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Investing in stocks and bonds is an established part of investing and wealth building, offering a safe and stable way of building returns. At least it has for most generations. According to Credit Suisse’s latest Global Investment Returns Yearbook, these established strategies may not be effective for Generation Z. One of the authors of the report, Professor Paul Marsh of London Business School, commented:

“The Baby Boomer generation benefited from the excellent performance of worldwide equities, bonds, and blended portfolios. Their grandchildren in Generation Z face a future with far lower expected investment returns.”

This doesn’t sound great, but it does not mean that investment is not an important strategy for younger generations. We take a look at what factors have led to this situation and how can Gen Z use alternative investment opportunities to generate positive returns.

A uniquely positioned generation

Although born into the most prosperous time in human history, Gen Z’s financial future is far from a done deal. With many of the generation entering the workforce in the coming years, the effects of the pandemic are likely to be significant. Research by the World Economic Forum (WEF) shows that a major factor is the generation's overrepresentation in service industry jobs like restaurants and retail. These industries have been hit hard by the pandemic.

According to the WEF:

“In terms of their future employment prospects, some economists are anticipating what they call ‘scarring’. Due to long periods of unemployment, Gen Z will miss out on formative years gaining experience and training. This may impact them later in life, as their ability to climb the career ladder will be affected.”

Traditional investment returns could be significantly lower for Gen Z

The Credit Suisse report shows that it might not be the effects of economic storms that Gen Z needs to be aware of. Baby Boomers, Gen X, and Millennials had all been able to earn average real returns of around 5% from equities and 3.6% from bonds. But, according to the analysis, someone from Gen Z with a 70:30 portfolio of stocks and bonds can only expect annualised returns of 2%.

The analysis looks at decades of financial history to explore the complex relationship between returns from shares and yields on government bonds. The report tracks the ‘real’ returns of these investments when inflation is taken into account. There is a clear relationship between real interest rates and returns. So, with interest rates having been historically low for a long time, future returns are likely to be lower too.

What does this mean in practical terms? If they want to build wealth effectively, Gen Z will need to save more, diversify their investments and think long-term.

Living through a period of huge change

Gen Z and the millennials who came before them have been born into the internet age, and their early lives have seen established social and professional processes uprooted. Digitalisation is impacting every part of human society and creating a unique set of opportunities for younger generations.

But rather than undermining investment activity, technological changes could be driving an increase among Gen Z. Two examples of this are the impact of robo-advisors and the growth in engagement in online brokerages among young people. Both of these show that young people want the tools to explore the world of investment on their own terms, and online platforms are helping to democratise and open up the world of investing to people that have previously felt shut out.

Finding the right opportunities

While more traditional investment strategies may be failing younger generations, there is evidence that they are beginning to forge their own path. An example of this is retail investing, where Gen Z and Millennials own up to 25% of the stock market. The age group is also driving growth in sustainable investment. Growing up in a period of technological, ecological and social change may mean that younger generations are less tethered to the past. The fact that traditional investment strategies may not work for them is only going to increase this feeling. We could be entering an exciting new age of investing.

Building wealth through investing in real estate

Crowdfunding is a good option for younger generations looking to invest for several reasons. While Millennials and Gen X tend to highlight capital growth and supplementing retirement as key investment priorities, for Gen Z, increasing capital to pay for things like education is often more important. This means that yield and security rather than liquidity are what younger generations are often looking for. Adding real estate to their portfolios makes a lot of sense in this context as it provides diversified global assets, stable long-term and hard currency returns. All without requiring a large amount of starting capital.

Gen Z is also used to using online platforms to enhance their daily lives. But they can also enhance their financial futures too. Building wealth is just as important for younger generations as it always has been, but it is time to break out of established patterns.

Bricksave is an online platform that enables access and empowers more people than ever before to do more with their money. Real estate crowdfunding helps investors create diversified portfolios of property-backed assets that offer attractive potential returns. We are helping younger generations access a world of investment opportunity.