A recent study by the Bank of America found that wealthy young investors in the US are choosing to buy watches, rare or classic cars, sneakers, antiques and fine wines rather than traditional assets such as stocks and bonds.
The study, which consisted of over a 1,000 high-net-worth individuals (HNWIs) in the US, found that Gen Z allocate three times more of their investment portfolios to alternative investments, when compared to older generations.
But are these wise investments? Here is what experts told Arabian Business.
Gen Z focused on luxury goods because of social media, influencer culture
“Gen Z’s interest in luxury goods is driven by several factors. These items are status symbols which are important for many people, not just Gen Z’s. Displaying these items on social media and the influencer culture significantly shape their preferences,” Stuart Porter FPFS, Wealth Coach and Chartered Financial Planner told Arabian Business, adding that these alternative investments a “high risk” strategy requiring specialist knowledge.
“This is because fashion and trends change making the highly desirable undesirable and vice versa. There is also a limited market for these items which means converting the item to cash may not be so easy. A further factor is that the condition of the item is very important to collectors, for example a pair of worn sports shoes, unless they belonged to a famous player, is unlikely to fetch a good price.
“Another factor for investing in memorabilia of famous sports stars is the impact on the value of that memorabilia if their reputation is undermined such as Lance Armstrong or O J Simpson. The traditional investment route is not without risk but they require less specialist knowledge, can be converted to cash far more easily, you can diversify your investment easily, you do not need to sell all of your investment at once, and are usually lower risk,” he said.
Echoing the sentiment, Dr. Ryan Lemand, Co-founder and CEO of Neovision Wealth Management in Abu Dhabi added Gen Z are exposed to the luxury market at a much younger age than previous generations.
“Gen Z consumers are entering the luxury market at a much younger age, around 15 years old, which is significantly earlier than previous generations. This early engagement is fuelled by social media and influencer culture, making luxury brands more accessible and desirable,” Dr. Lemand said, adding that social media platforms such as Instagram, TikTok and YouTube play a “significant role” in promoting luxury lifestyles.
“Influencers and celebrities often showcase luxury products, creating a sense of aspiration among young consumers. Around 84 percent of Gen Z and 81 percent of millennials have purchased a luxury item after seeing it on social media,” he said.
But, what has led to this trend among Gen Z investors?
Dr. Lemand explained that the Covid-19 pandemic, as well as economic uncertainties have led Gen Z investors to seek a ‘YOLO’ mentality.
YOLO refers to an abbreviation for ‘you only live once’, on social media. Many users hashtag the term to mean that individuals must do things that are exciting, or enjoyable even if they are dangerous or trivial.
“This has driven many to seek immediate gratification through luxury purchases rather than long-term investments. Additionally, luxury goods are often seen as status symbols and a way to achieve social validation, which is highly valued in the social media age,” he said.
However, Porter warned that collecting and investing are not synonymous, and to avoid confusing the two terms.
“Collecting is about acquiring items for their own intrinsic value whilst investing is generally about buying assets which have the potential to grow which will then be sold to generate cash for another purpose, such as to pay for our standard of living,” he said, adding that as Gen Z pass through various milestones in life such as buying a house, getting married or starting a family, their preferences will change, making it “more mainstream.”
“Before investing in any form of asset, understand the risks and have an exit strategy. When investing in collectables (art, coins, cars, stamps, luxury brands, etc.) follow the market closely for a few years to understand the business cycle and typical transaction costs. Learn about specialist auction houses and where they are located. Investing is not just about buying something because you like it, it is about its future potential value,” he said, adding that many regulators today have expressed a growing concern over influences promoting financial products.
“This may be construed as regulated financial advice,” he said.
“One I saw recently showed how you could “easily” turn $20 into $2,000 in a few days whilst forgetting to tell the viewer that the process relied on picking the winner each day. This is rather like betting on a horse race once you know the result. It is not possible in real time and therefore misleading. Unfortunately, there is little by way of financial education in school. This means many people have no way of telling whether the information they are receiving is reliable or realistic. To defend against this, the industry should undertake campaigns to make the public better informed about financial matters,” he said.
Gen Z highly values ‘sustainability and quality’
In addition, Dr. Lemand explained Gen Z also highly values “sustainability and quality.”
“They often perceive luxury goods as better long-term investments due to their durability and potential for resale, aligning with their environmental values and economic pragmatism,” he said, adding that luxury brand are also leveraging new technologies to their advantage to boost the shopping experience. This includes virtual try-ons, augmented reality and NFTs.
“This tech-savvy approach appeals to younger consumers who are comfortable with digital innovation,” he concluded.
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