Welcome to the 131st episode of the Alternative Investing Podcast!
In this episode, we'll discuss three important lessons you can learn from young investors taking untraditional ways to achieve financial freedom faster.
If you're a Gen X or boomer investor interested in how Gen Zers and millennials approach their wealth-building journey, then make sure to listen to this episode!
Today's topic is a bit controversial in a way that may surprise some and infuriate others.
However, if you’re in for the lessons, I invite you to join me as I talk about the new breed of young investors who want to do things better than their parents and grandparents have done.
As I observed these young investors, I noticed that even though they acknowledge that building wealth is important, they don’t necessarily agree with the traditional way of doing it.
What they’re constantly asking themselves is how they can make it BETTER and do it FASTER.
Being adults, sometimes we’re quick to dismiss young people as being flighty and not having much to bring to the table, but that’s not always the case.
How Gen-Zers and Millenials Approach Wealth Building
Just last year, the Bank of America put out a report examining how different groups of people invest.
They studied ultra-high-net-worth individuals and even younger investors and found that 80% of these younger investors are trying new ways to invest their money. Specifically, they are into alternative investments rather than mainstream investment opportunities such as shares, bonds, and the typical buy-and-hold real estate.
And compared to older investors, they were more willing to put a higher percentage of their wealth into those alternative investments. On top of that, 50% of those Gen Zs and millennials also hold crypto.
But the fascinating thing that caught my attention was that over 84 trillion dollars will be handed down from the Gen Xers and baby boomers to the millennials and Gen Zers between now and 2045.
Overall, the study found that the younger generation lacked confidence in traditional investments, and I think a part of it is because of their desire to get where they want to go much faster.
You can observe this clearly in the workplace, where most of them constantly try to level up their skills so they can move up the ladder more quickly. They don't just accept that they should work hard and that the rewards will come later, as my generation did.
I’m saying this from a personal observation because I’ve worked with many younger people when I brought interns into my business. And if there’s one thing I notice about them almost immediately, they want to get into alternative investments as soon as possible.
Yes, that’s their main goal instead of looking at the traditional way of building wealth: set aside capital first, invest in traditional assets, grow your net worth, and then divert some of that capital into alternatives.
These young individuals see that cash flow and passive income are the golden tickets to stepping outside the workforce sooner and achieving the financial freedom they want.
So while my generation was focused on investing in assets that grow their net worth to allow them to leverage into bigger assets so they can end up with a large capital that they can split off into alternative investments, the younger generation wants to go straight into alternatives.
If you’ve listened to some of my podcast episodes, you might remember me mentioning that alternative investments are for people who already have good capital.
Why? Alternative investments are not a great way to grow your capital in the same manner as purchasing a traditional buy-and-hold property.
Most people I work with want a significant result from their investments in the span of two to five years, and for that to happen, they need to have enough money saved up so they can invest it and get the cash flow they need from alternatives.
However, the Gen Z and millennial investors we’re talking about are challenging what people say they think they need to live off.
If you’re familiar with the FIRE (which stands for Financial Independence, Retire Early) community, they always talk about how to invest in a way that will help them achieve financial freedom in their early thirties and how they can live off less so they’ve got the option to step away from their work if they want to.
These are the reasons why alternative investments are gaining traction and are being considered to help them transform their timelines to financial freedom.
Please note that I’m not advocating crypto and other investment opportunities because their risk profiles don't suit my preference.
But in some ways, I want to give kudos to these young investors for thinking outside the square and looking for other opportunities that can fast-track their ability to leave their jobs sooner.
So now, let’s talk about the key lessons I want to share that apply to all investors but especially to Gen X and Baby Boomers.
Honing in on What You Need and Setting it as a Baseline
The first lesson is to hone in on what you need and set it as a baseline goal.
Based on my observation, most people aspire to build wealth more than they need, and these millennials and Gen Zs have recognised that. I think our fear of loss drives us to work longer and harder, strive for unrealistic goals, and create more than enough wealth.
Let me share with you an example.
I have a client who has modest lifestyle expectations. He believes that their family, which includes children who are not in private school and live fairly frugally, could live on a household income of about $120,000.
But when I asked many people like him what their passive income goals are, they would say something like $300,000.
So I encourage them to distinguish between what their baseline goal is and what their aspirational goal is.
Because they could achieve financial independence much sooner if they could be realistic about how much money they REALLY need to live their current lifestyle.
We acknowledge that our generation and the generations before us had tough times growing up because money was scarce. And I believe those experiences have created character traits and behaviours around money that may not be helpful for us.
So let me emphasise again to hone in on what you need and set that as the baseline goal.
Some Gen Zs and millennials have a baseline goal of $40,000 to $50,000, but as a more experienced investor, you need to ask yourself what you need.
Do you need fancy toys?
Do you need business class airfares?
Do you always need to stay five-star?
And even if you need those things every now and then, how much does that cost?
Starting Alternative Investment Sooner
The second lesson is to start converting your capital into alternative investments sooner.
Now that we’re still in the recession, it’s more important than ever to stop getting caught up in the rollercoaster of the share market and start building cash-flowing investments.
This goes back to what I said earlier: building capital first and then converting it into alternatives.
However, giving yourself enough runway to do a little bit of both will cut down your financial freedom timeline. Instead of waiting until you’re in your forties, fifties, and sixties, I can see the merits of having passive income from your cash flow when you’re young.
So while you're earning good money, it’s a good idea to convert that into assets and investments that will most likely increase your net worth over time.
If you think about typical investors, some want to get to a $5 million or $10 million net worth before converting their capital into alternative investments. In contrast, most millennials and Gen Zers don’t want to wait that long.
Instead, they give themselves four to five years to develop the cash flow they need to convert that capital into alternatives. You need to remember to get the stewardship piece right so you can set aside fuel from your active income to invest.
Aspiring to Reach Financial Freedom Well Before Retirement Age
Now, let’s talk about the third lesson, which is about achieving financial freedom well before retirement age.
Wherever you go, you’ll always encounter wealth professionals advocating how you can have sufficient money so that when you hit 65, you’ll have enough to live comfortably for the rest of your years.
While this is the strategy of the masses, millennials and Gen Zs think the other way. They want to reach financial freedom long before retirement age.
In the FIRE community, they’re even talking about retirement by age 30, which is just unbelievable.
However, their concept of retirement isn’t about stopping work and sitting around doing nothing. It’s about applying their skills, talents, resources, and time to pursuits that matter to them and will impact the world.
There are a lot of investors who think that retiring before 65 or 67 sounds crazy, and they think that for them to do that, they need to take drastic actions.
But I can assure you that's not the case.
Right now, I’m working with many smart investors in their early thirties who recognise that applying the right knowledge and making the right investments can put them in a position decades before others.
And you can do it, too, as long as you understand that there’s a huge difference between something being risky and something being unfamiliar.
For example, it might be unfamiliar to you to invest in alternative investments backed by real properties.
But if you can focus on educating yourself and growing your network with experts in this space, you can make the unfamiliar familiar.
Then, as you start to contrast the attributes of alternative investments with those of traditional investments, you will eventually understand why they have lower risk profiles.
Rounding these all up today, I just want to say that the aspiration of these Gen Zs and millennials to retire early is admirable.
I know many people who work their butts off because they think they have to earn as much as possible to create far more wealth than they need.
They say they’re interested in leaving a legacy, but that’s just the justification for not spending time with their kids and for putting themselves in a situation where their mental health, stress, and anxieties start seeping into all other areas of their lives.
So if you want to create financial freedom well before retirement age, there's a lot that you can take from how Gen Zs and millennials look at things.
You need to reassess how much you think you need, start converting capital into alternatives sooner, and understand that the greatest way to de-risk is to educate yourself on good investments.