Younger Investors Like Alternatives, And It Pays Off

Jan 25 2008 | 12:10pm ET

Thanks to their faith in alternative investments and their openness to innovation, younger investors are better investors, according to a new report from Northern Trust.

The survey, finds that Generation X millionaires—those between the ages of 28 and 42—are more sophisticated investors than their parents and grandparents. And that sophistication, notably when it comes to alternatives, makes them more likely to enjoy a better long-term return, and may beat their elders this year, as well. It also makes them happier, Northern Trust says.

“Historically, investments in alternative asset classes have generated superior returns and provided important diversification benefits, given that their return profiles are less correlated with traditional asset classes,” John Skjervem, chief investment officer of personal financial services at Northern Trust, said.

“But these benefits come at the cost of reduced yield and liquidity. In fact, many alternative investments pay no current income and are characterized by lock-up periods that range from months to years. Older investors, many of whom rely on their investment portfolios to produce some or all of their income needs, often find these income and liquidity 'costs' financially prohibitive. Younger millionaires, however, are often still working and can use wage income to support their current lifestyle needs, allowing this group to capitalize on alternatives' favorable return and diversification benefits.”

Nearly a quarter of Gen X portfolios are allocated to alternatives, according to the survey. By contrast, only 14% of Baby Boomer (aged 43 to 61) millionaire portfolios are so invested, and just a tenth of the portfolios of the so-called “silent generation” (aged 62 to 77). Younger investors are also more adventurous in their equity allocations, putting more than half in international and mid- and small-cap names, and more interested in new products, such as exchange-traded funds, structured notes and socially-responsible investments.

Among the latter category, 41% of Gen X investors aware of SRI have some such investments. Just 18% of Boomers and 13% of the over-62 set who know about it invest in SRI.

Gen Xers also have substantially larger allocations to cash.

What’s more, they are happier with those allocations than the older are with theirs. Sixty percent of Gen Xers are satisfied with their hedge fund investments, while just a third of silent generation millionaires and less than a quarter of Boomers are. Similarly, whereas 56% of Gen Xers are happy with their private equity portfolios, just 42% of the silent and 35% of Boomers are.

Happier, and so content to leave things as they are: Entering 2008, 63% of younger investors plan to maintain their current asset allocation. Of the middle-aged, only 54% plan to, and just 49% of the elders expect to keep things the same.


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