By Tim Hewson
22 September 2008
Opinionated, ego-centric, demanding and flippant. Just a few of the frequently used terms used to describe Generation Y (those aged between 18 to 29 years old).
In contrast, Baby Boomers (aged 45 to 65), also known as 'Generation Me', are typically described as being selfish and power hungry.
Debunking the myth that 'never the two shall meet' are some of the findings of a recent RaboPlus DIY Investor survey conducted by Celsius Research.
A bricks and mortar investment strategy
One of the survey's key findings is that Australia's love affair with property is alive and kicking.
In fact, excluding allocations to superannuation, investment property is the most popular single asset for Gen X (aged 30-44), Gen Y and Boomers.
And whilst an allocation of 16 per cent to investment property by Boomers may appear relatively high, Gen Y's allocations average close to 24 per cent.
It's only once you combine both compulsory super and Self-Managed Superannuation Funds (SMFS) that a preferred investment larger than that of investment property is obtainable.
And this in itself is interesting…typically governed by long-term tax incentives you would normally think superannuation (and in particular SMSFs) would be the preferred Boomers choice.
However, Gen Y's also allocate nearly 13 per cent of their total portfolio to SMSFs, compared to only 17 per cent of Boomers.
So back to property…
Late last year, Australian Property Monitors General Manager Michael McNamara noted that Gen Y's display all the traits of 'sophisticated microeconomic modelling'. Gen Y's are consciously turning their noses up to a mortgage in the 'cultural wastelands of Sydney's suburbia', and typically renting in inner city hot spots.
Not willing to make the necessary lifestyle sacrifices, Gen Y's are 'demonstrating economic reasoning skills', attuned to the well-known economic theory of 'opportunity cost'.
In this case, Gen Y's live a 'here and now' lifestyle, instead of a mortgage and significantly less discretionary spending. As a result, many Gen Y's stay home longer, save faster and buy investment property.
In comparison, Boomers are making a sea-change, whilst Gen X's are desperately trying to obtain a mortgage, which many have recently found out, is not all smooth sailing.
The impact of the global sub-prime sparked credit crisis, increasing living costs, inflation and historically high interest rates means that Gen X's have certainly sacrificed more than any other generation for the 'Great Australian Dream'.
All this at a time when property's foundations look unstable
Against the backdrop of annualised capital and rental growth returns of more than 15 per cent per annum since 1929, Gen Y's have done nothing but grow up (relatively speaking) with increasing property prices.
However, recent figures from the International Monetary Fund'sWorld Economic Report 2008 suggests that the Australian property market is the 4th most vulnerable market globally, with property prices likely to be inflated by more than 25 per cent.
Additionally, the Adviser EdgeNational Property Sector Update 2008 reported that residential property is down 15 per cent nationally.
Recent figures from the Australian Bureau of Statistics (ABS) further support this and also show that the weighted average of property prices across Australia's eight capital cities has flattened sharply during the March and June 2008 quarters at 0.4 per cent and -0.3 per cent respectively.
This despite an annual increase of 8.2 per cent for the 12 months to June 2008.
If anything, this tells us that property prices are on the path to a significant and sharp downturn over coming quarters, despite the recent decrease in the Official Cash Rate (OCR) by the Reserve Bank of Australia (RBA).
Adding to these issues the fact that property investing continues to get harder with the fall of A-REITs by more than 40 per cent from recent highs.
So why the infatuation with property?
Compared to Boomers, Gen Y's typically perceive investment property as being a less risky investment, compared to all other investment options.
In fact the survey confirmed that 37 per cent of Gen Y's consider investment property to not only be 'a short term investment', but also the investment which provides them with the best opportunity to generate higher yields.
Relatively speaking, Gen Y's are also 168 per cent more likely to focus on 'short term gains' when choosing their preferred investment, compared to the broader DIY Investor segment.
As anticipated, Boomers typically make their largest investment in superannuation. In fact compulsory super and SMSF accounts for more than 50 per cent of the Boomer portfolio.
In contrast to Gen Y's, Boomers are also significantly less likely to allocate to investment property, which they perceive as being 'for younger investors' and a relatively less safe option compared to superannuation.
Boomer investments in investment property only account for 16 per cent of their total portfolio.
Thinking about this figure another way, of the remaining 50 per cent not allocated to superannuation by Boomers, investment property is then the single largest investment representing an allocation of 32 per cent of the residual portfolio.
Return expectations
Boomers are significantly more likely to want to understand an investment in detail before investing in it. Gen Y's by comparison simply want a high headline rate.
Boomers will on average settle for an annual return of 11.6 per cent. Gen Y's on the other hand look for a return above 14 per cent - an almost 20 per cent higher return.
Of course, these figures become all the more interesting when you consider that 50 per cent of Boomer performance is expected to come from superannuation - a more diversified and conservative approach compared to investments external of the SMSF.
In general, Boomers tend to be less diversified than Gen Y's. Boomers generally make a higher allocation to super and only spread their portfolio across an average of 3.4 investments.
By comparison, Gen Y's will typically make 4.7 investments, diversifying their portfolios by a further 38 per cent.
Interestingly, 37 per cent of Gen Y's believe they only take 'calculated risks'. But in reality, research shows that Gen Y's are generally more cautious and conservative than any other generation.
Whilst this may in part explain their broader diversification when compared to both Gen X and Boomers, it largely contradicts Gen Y's thirst for higher returns over a shorter timeframe.
However, at least 35 per cent of Gen Y's believe they will increase their allocation to riskier investments for the pay-off of higher returns.
Boomers in contrast favour investments perceived as being safer (35 per cent), like superannuation (49 per cent) and with a strong focus on long-term returns (79 per cent) over short-term gains (1 per cent).
Given a clean slate and $500,000 what would DIY Investors do differently?
On average, Gen Y's would continue to prefer investment property despite increasing their allocation to managed funds by 58 per cent compared to their current portfolio weighting.
If given another $500,000, Gen Y's would allocate an additional $217,000 to investment property and increase their total allocation from 24 per cent to over 43 per cent.
In contrast, Boomers would generally seek the perceived safety and security of increasing their allocation to superannuation, and diversifying into managed funds and fixed income as their second and third preferred options.
However, if given another $500,000, Boomers would take the unexpected step of increasing their investment property allocation by 80 per cent.
Of course, superannuation comes a very close second. But by contrast, Gen Y consistently ranks superannuation as their fourth most preferred investment after investment property, shares and cash.
Same, same but different
Whilst you would typically assume that any generation separated by more than 15 years is likely to be diametrically opposed in their thinking, Gen Y's and Boomers in fact share more investment traits than they would likely admit.
In fact, despite all their differences, one might even go so far as to say they are both very rationale, highly motivated and opportunistic, sophisticated, strategic and innovative investors, zealous in their thirst for returns.
Perhaps a more pertinent question is whether each of the Gen Y's and Gen X's will adopt the investment characteristics of their preceding Boomer generation, or whether they will fundamentally alter the investment characteristics by migrating their investment beliefs over generations to come?
The one certainty that did arise from the survey is that all generations are increasingly looking beyond superannuation to create wealth - and also provide for their financial security in retirement.
Happy Investing!
