Investing for Generations

Long-term investors develop a habit of looking further over the horizon than short-term investors do. Even beyond that, those with a dedication to establishing and maintaining family wealth that truly endures need to consider not only how far ahead they can see, but how far their children and then their grandchildren can see into their own respective investment futures. In short, there is no “in short” about generational investment. And in challenging times like these, it’s more important than ever to focus on the long term.

What is a generation?

Believe it or not, there is no complete consensus on the number of years a generation represents. A rule of thumb has been that a generation used to be about twenty years but has stretched out to be closer to 25. But science actually tells us that it’s probably closer to 33 for men and 29 for women.[i] And if that’s not confusing enough, consider that when we talk about “generations,” we could be talking about two different things: either the years between parents and children or the named groups of people born within a certain time span.

When it comes to investing, though, it might be most helpful to consider that both definitions are pointing to the same thing: investments should be handled carefully over the long term—sometimes very long term—and families from one generation to the next have similar investment goals that need to be addressed well in advance. Families go on and on, but wealth can either thrive or dive from one generation to the next.

Big Life Expenses, Big Investment Goals

The age-old desire that parents have for their children to enjoy better lives than they did acts as a powerful motivator to lay the solid groundwork for your children so that they can then do the right thing for their children (a.k.a. your grandchildren) as well. Generation after generation, they will be facing the usual suspects of big life expenses that require substantial wealth to cover financially: marriage, housing, children, and college—possibly in that order.

The good news is that none of these expenses should come as a surprise. They are part of normal life. Sure, some teens might need braces. Others might pursue a sport or other passion that requires a significant financial commitment. And, while some parents would never think of helping their children buy a house, others might consider it a given. In all these cases, that’s where family values—from generation to generation—come into play. In the long run, as generational investment goes, winning and losing family wealth is always at stake.

For Richer or Poorer

Even the wealthiest families, whose fortunes may seem invincible, face the consequences of poor financial planning from one generation to the next. In fact, an often-quoted statistic reports that “about 70% of wealthy families lose their wealth by the second generation, and 90% do by the following generation.”[ii] That’s not to say that they lose everything, but at least that their standard of living would be dramatically lowered. It takes solid financial planning and the teaching of financial management skills to maintain and, hopefully, build upon wealth from one generation to the next.

Generational Names

It’s not difficult to find studies that spot savings and investment traits in Baby Boomers and decide that these traits are, supposedly, entirely lacking in Millennials. A real financial advisor will get to know you and your goals as an investor, not as a nameless part of a named generation. Willingness to save or likelihood of buying a house usually ends up tying to those big life events mentioned earlier and how they line up with the much larger trends in the economy. Again, the vision for financial strategy has more to do with planning for personal and family goals and little or nothing to do with what everyone else is doing. Investment strategies and portfolio mixes should be driven more by the life stage of the investor than the generation they belong to.

Spanning Generations

Later in life, when a lot of the important thinking and planning around generational investing takes place, it’s important to continue investing in one’s own health. After all, eating right and exercising will go a long way toward keeping you around to enjoy your grandchildren and even great-grandchildren.

They say you can’t take it with you, but that doesn’t mean you need to give it all away too soon. You will always have your core capital needs associated with maintaining your current lifestyle. Of course, it is wise to expect a higher level of spending on healthcare as one ages, too. In fact, when we were talking about big life expenses such as college, we probably should have included aging as well.

By its very nature, generational investing suggests long-term thinking—decades instead of years, and especially not months, weeks, or days. Investing for generations means taking a long-term investing strategy and stretching it out past one’s own lifetime. It has to do with legacy. Not simply the legacy of financial wealth, but also the legacy of knowing what to do with it, generation after generation.

[i] How long is a generation? Science provides an answer, https://isogg.org/wiki/How_long_is_a_generation%3F_Science_provides_an_answer, originally published in Ancestry Magazine, Sep-Oct 2005, Volume 23, Number 4, pp51-53

[ii] Leave Behind More than Your Money: Communication Is Key to a Successful Legacy, https://www.kiplinger.com/article/retirement/T021-C032-S014-communication-is-key-to-a-successful-legacy.html, January 15, 2019, referencing a study by The Williams Group, family wealth consultancy

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