Baby boomers, Gen Xers, and millennials — the three largest generations of the five that represent the 326 million people currently living in the U.S. — have many differences that set their generations apart. When it comes to investing, though, a new Wells Fargo Investment Institute report found the generations are more alike than different.
Titled “Seeing Wealth Differently Across Generations,” the report analyzed the investing choices of more than 900,000 clients ranging from baby boomers to millennials — comparing their specific asset allocations with overall average investor allocations.
Hear from members of each generation on why they invest the way they do in a new Wells Fargo Investment Institute video (3 minutes).
What the generations have in common
Darrell Cronk, president of Wells Fargo Investment Institute, said despite differing views on spending, investing, and building wealth, baby boomers, Gen Xers, and millennials don’t differ much in how they act on those views.
Members of all three generations largely follow the same progression of marriage, children, and homeownership. Cronk said the cycle is characterized by a focus on discretionary spending in younger years, followed by a greater emphasis on saving — for retirement, a home down payment, or children’s education — and then a return to discretionary spending once long-term debts are paid off.
Cronk said the report also discovered all generations are making similar investment choices, such as having a large share of equities and U.S. companies in their portfolios, and having a higher allocation to cash than what Wells Fargo Investment Institute recommends.
Differences based on life experiences
“We discovered from an analysis of our clients’ asset allocations,” Cronk said, “that one generation does not invest that differently from another, but perhaps they should, given their different investment objectives and time horizons coupled with a slow, low-growth environment.” He acknowledged that the few differences that do exist seem based on experience.
One example is that millennials are more heavily invested in fixed income than one would expect. This is likely because they were reaching adulthood during the Great Recession, Cronk said. On the other hand, he added, millennials have fewer equities in their portfolios than the Institute would expect for investors at their stage in life.
Both baby boomers and Gen Xers have higher allocations than millennials to alternative investments — investing more in hedge funds and equity investments in private companies. And they invest more as a generation in oil and other commodities. Cronk said this could be because, on average, they have larger accounts to spread around to these diversifying asset classes.
Another experience-based difference is millennials’ comfort level with new technology, he said, and their desire to make a positive social impact at work and as individuals. However, the Institute’s report did not analyze investing decisions based on these differences.
“Looking ahead, we do not expect millennials’ financial habits to differ significantly from prior generations — a trend that should continue as wealth passes down from one generation to the next,” said Cronk.
Taking into account both similarities and differences, he said, the following tips can help members of each generation with their investment plans.
Millennials: Learn from those who traveled the road before
“Millennials have the rest of their financial lives in front of them, and that means a lot of expenses and a need to save,” said Laurie Blackburn, a financial advisor for Wells Fargo Advisors. “Getting a handle on how to manage both is key for this generation because they have time on their side. The fact that millennials will follow the same financial progression as the generations before them demonstrates the need to set up a budget and savings plan. They can get where they want to be with discipline on spending and saving, plus the power of compounding will propel them forward over time.”
Gen Xers: Talk early and often about money
“Many from this generation are squarely between kids and aging parents, and while this can be a gift, the convergence of these responsibilities can be overwhelming at times,” said John Papadopulos, head of Wells Fargo Retirement. “Never underestimate the importance of conversations, whether it’s talking about money with kids or financial plans with aging parents. Also, we have seen that a written financial plan is crucial in this situation because it can help provide a roadmap when balancing substantial financial demands with the need to continue saving and investing for retirement.”
Baby boomers: Prepare the next generation for what’s to come
“The phrase ‘from shirtsleeves to shirtsleeves in three generations,’ illustrates how quickly wealth can evaporate,” said Jill Shipley, managing director of the Family Dynamics and Education group for Abbot Downing, Wells Fargo’s business serving ultra-high-net-worth clients. “Typically, the first generation creates the wealth through hard work and struggle. The second generation often gets a close-up view of that struggle and understands the importance of hard work. But by the third generation, the connection can be lost.” Without a link to the sacrifices their grandparents made, young family members may take the wealth for granted — why Shipley said that communication is the key to keeping wealth in the family.
All generations: Make a plan and stick to it
“It really helps to start with your goals and your time horizon,” said Tracie McMillion, head of global asset allocation at Wells Fargo Investment Institute, and one of the report’s authors. “Once you determine what you need the money to do for you, and when, you are much better able to determine how much risk is appropriate for your investment account. Historically, over longer periods of time, diversified portfolios tend to generate positive returns that allow your money to grow.”
With people living longer and more active lives, Cronk also said there’s a narrowing generation gap as the three generations increasingly work together, deal with family issues together, and even use automated investing tools and technology once thought to only interest millennials.
“Investing is a dynamic endeavor, and each generation should plan accordingly as they continue along their financial cycle of life,” he said.
Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Wells Fargo Investment Institute, Inc., is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
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