Affluent boomers may face bigger risks from the current market volatility than younger investors simply because of how they invest.

When it comes to investing, boomers generally aren't as well diversified as their kids, opting for traditional investments instead of spreading risk through newer financial alternatives.

Boomer investors - aged 44-62 - allocate just 14 percent of their portfolio to alternative investments such as hedge funds, private equity, investment real estate and commodities. Senior investors, aged 62 to 77, allocate only 10 percent to those alternatives. 

That compares with 23 percent of Generation X investors - aged 28 to 43, according to a new study by Northern Trust, a wealth management firm based in Chicago.

Boomers are also less likely than Gen Xers to adopt new investment products such as exchange traded funds and socially responsible investments that eschew holdings tied to tobacco, for example. Among those familiar with socially responsible investments, only 18 percent of boomers and 13 percent of older investors include them in their portfolios.

Variety Needed
A lack of diversification could work against older investors by potentially increasing investment portfolio volatility and decreasing returns in the long term, compared to Gen Xers who are approaching the management of their assets more like institutional investors.

"Historically, investments in alternative asset classes have generated superior returns and provided important diversification benefits, given that their return profiles are less correlated with traditional asset classes," said John Skjervem, chief investment officer of personal financial services for Northern Trust. 

At the same time, it's important to point out that these benefits come at the cost of reduced yield and liquidity, Skjervem said. That's because many alternative investments pay no current income, and are characterized by lock-up periods that range from months to years. 

"Older investors, many of whom rely on their investment portfolios to produce some or all of their income needs, often find these income and liquidity 'costs' financially prohibitive," Skjervem said. 

High-net-worth investors in this study were defined as households having $1 million or more in non-real estate liquid assets. This excludes 401(k) and other retirement plan assets as well as most real estate holdings.

Slumping Markets
Recent stock market turbulence has left many boomers scratching their heads about how to best protect their retirement savings amid worries about a possible recession. 

"With equity indices now more than 10 percent off their fall 2007 highs and daily financial headlines increasingly dire, investors of all ages and wealth levels will be tested . . .,"  Skjervem said.

Even with market uncertainty, about 54 percent of boomers plan to maintain their current asset allocation coming into the new year, compared to 63 percent of Gen Xers and 49 percent of the seniors. About 12 percent of boomers' assets are allocated to cash, compared to 17 percent of Gen Xers assets and 11 percent of the older generation's portfolios.