If you want to build wealth, traditional investment methods won't get you there — at least according to young, wealthy people.
Among 21-43 year olds with at least $3 million in investable assets, only 28% said they could earn above-average returns from stocks and bonds. 2024 Bank of America Private Bank High Net Worth Americans Survey.
The opposite is true for those aged 44 and over, with 72% saying traditional investment methods are working well for them, and 84% of older adults believe that domestic and international equities offer the greatest investment growth opportunities among many asset classes.
Of course, owning stocks has been a way for Americans to build wealth for generations, and the U.S. stock market as a whole has made some profits. 10% per year for the past 100 yearsAssumes dividends are reinvested.
But for young, wealthy investors, stocks are the most popular investment, ahead of seven other types of investment, including real estate, cryptocurrencies, private equity and direct investments in companies.
Brad Klontz, a certified financial planner and professor of financial psychology at Creighton University, said younger investors, even those in the jet set, likely have some things to learn from older ones.
“Generally, the older you are, the more accurate your list is,” he says. “All the research I've done has shown that the older you get, the healthier your mindset is when it comes to money, because, frankly, we learn the hard way.”
Klontz says young, wealthy investors may fall victim to the same cognitive biases as average investors that could prevent them from maximizing their returns. Here we look at two of their main mistakes: ignoring conventional wisdom and prioritizing exclusivity.
Young people have been ignoring traditional advice for 'thousands of years'
In general, it's not surprising that younger investors, regardless of their wealth level, want to forge a different path than older generations.
“The desire to defy convention is a really important developmental stage,” Klontz says. “Young people on social media tell me, [traditional investing advice] “That's not the way it is anymore. Everything has changed. This is something people have been saying for thousands of years.”
Don't Miss: How to take control of your money and increase your wealth
Older investors tend to favor stocks because that's how they've historically delivered returns, and many of them are also likely to have tried and failed to find new, faster, better ways to build wealth.
“If you had asked me that question in my 20s, I might have said day trading, right before I lost everything I owned day trading,” Klontz says.
Klontz sees this story reflected in younger investors' enthusiasm for cryptocurrencies, which have generated phenomenal gains for some while destroying the portfolios of others who have speculated on highly volatile assets.
“When it comes to some of the tried-and-true approaches to investing, it's really a long-term game,” he says, “and when you hear people talking about cryptocurrencies or alternative assets, it's a much more short-term mentality. They're probably interested in making money faster.”
“We are inherently status-obsessed.”
Klontz cites exclusivity as another common feature of the investments favored by young, affluent Americans.
Real estate, private equity deals, and direct investments in companies require a level of cash that most individual investors don't have. For example, if you're buying an investment property, you need a substantial amount for a down payment. And to invest in a private equity fund, you must be an accredited investor, which typically means having an income of more than $200,000 or a net worth of more than $1 million.
The idea is that these investments must be better than what everyone can afford, otherwise they wouldn't be that hard to make, but that's not necessarily true.
For just a few dollars and a small fee, you can buy exposure to the S&P 500, a benchmark of the entire U.S. stock market, in the form of an exchange-traded fund.
In doing so, over the past 30 years It crushed the residential real estate market in the U.S. It's a much less risky purchase than investing in small businesses, half of which go bankrupt in the first five years. According to the Bureau of Labor Statistics.
and The data is mixed As for whether private equity funds tend to outperform public stocks over the long term, you generally have to pay exorbitant fees for the privilege of investing in one — typically 1.5% to 2% of invested assets per year, plus 20% of annual profits above a certain threshold. It's a particularly risky move, given how much investment fees can eat into long-term returns.
That's not to say that investing in real estate, private equity or small businesses will necessarily fail or underperform the overall stock market, but it's important to recognize why you might prefer one investment over another, Klontz says.
“We are all born with an attachment to our status,” he says, “and to deny it is to show spiritual immaturity.”
Want to master your money management this fall? Enroll in CNBC's new online courseWe'll teach you actionable strategies to master your budget, reduce your debt, and increase your assets. Get started today and become more confident and successful. Use code EARLYBIRD to receive a 30% off introductory discount extended through September 30, 2024 for the back-to-school season.
plus, Sign up for the CNBC Make It newsletter Learn tips and tricks for success in work, money and life.
