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Young, Rich and Savvy: Are Gen X Investors Better Prepared?

As the markets crashed last week, politicians and economists scrambled, while analysts warned investors to brace for a bumpy ride. But Northern Trust, a bank that caters to the well-heeled, reported that one group of millionaires was well-prepared: the young ones.

According to their recent survey, Generation X investors with more than $1 million to invest are more diversified than those of their older counterparts – they’re also more heavily invested in alternative investments. Gen Xers (ages 28 to 42) allocated 23% of their portfolios to alternative asset classes like hedge funds, private equity, investment real estate and commodities. That compares to 14% for baby boomers (ages 43 to 61) and 10% for the Silent Generation (ages 62 to 77).

Northern Trust also said that Gen X millionaires were more diversified when it comes to their stock holdings, with more than half of their money spread across international, mid-cap and small-cap investments.

Even more surprising, at least to me, was the fact that young millionaires hold more in cash. Gen-X investors have 17% of their portfolios allocated to cash, compared with 12% for boomers and 11% for the Silent Generation.

John Skjervem, Chief Investment Officer for Personal Financial Services at Northern Trust, suggested that young investors tend to be more opportunistic and like to hold cash so that they can jump on an opportunity. Or, perhaps they simply need to keep more cash on hand for their private equity allocations: investors usually invest in private equity funds in installments over time, so they need to keep extra cash on hand. Whatever the reason, the cash allocations paid off handsomely over the last few weeks.

What isn’t clear, however, is whether investments in hedge funds and private equity will pay off over the long run. Choosing the right manager is incredibly important when it comes to alternative investing. It’s usually not enough just to be in the right asset class. These funds also charge higher fees than the average stock mutual fund – a lot more. The typical hedge fund charges 2% of assets, and takes another 20% of all gains.

Given their exorbitant costs, investors need to be sure they selected a manager they can trust. Endowments and other institutional investors spend a lot of money and time making sure they select the alternative managers

After all, “hedge fund” is a loose term that gives managers a lot of freedom to invest in complex instruments. While some hedge funds aim to lessen volatility and protect your money in a down market, many don’t necessarily “hedge” against anything at all – and investors stand to lose most, if not all, of their money. As for private equity investments, young millionaires will have to wait a number of years to see if their investments pan out. Private equity funds usually don’t return money to investors for three to eight years.

Here at FiLife we’re big fans of diversification and long-term asset allocation targets. But we also think it’s important to keep an eye on fees and to thoroughly research active managers if you decide to go that route. Only time will tell whether today’s young millionaires will actually get what they paid for.

– Kristen Sullivan

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