Less than half of young Americans are investing in stocks, with market volatility and concerns about the economy cited as top reasons for not doing so.
As The Fed’s quantitative tightening program continues, market watchers expect more pain for public companies and their shareholders. In the event of a market crash, young people have historically exited the stock market and have been reluctant to re-enter.
This bear market is no different, and JPMorgan reports that retail investors have been exiting the markets at an accelerated pace. This is especially true for young people.
Young people are becoming independently wealthy
Rather than make themselves susceptible to the vicissitudes of the public markets, many young Americans are building their wealth. As CNBC reports, there are now over 600,000 millennial millionaires in the US alone, and in the UK, the number of millennial and Gen Z millionaires doubled in just one year.
There are several reasons for this growth in wealth. The main reason, of course, is that many young people are making more money than previous generations. In fact, despite the headlines depicting millennials as cash-strapped and burdened by student debt, data shows that they have higher inflation-adjusted incomes and net worths than previous generations at the same age.
Young people are more educated, but they’re also branching into new and innovative industries where they can command higher salaries. Nearly two-thirds of Gen Z have started or plan to start their own business, while nearly half have multiple side hustles.
But income is not the only factor contributing to millennial and Gen Z wealth. Another important factor is that young people are saving earlier and reducing their debt rapidly, while boomers are building debt.
In addition, many young people benefit from inheritances. Millennials benefit from the largest intergenerational wealth transfer in history, with $30 trillion entering their pockets over the next few decades.
So while the stock market may be in turmoil, young Americans are building significant wealth outside public markets.
Young people are seeking higher returns
Rather than risk that hard-earned money in public markets, young people are increasingly seeking higher returns by investing in alternative assets such as real estate, private equity, and venture capital. While 60% of millennials see a “future usage opportunity” in alternative investment, just over a third of baby boomers do.
These investments are often more illiquid than stocks but offer the potential for much higher returns. For example, according to Cambridge Associates, the S&P 500 has only returned an average 11% IRR, while the average VC fund generates a 19% IRR. These differences become increasingly clear in downturns. In the decade after the dot-com bubble burst, the public market equivalent index’s annual return was just 0.08%, while private equity returned a 7.5% average.
Gen Z and millennials are also seeking to make an impact with their investments. They are increasingly interested in impact investing, defined as investing to generate social or environmental impact and financial return.
The bottom line
There are multiple reasons why millennials and Gen Z are leaving public markets. They are becoming independently wealthy, they seek higher returns, and they want to make an impact with their investments.
With Gridline, young people can invest in a selection of professionally managed alternative investment funds and get exposure to non-public assets with lower capital minimums, fees, and greater liquidity.