People in the Gen Z (born 1997-2012) and Millennial (1981-1996) generations are making decisions about their financial futures in a time of unprecedented uncertainty in the economic environment and investing landscape. Even prior to recent ructions in global equity and bond markets – and the potential unravelling of the unidirectional mode of investing in U.S. dollar-related assets – deeper structural shifts are prompting many young people to reconsider their sources of income and means of building wealth. 

For example, the acceleration (and presumed proliferation) of the use of GenAI has spurred many Gen Zs and Millennials to reconsider the skills they need to meet changing patterns of demand. Seemingly tech-forward jobs such as coding and software development – once thought to be stellar paths for the future – are now clouded by the prospect they may be made obsolete by GenAI. 

Moreover, AI is hardly the only structural threat complicating their efforts to invest for stability and prosperity. Climate change has also contributed to a record cost of home ownership within many countries, prompting some in younger generations to reassess this traditional path to wealth creation.;

Note, too, that structurally higher inflation and a higher-for-longer interest rate environment is underpinning elevated financing costs for both households and governments. With record levels of public debt and rapidly aging populations in many advanced economies (including Japan, the United States and the United Kingdom), those still early in their careers are worried that governments may not be able deliver on retirement promises. 

So, set against this backdrop of uncertainty, how should the Gen Z and Millennial generations approach portfolio construction and asset allocation? As we shall see, the ability to make multifaceted investments in one’s own human capital today – which can accrue greater returns in one’s own financial capital – will be pivotal. Asset allocation for a long horizon also needs to entail breaking the traditional mold of a “60/40” split between equities and bonds, in taking a position to gain more exposure to alternative investments and private markets. Geographical diversification is also of paramount importance. 

The Great Gatsby Curve 

People within rising generations today in both advanced and emerging economies face various forms of inequality: income inequality, wealth inequality and inequality of opportunity. Part of the reason for this ongoing secular changes within the economy. As we move from “old” manufacturing-oriented and goods-producing to “new” services-providing growth, the pie of economic growth gets smaller over time. This means that in advanced economies, growth is capped at about 3 percent per annum – which doesn’t leave much leeway for generous tax breaks or endless government spending.

In the transition to services-driven economies we’ve also seen the emergence of a U-shaped employment curve: the wages (and hence, often wealth creation) for white-collar workers stand on one side of the U shape, and wages for blue collar workers stand on the other. Overall, workers within most advanced economies have witnessed a declining share of income over time.

By no coincidence, we’ve witnessed a decline in intergenerational mobility (IGM) along with an increase in income inequality, a linkage economists have dubbed the Great Gatsby Curve. The chances of a person born in the bottom part of the income distribution to rise to the top have declined over time in countries with higher inequality. Effectively, the social mobility escalator is broken for reasons that vary from country to country. For example, in France, a highly specific educational system is a contributing factor. Policies to encourage greater mixité within society – and to enhance diversity within the country’s elite grandes écoles graduate schools have been instituted, but without much success.

Personal Portfolio Composition

So how should Gen Z and millennials approach portfolio construction? The answer in part entails striking the right balance between investing in financial capital and in one’s own human capital. Traditionally defined, human capital is the present value of the anticipated earnings over one’s remaining lifetime. In our age of GenAI, as one labor economist points out, we can also think about skills in terms of expertise. The market value of this bank of expertise ebbs and rises with changing patterns of demand. The trick is to continuously hone one's own skills in response.

And how can this bank of skills be effectively adapted over time? Miles Corak et al. argue that parents can inculcate this sense of investing in human capital in their children. Research shows that the decisions made before one turns 40 can impact outcomes for one’s financial security later on in life. Even if parents do not have the financial capital to pass on wealth, imbuing the importance of continually investing in skills is an asset that can be transmitted across generations.

Amid the accelerated pace of change in the labor market, which is likely to result from increasing automation, humility is also required. Staying at the forefront of expertise will require continuous investment in education or “learning for working” in adapting to demand – something the governments of Singapore and Saudi Arabia know well.

Importantly, in one’s own portfolio construction, human capital can also be directed toward bolstering financial capital. Data from Ireland show that households with higher levels of education are likely to take on more risk in their investing decisions – and that such behavior significantly impacts their portfolios by generating a higher return horizon over time. To put it simply, the positive correlation between higher educational attainment, a stronger appetite for risk and robust portfolio performance indicate ways in which human capital can generate financial capital beyond wage-earned income.

Human and financial capital also intersect (and yield synergies) in building up equity in one’s own business – be it a start-up, or shares in a corporation in which one works. And, in the age of GenAI where everyone may become an “expert,” building one’s own personal brand may become increasingly important. In the case of the U.S., estimates by Piketty and Saez (updated to 2024) show that entrepreneurship contributes over 30 percent of the income of the top 1 percent of the distribution.

This stands in contrast to the way in which rents or dividends contributed to the lion’s share of income of the top earners earlier in the 20th century. What this suggests is that the American dream is not necessarily broken, but that policy should be directed toward supporting an amplification of corporate ownership as well as providing greater support for entrepreneurship across income brackets. Programs such as Ownership Works, which support greater employee participation in corporate ownership, stand out here by enhancing this marriage of human and financial capital.

Keep Calm and Diversify

Along with the need to strike the right balance between investing in financial capital and one’s own human capital, Gen Zs and Millennials are approaching asset allocation in a rapidly changing investing environment. Due to recent policy shifts in the U.S., the value of the U.S. dollar against a trade-weighted basket of other currencies is down by 10 percent this year. Amid rampant fiscal expansions in advanced economies – including the US and Japan – long-term bonds are coming under pressure, which indicates that even some fixed-income assets may no longer be deemed to be safe-haven assets.

US household wealth is concentrated in financial assets such as equity shares and mutual funds. By contrast, in some European countries, including France, Italy and Spain, wealth is predominantly composed of real assets such as residences. (In Japan, wealth is mostly held as bank deposits.) Meanwhile, data from the Fed show that younger generations are steadily increasing their allocation to crypto assets, while ownership remains negligible for Baby Boomers and the Silent Generation. What’s the right balance going forward? 

Certainly, geographical diversification – as well as diversification across asset classes – remains crucially important. Geographic diversity can be managed via equity funds and currency exposure as well as through corporate bond markets. Looking beyond geographic asset allocation, the need to diversify across asset classes is pivotal for generating and maintaining wealth over the long run. The age-old “60-40” prescription for portfolio allocation (that is, 60 percent equities, 40 percent bonds) can be updated to reflect the need for growing exposure to alternative investments and private markets.

Traditionally, individual and family investors accessed real estate as an asset class via real estate investment trusts. Similarly structured vehicles now offer access to infrastructure and subgroups of infrastructure (including telecoms) which are important as hedges against inflation. Lastly, in thinking about digital assets, investments can be directed toward the technology underpinning blockchain (distributed ledger) technology, as opposed to crypto assets themselves. This can be done by buying specific infrastructure groups that invest in distributed ledger technology via an asset manager, or indeed by investing in financial institutions that have a significant leg up on digital innovation. 

How the Private Sector and Policymakers Can Help

Despite the unprecedented level of uncertainty in the global financial markets today – and the persistence of various forms of economic inequality for rising generations – all hope is not lost. Certainly, structural forces such as climate change, sticky inflation and the accelerated pace of automation are complicating the investing landscape. But as we’ve seen, the ability to adopt a holistic stance in terms of one’s own personal portfolio construction – that of balancing and continually investing in one’s own human as well as financial capital – can put Gen Z and Millennial generations in a relatively stronger position regardless of the headwinds to come. Taking a multidirectional view of human capital – and the ways it can amplify one’s own financial capital – is essential here.

Recognizing the fact that entrepreneurship can significantly boost one’s income, efforts by various public and private sector entities to support startups and to enhance corporate ownership opportunities are laudable. Policies aimed at inculcating a culture of early wealth- building in the U.S. via investment accounts are also commendable, especially in light of the power of compound interest over a lifetime. In keeping with our diversification theme, the economic impact of such accounts can also be amplified by offering global exposure as well as exposure to alternative and unlisted assets (something that investing giant the AustralianSuper fund offers).

Overall, the ability for rising generations to adopt a culture of stewardship (and for parents/guardians, the private sector and for policymakers to encourage) provides a buttress against despondency about the future. While governments are tapped out, public purses are likely to be “lesser for longer.” Empowering the rising generations and equipping them with versatile tools to approach portfolio construction and asset allocation can, in turn, create a new class of stewards to look after generations to come.