Wealth in America 2008: Profile of the Young Millionaire Investor

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1 Wealth in America 2008: Profile of the Young Millionaire Investor January 25, 2008 John Skjervem Chief Investment Officer Bill Whitt Director of Market Research 2008 Northern Trust Corporation northerntrust.com

2 Background and Methodology The Wealth in America study represents one of the fullest pictures available of U.S. millionaires and their finances Nationwide survey of 1,014 households with stated liquid assets of $1 million or more Survey conducted in October 2007 Online questionnaire covering a variety of topics: Investments Outlook for 2008 Advice and use of advisors Philanthropy Wealth transfer Retirement Third year of the study; previous studies in 2005 and 2006 Study design allows for deepened understanding of the wealth market in the U.S. Trend analysis Distinctive characteristics of wealth according to age, wealth levels, geography Today s webcast focuses on the emergence of young millionaire investors (Gen X) and how their approach to investing differs from that of older millionaires (Baby Boomers and the Silent Generation) 2

3 Overall Asset Allocation Gen X millionaires on average hold broadly diversified investment portfolios, and, as a result, may be more likely than older generations to limit the impact of potential market turbulence. Average Allocation to Alternative Asset Classes, by Age Percent of Investment Portfolio 23% 17% 10% 47% 3% 2% 4% 14% 10% 12% 11% 17% 20% 55% 55% Other Alternatives Cash Fixed Income Equities 3

4 Allocation to Alternative Asset Classes Compared with older generations, Gen X millionaires have significantly greater allocations to alternative asset classes, such as real estate, hedge funds and private equity. Average Allocation to Alternative Asset Classes, by Age Percent of Investment Portfolio 23% Commodities 14% Hedge funds 10% Private equity Investment real estate 4

5 Allocation to Equities Within their equity holdings, Gen X millionaires are somewhat more diversified than older generations, with larger allocations to international stocks and to mid- and small cap equities. Average Allocation to Equities, by Age Percent of Investment Portfolio 22% 18% 16% International 33% 30% 30% US small and mid cap 45% 51% 54% US large cap 5

6 Asset Allocation Plans in 2008 Entering the current market correction, Gen X millionaires stated they were more comfortable with their current asset allocation than older generations Percentage of Millionaires Planning to Maintain Current Allocation in 2008, by Age 63% 54% 49% 6

7 Product Ownership Gen X millionaires are relatively adventurous investors, being much more likely than their older counterparts to invest in newer and nontraditional products if they are aware of them Ownership of Select Types of Investment Products, by Age Percent Owning Among Those Aware of Product 52% 39% 39% 42% 41% 37% 28% 20% 29% 22% 18% 13% 14% 14% 15% 20% 12% 12% ETFs Structured Notes Soc. Resp. Investments Managed Futures Currency Funds High-Yield Bonds Gen X Baby Boomers Silent Generation 7

8 Satisfaction with 2007 Investment Performance Gen X investors satisfaction with the performance of their investments in alternative asset classes is significantly higher than that of older generations. By contrast, there was no significant difference among the generations in satisfaction with performance of their large cap, small and mid-cap, and international equity investments. Experience with Performance of Investments, by Type of Investment Percent Whose Returns Exceeded Expectations 60% 56% 23% 33% 35% 42% 38% 31% 30% Hedge Funds Private Equity Real Estate 8

9 Outlook for Stock Market in 2008 Gen X millionaires were more optimistic at the time of the survey than older generations about stock market performance in the coming year Overall, millionaires in this year s survey are slightly more pessimistic about the market s prospects in the coming year than they were last year Expectations for 2008 Stock Market Performance, by Age 28% 14% 11% 15% 14% 11% 9% 8% Total Sample Gen X Baby Boomers Silent Generation Optimistic (expect >10% increase) Pessimistic (expect negative or flat performance) 9

10 Advisor Orientation Gen X millionaires on average have a more collaborative approach to making investment decisions. Not only are they more likely to collaborate with their advisor when making investment decisions, but they are also more likely to consult friends or relatives. Advisor Orientation with Regard to Investment Decisions, by Age Percent Consulting with Friends or Relatives When Making Investment Decisions, by Age 25% 29% 26% 27% 17% 61% 50% 53% 9% 14% 22% 21% Gen X Baby Boomers Silent Generation Gen X Baby Boomers Silent Generation Delegate to advisor Collaborate with advisor Wholly selfdirected 10

11 Orientation Toward Value and Growth Investment Styles Perhaps reflecting a greater sophistication or knowledge of investing, Gen X millionaires are much more likely than older generations to express a preference for either value or growth styles of investing. Orientation toward Value and Growth Styles of Investing, by Age 14% 31% 28% 43% 11% 19% 26% 58% 70% Bias toward value style Bias toward neither growth nor value styles Bias toward growth style 11

12 Orientation Toward Active and Passive Investments Gen X millionaires are also more likely than older generations to have a preference for either an active or passive approach to investing. Orientation toward Active and Passive Styles of Investing, by Age 41% 44% 34% 35% 31% 36% 15% 31% 33% Bias toward active style Bias toward neither active nor passive styles Bias toward passive style 12

13 Risk Profile As one might expect given their longer investment time horizon, Gen X millionaires are more likely than older generations to view themselves as aggressive investors with regard to risk and reward. Orientation toward Investment Risk, by Age 20% 14% 13% 29% 23% 7% 51% 73% 70% Aggressive (willing to take substantial risks for substantial gain) Moderate (willing to take moderate risks for moderate gains) Conservative (highly risk averse) 13

14 P E R S O N A L F I N A N C I A L S E R V I C E S Questions 14