traditional stocks, bonds and cash equivalents can provide high returns, tend to have a higher tolerance for risk and seek investments that align with their values.
Q
Do alternative investments provide higher returns?
A
Compared to traditional investments, alternative investments, such as private equity and venture capital, have the potential to generate high returns. However, alternative investments also carry higher risks.