Many younger investors are finding creative ways to build wealth. Gone are the days of yore, when investing solely in bonds and stocks was the go-to method to becoming rich. In fact, a whopping 72% of younger high-net-worth Americans between the age of 21 and 43 “believe it is no longer possible to achieve above average investment returns by investing solely in traditional stocks and bonds,” according to a Bank of America report.
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In comparison, only 28% of Americans in the 44 and older age bracket share this sentiment. So, what are these younger generations investing in, and should you do the same?
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Collectibles — Wine, Cars and Sneakers
Wealthy millennials and Gen Z Americans are very keen on collectibles, with 94% being interested in them, according to the report. For instance, 46% of Americans in these generations are interested in collecting watches; 36% are interested in wine and spirits; 32% in rare or classic cars, while 30% are interested in sneakers.
Yet, while these assets provide diversification, approaching and investing in them with caution is key, several experts agreed.
Steve Sexton, CEO of Sexton Advisory Group, noted that diversifying your portfolio using assets with low correlation to one another is generally a good thing. He added, however, that it’s important to recognize some alternative investments are more reliable than others.
“Collectibles like wine, fine art, cars and even NFTs [non-fungible tokens] may make for great party conversation and occasionally yield a return or two, but generally, I wouldn’t advise on banking on collectibles to make or break your portfolio,” said Sexton.
Another potential downside: these investments are not liquid. While that vintage wine collection or rare sneakers might look great, it won’t be easy to sell quickly if you suddenly need cash, said Gloria Garcia Cisneros, wealth manager, CFP LourdMurray.
Instead, she urged, these should complement, not replace a well-rounded financial strategy.
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Precious Metals
Interestingly, the report found that 45% of younger Americans own physical gold, while another 45% are interested in investing in it. Experts noted this makes sense, as gold has several benefits such as being considered an inflation hedge.
According to Alex Ebkarian, COO and co-founder of precious metals dealer Allegiance Gold, it’s incredibly important for younger generations to diversify beyond buying traditional paper-backed assets such as stocks, bonds and mutual funds. One way to go about it, he said, is with precious metals.
These invesetmens as an alternative asset can be beneficial, he noted, because in times of financial crises — such as the Great Recession of 2008-2009 — gold held its value, while portfolios with only paper-backed assets lost tremendous value.
Crypto
Not surprisingly, younger investors are also interested in crypto, which has become mainstream in the past few years, yet is still considered an alternative investment and highly volatile. The numbers speak for themselves: 28% of younger wealthy Americans believe it’s the area that offers the greatest opportunity for growth (second to real estate), while 49% of that cohort own digital assets and 38% are interested in them.
Here too, experts urge caution. While diversifying your portfolio is important, it’s also essential to understand that digital assets, which are potentially lucrative, aren’t a sure bet, said Jacqueline Cooper, CEO of both the Blockchain Legal Institute and the Maryland Blockchain Association.
“For instance, Bitcoin is increasingly being adopted by the traditional finance community, providing new avenues for investment beyond decentralized finance. However, this does not eliminate the inherent risks involved,” she said.
Real Estate
For younger wealthy Americans, real estate is the number one choice when it comes to which investment presents the greatest opportunity for growth, at 31%. These investments can now come in a variety of flavors. For instance, real estate investment trusts (REITS) — in essence mutual funds that buy real estate instead of stocks — can be a good diversification tool.
In fact, the benefit of investing in alternative investments that are uncorrelated to the stock market, such as REITs, means that they’ll potentially stay stable or appreciate even if the stock market dips, said Sexton. “Real estate investments (REITs, farmland, commercial and residential properties) are generally considered as sound investments because they’ve historically provided steady income and tax benefits,” he said.
Another alternative way to invest in real estate is via fractional ownership. Alex Blackwood, CEO, co-founder, mogul Club, said fractional real estate is one of the most strategic and creative forms of alternative investing among Gen Z. As he explained, this enables investors to buy into a portion of a home, typically a rental property, and receive high yields without having to do the maintenance and upkeep that comes with ownership.
“Younger generations are getting involved in fractional real estate investing at a growing pace, especially since home affordability has been such a concern for them in recent years, making investing in single properties nearly impossible,” Blackwood elaborated.
The Bottom Line
Experts — such as Shawn Carpenter, chairman, CEO, StockAlarm — noted that stocks and bonds are not disappearing anytime soon, and remain a good base for any investment plan. Yet, adding alternative investments in your portfolio can make it more diverse and lower the risk. Beyond the cultural appeal and the potentially high returns, deciding if you should go for alternative investments really depends on what your personal goals are and how much risk you can accept.
“Selling a collectible watch or an antique car is not as simple as selling stocks in the stock market,” Carpenter said. “Also, you need to study. Learning about the sneaker market or knowing the worth of old wine needs time and hard work.”
So where do alternatives play in?
First, start with a strong foundation of traditional investments and emergency savings. Next, if you’re interested in alternatives, consider allocating a small portion of your portfolio — typically no more than 10-20% — to these more speculative investments, according to LourdMurray’s Garcia Cisneros. In other words, she said, think of it as money you’d be okay losing entirely if things don’t pan out.
“Being young gives you a fantastic advantage: time. The power of compound interest means that steady, long-term investments in more traditional assets can yield significant growth over decades,” she said. Garcia Cisneros added that while it’s okay to explore alternative investments, don’t let them overshadow the importance of building a solid, diversified portfolio of stocks, bonds and other more conventional assets.
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This article originally appeared on GOBankingRates.com: Younger Generations Are Buying These 4 Alternative Investments — Should You?
