They are smart, young and rich. They are the X and Y generations. And they have shown themselves to be stunningly successful in the management of their portfolios. How do they do it?
Since 2008, 40% of the affluent Generation X and Yers reported an increase in the value of their portfolios, compared to only a 28% cross-generational average increase. These numbers come from the Aite Group, an independent research and advisory firm focused on business, technology and regulatory issues and their impact on the financial services industry. Aite surveyed 1,014 U.S. investors across different generations. Affluent X's and Y's were younger than 45 with at least $250,000 in investible assets, or a household income of at least $140,000.
Among other things, the study shows 7% of the young and affluent lost more than 10% on their investments, compared to an 18% average. Some 25% of affluent Gen X and Y lost less than 10%, while on average, 41% of the investing population lost less than 10%.
black; '>How are the young and well-off doing it? In ways that might surprise you.
The rules of portfolio management dictate that you should invest then forget. But that's not what Gen X and Y are doing. And they're choosing to invest their money in different instruments.
Gen X and Y are known for their tech-savvy ability to quickly get information. They have high expectations and they shift quickly in their decision-making.
They're young, they're affluent and they're... twitchy. Especially in this economy.
Normally, that's not something you want in an investor. But it seems to be working for these generations.
Here is how they do it: As we all know, X and Y are now accustomed to instant access to information. There's not much they can't do by cell phone, and the Internet continues to be a huge game changer.
'The Internet has become a great equalizer,' said 29-year-old Financial Uproar blogger Nelson Smith. 'Suddenly everybody has access to the same research as the pros. Learning how to read it is another story (and many people think they know much more than they actually do), but there's no longer an information gap.'
The difference comes out in the profits. While older generations feared big losses, the younger generations were proactively seeking to make gains.
Here's how they took action:
- They made more changes to their portfolios: More than half of Gen X and Gen Y investors restructured their portfolios multiple times (approximately 60% made two or more portfolio changes) over the past few years with the young affluent or high-income investors restructuring most frequently (69% restructuring two or more times and about 45% restructuring three times or more).
- They own alternative products: Although the majority of their investments is still in stocks, bonds and mutual funds, they are also more likely to own exchange-traded funds, commodities, hedge funds/private offerings, foreign exchange contracts, futures contracts and options contracts.
- More online trades: Generation X and Y on average made a higher number of online trade transactions than other generations. (Some 27% made 25 or more trades per year, on average, compared to the general populace of 11%.)
- When they don't like it, they leave or switch: More than half (53%) of the young affluent said they were planning to switch or ditch financial advice firms within the year, and 30% are planning to switch or ditch their advisers. They also top the list of those who've already departed or switched.
'Investors just aren't buying the value proposition that advisers bring to the table,' Smith said. 'They look at their returns, compare them to the index and think, 'I paid an adviser and still lagged the index?'
The top reasons they left firms? Primarily because of interest rates or financial advice they'd received (28%). The other top reason (20%) was banking fees (such as account fees, financial advice fees and asset management fees).
'It's not just about better investment performance,' said one of the Aite report's writers, Sophie Schmitt.
Case in point: Beth Cleveland and her husband tried a large firm but switched after they found their relationship with their adviser too impersonal. Now, they're very happy with their financial adviser, despite the fact that he's several states away.
The 29- and 30-year-old Gen Yers are extremely busy -- she runs a public relations business from Danville, Pa., and her husband is an emergency room resident -- so they prefer to have an adviser watch their investments.
Their CPA referred them to Jody Hyden, with Ameriprise Financial in Charleston, S.C., who offered them 'a lot more personal attention and customized planning that help us create a really strong portfolio from investments to insurance to college planning for our newborn,' Cleveland said.
The Investing Answer: Despite your financial successes, there may be a place for a financial planner in your future, as Cleveland has found. A great time to use a financial planner is to help you choose from your employer's benefits. A planner will consider your personal situation, help you through a maze of decisions about health insurance, choices between stock options or special bonuses and things that are difficult to investigate on your own, said Susan John, chair of the National Association of Personal Financial Advisors.
