Over the past decade young investors entering the market for the first time (e.g. millennials and gen-z) have experienced staggering market returns nearing 20% annualized in public equities, and returns well above that in crypto investments and monetization of stock options through IPOs. And these record rallies in cryptoassets, technology stocks, and IPOs have led to newly minted millionaires.
But unlike previous generations that earned wealth through a long career of working and investing, many of these individuals stumbled into this wealth early in their career. The once worthless corporate equity warrants (i.e. start-ups) and stock options overnight became worth millions, and small investments into cryptoassets suddenly turned into “real” millions that could be sent to bank accounts. This group is defined by two important things:
- Most of these new millionaires are in their 30s (millennials and Gen-z) with long investment horizons
- Many didn’t start investing (or enter the workforce) until after the technology bubble and financial crisis bear markets, and as such have only experienced staggering returns across investments.
These new millionaires are accustomed to high risk/high return investments, and the high return profiles of venture capital, technology stocks, and cryptoassets. And so, the idea that they should invest their newfound wealth in a “balanced” 60/40 portfolio with an expected return of 4.6% going forward is unlikely, to say the least.
Instead, most of these young investors would rather invest in momentum stocks, private markets, crypto, and niche investments, all of which carry both high risk, but the potential for massive returns. This changing investor mentality, combined with the building “retail momentum” is driving market paradigm shifts.
And for long-term investors, this matters.
We think this trend is likely to promote more persistent market volatility, especially concentrated episodic volatility. These young investors have earned a lifetime of earnings at a young age, and are willing to take on excess risk with it.
Valuations will always matter in the long run, but we think “herd investing” and momentum trading remain persistent, resulting in short-term dislocations which are likely to be more pronounced, and potentially last longer (months or years vs. days and weeks).
Alternative investments (e.g. private equity, venture capital, private debt, cryptoassets) and non-correlated niche investments as a core investments inside portfolios are one way to potentially limit the impact of these risks. Private alternatives inside portfolios tend to be less impacted by public market swings, and can potentially limit broad market exposure and enhance risk/return profiles. Meanwhile as we wrote about in a previous blog post (Implications of Adding Bitcoin (Crypto Currencies) to Traditional Portfolios) we think cryptoassets are another way to potentially differentiate portfolios.
It’s time for most investors to rethink portfolio risk, diversification, and drivers of return.
ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.