Why Gen Zs aren’t copying their parents’ portfolios

At the start of the year, a reader wrote into the IC Portfolio Clinic and alluded to an episode from years gone by. His investment approach was cautious, with a large proportion of his portfolio held in cash and bonds. The reasoning was entirely understandable: his father had lost large sums of money in the dotcom crash, leaving the reader wary when it came to his own investments. 

It is not surprising that a difficult family experience would have an impact on investment decisions in future. Research shows that our parents’ financial attitudes, experiences and habits can all shape how we invest; today’s young investors report that their parents are a key (and trusted) source of investment advice. 

Despite this, young investors are not copying their parents’ portfolios: as of 2022, 20 per cent of young US investors owned only crypto assets and non-fungible tokens (NFTs), while only 30 per cent report holding any kind of bonds at all. Why are the generations investing so differently? 

Starting young

Over the past 10 years, a body of research has shown that parents play a key role in ‘financially socialising’ their children. This conveys a simple idea: by modelling financial practices and talking to their families about money, adults can help their children to develop the skills that they need to become financially independent later in life. 

Studies show that parents have more of an impact on financial behaviour than work experience and formal school-based programmes combined. It makes sense that young people should look towards their parents as they make their early investment decisions – and the research bears this out.  

In 2023, figures published by regulatory organisation FINRA and the CFA Institute looked at where young people learn about investing. As the chart shows, Gen Z investors (aged between 18 and 25 at the time of the survey) were most likely to learn about investing from social media and internet searches – although parents and family were in a close third place. 

A 2023 survey found that among ‘affluent’ investors – defined here as having investable assets (including property and vehicles) of £25,000 or more – the pull of parental advice was even stronger. According to research by UK law firm Michelmores, more than half of millennial investors (a young-ish 26-41) said that their parents and others of the same generation had the most influence on their investment decisions.

Crypto splits the generations 

An old rule of thumb says an investor's allocation to bonds and less risky assets should increase as they get closer to retirement age. So we would reasonably expect portfolio composition to look different between age cohorts – but perhaps not as different as it does.

Crypto splits the generations, as the chart below shows. As of late 2022, 21 per cent of ‘affluent’ millennials held some cryptocurrencies, compared with 22 per cent of Gen X investors (aged 42-57) and just 3.6 per cent of baby boomers. Younger investors were also far more likely to invest in peer-to-peer lending platforms (8 per cent of millennials against 1 per cent of baby boomers) and crowdfunding (9 per cent against 1 per cent). The Michelmores report stresses that, although these numbers aren’t high, “it demonstrates that younger generations are more willing to take a risk with their investments”. 

When it comes to the investors surveyed by FINRA/CFA, the proportion of young people holding high-risk assets was even greater. More than half of Gen Zs reported owning crypto, while a quarter held NFTs. Strikingly, for 20 per cent of the Gen Zs surveyed, these were their only forays into investing at all.

That younger people take more risks is hardly unexpected. After all, Gen Z investors have youth on their side, which in theory makes them better equipped to tolerate greater losses than older investors. Most (given their average age of about 21.5 years old) will have no financial dependents, which also gives them the freedom to take on more risk. But there are reasons to think that today’s young investors might be making riskier decisions than their parent's generation did at the same age. 

Almost half of the young investors surveyed said that they had started investing by dabbling in crypto (described as ‘high risk and largely unregulated’ by UK regulators), while only a third had started out by investing in shares. According to the CFA study, 'Fomo' – fear of missing out – was a significant motivator for Gen Zs, and the rise of social media will have only made its pull stronger. 

When I was your age…

The economic context must also be considered. As the table below shows, an average millennial investor would have been the same age as today’s Gen Zs in 2012. Gen Xers, baby boomers and the 'silent generation' were the same age in 1996, 1978 and 1959, respectively.

(For those silent generation readers wondering about their relative lack of attention in this article – the cohort is rather neglected in the research, and when they are highlighted, conclusions about baby boomers tend to be carried across).

The current economic backdrop is having a particular effect on investment decisions. Young investors have faced the global shocks of the pandemic and energy price spikes against a backdrop of sluggish growth and soaring inflation. Unsurprisingly, almost half of Gen Z investors think that the economic circumstances facing their cohort are “more challenging” than those of prior generations. 

Older investors (who, after all, weathered episodes such as the winter of discontent or the dotcom crash) would no doubt beg to differ. Yet today’s younger investors are also facing a host of more structural economic concerns. Survey evidence suggests that student debt, housing affordability and later retirement ages are all weighing on young UK investors. 

Globally, Gen Z investors hope to fund travel plans or earlier retirement. In the UK, ambitions are far more mundane: the FINRA/CFA study suggests that young UK investors want to buy a home and have a second source of income. Tellingly, a staggering 26 per of young investors surveyed in the UK think that they will retire over the age of 70. The figure is just 4 per cent in China, and 10 per cent in the US. The report suggests that if young investors feel they are saddled with hostile economic circumstances, they “may deem it necessary to take risks to be able to succeed financially”. 

The ESG divide

There is also a gulf between the generations when it comes to ESG (environmental, social and governance). According to the Michelmores study, 22 per cent of millennials see ESG as a primary consideration when making an investment decision, compared with just 6 per cent of baby boomers (aged 58-76). By contrast, over 40 per cent of the older generation reported that “social and environmental impact has never been a consideration” in their investment decisions. 

But the gulf is narrowing. Whether a venture will have a positive social or environmental impact is less important to millennials today than it was in 2019, ranking below risk, management fees and liquidity in a list of priorities. A tougher investment climate could go much of the way to explaining why. After a muted couple of years, ESG funds saw significant investor outflows last year. ESG-unfriendly commodities, oil, gas and defence stocks all performed well, just as the growth stocks in ESG funds came under pressure from higher interest rates. 

Data from Refinitiv Lipper suggests that by the end of 2023, ESG funds had significantly underperformed their benchmarks over one-, three- and five-year time horizons. Michelmores partner Charles Courtenay noted that “it’s not surprising that people are less inclined to prioritise social impact investments when faced with economic uncertainty – it is hard to go green when in the red”. 

It doesn't cut both ways  

These different approaches can heighten tensions between the generations. Last year, a report from Abrdn found that around a third of baby boomers said that they would be less likely to pass their wealth onto someone with a different attitude to money. Of particular concern was a tendency for younger investors to prioritise a shorter-term outlook, a decision that can “colour older generations’ wealth transfer decisions”.

Younger investors don’t always share these doubts. Michelmores research found that young investors tend to be far more confident in their investment knowledge than older cohorts. Almost half described themselves as ‘expert or advanced’ – compared with just 13 per cent of baby boomers. Yet confident young investors still hold advice from their (more humble) families in high esteem: according to FINRA, Gen Zs rated their parents and families as their most trusted resource. 

Interestingly, things don’t seem to run the other way: as the chart above shows, less than a fifth of baby boomers report seeking advice from friends and family before they select an investment. We know that younger investors feel the benefit of talking about investments with their families. Given their different perspectives, horizons and experiences – perhaps older ones could, too.