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Building Generational Wealth

While money doesn’t necessarily make people happy, the lack thereof can be the cause of great distress. One of the best gifts we can give our families is financial peace of mind. In this article, we discuss one of the best kept secrets that the top wealthy families have kept for themselves for centuries, and how almost anyone can do it with the right plan and the solid team to help achieve it; that is building “generational wealth.”

The Basics of Generational Wealth

In simple terms, generational wealth is wealth that is passed down through generations, preferably without losing its value or, better still, while increasing in value over time.

Moreover, being wealthy on paper might not mean that the person has access to cash, which is always a consideration when looking at future financial plans.

Some people do not want their descendants to have full access to large amounts of cash, at least during certain phases in their lives, such as at a young age, or they may want to pass on large cash sums to adult descendants to live off comfortably.

So, when looking at planning generational wealth, the main elements one should look at is the growth of wealth, protection of wealth, and passing on of wealth. If one of the elements is missing from the equation, it may create more problems than benefits.

Growing Wealth

How wealth grows highly depends on how long one is planning to do it for. When we are talking generational wealth, then we can be talking in decades or even centuries. We understand that this is normally beyond most people’s comprehension, but we just need to look at some examples, such as large estate owners (lords) in England, where they have vast amounts of wealth that started from almost nothing centuries before.

But, to make it more realistic and something that we can deal with here, we can look at the idea of decades instead. A person who is in their 30s or 40s may be looking at retiring in 20-30 years. A period of 2 to 3 decades can definitely be a major contributor in how wealth grows from a relatively small amount.

The mindset that one needs to have is one of longevity and not speed. It is a marathon, not a sprint. What this means is that any decision will have to have the far future in mind, rather than today or the coming 5 years.

This is where most people struggle, especially those who have little experience in investing. To demonstrate this, we can use an extreme example from stock markets that can highlight how short-term decisions can be detrimental, and how long-term views can build amazing wealth!

The example that we are using here is Amazon. If we bought the Amazon stock on the 23rd of December 1999, we would have paid around $89.75. What followed right after was the “DotCom” crash, and the stock price went all the way down to $6.78 in November 2001. This meant a loss in value of over 92% from the previous peak! Most people would have sold in the panic, and would have actually lost that money, while those with a long-term view and conviction were buying more at a discount.

The stock price did not get back to that same level until 2007, only to be followed by the drops due to the financial crisis of 2007-2009. From 2009 onwards, the stock price has risen to $3,700, and today it is trading around $3,000.

If we assume that we haven’t added any more of the Amazon stock during the crashes, and that we kept it from when we bought at the peak in 1999, our investment value today would have been up by 3,242% over a period of just over 20 years! Translating this into Dollars, an investment of $100,000 in 1999 should have been worth $3,242,000 today! This is after the investment was down more than 92% right after we entered.

As this example shows, as long as the overall conviction holds, any market shocks can be seen as temporary whenever we are looking at the long-term.

Of course, this is a rather extreme example, and most investments do not appreciate by thousands of percents like this, but we can take a look at historical performances of most solid investments, and we can see the same pattern repeating itself.

Protecting Wealth

The element of protection has many facets, but we can concentrate on one main element here, which is risk management.

As mentioned in our article about diversification, putting all the eggs in one basket can spell disaster to one’s investment portfolio, if what we have been concentrating our investments on do not go to plan.

Therefore, diversification and taking risk into consideration has to always be a key factor when planning to build generational wealth. We want to concentrate on investments that can weather storms over generations, and not just ones that can become obsolete within years.

Passing on Wealth

Most factors to consider in this part revolve around cash. Whether this is how much cash beneficiaries will get as a one-off or regularly, or how much inheritance tax or capital gains tax they will have to pay, this is usually a significant part of the plan.

Moreover, there are certain ways to organize such cash payments over time, such as conditions put on ages of beneficiaries, how much they would get, and when, etc. but this is beyond the scope of this article.

Where to start?

  1. As we’ve mentioned at the start of this article, the mindset needs to be one for the long-term. Think decades and not years.
  2. Focusing on industries and/or sectors that can transcend decades. Real estate is one such sector that has proven to be the most solid over generations.
  3. Do not look for quick or huge gains, but always think of the “compounding” effect of steady growth. A 6% yearly growth compounded should lead to growth of over 500% over 30 years.
  4. Always think about regularly investing, regardless of market conditions or what is happening around you in the world.

And, that last point is probably one of the most important ones to always stick to and ensuring whole families understand it to build generational wealth.

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