Image Source: Countdown to Generational Wealth Transfer | Planned Giving Authority
Generational wealth is about more than just
It’s about the legacy and opportunities we leave for our children and grandchildren.
And while many think that generational wealth is reserved for the elite few, the truth is that it is closer than many think and is an extremely important way for families to setup the next generation for success.
Today, we’ll be going over what generational wealth is, why generational wealth can be both good and bad, investment areas which will help build generational wealth, and some other tips to help maximize your returns in the years and decades to come.
The Quick Introduction to Generational Wealth
Generational wealth, at its core, refers to assets passed down from one generation to the next. It’s not just about
The essence of generational wealth lies in its ability to provide financial security and opportunities for future generations, offering family members a foundation to build upon and achieve their own success.
Successfully creating generational wealth means more than just making lots of
Sustainable Wealth Accumulation
Actually building lasting generational wealth is a difficult task to accomplish. Simply hoping for lottery winnings or betting big in the stock market is not a sustainable way to build wealth. Rather, true generational wealth comes from investing in sound assets (think index funds, real estate, small caps, businesses, etc…) and building your portfolio to withstand any market fluctuations or economic slowdowns.
The trick to being successful and building your family’s financial future is taking the long-term approach and prioritizing sustainable wealth accumulation that will make a difference as time goes on. In other words, forget the get rich quick schemes and put your attention to more sustainable investment opportunities.
Effective Wealth Management
Once you start building your investment portfolio, proper management of these assets is crucial. This includes understanding your investment strategies, managing risks, and being aware of tax implications. It’s about making smart decisions that preserve and enhance the investments over time.
Strategic Wealth Transfer
This is about planning how to pass assets to the younger family members effectively.
It involves legal and financial planning, including wills, trusts, and estate planning, to ensure a smooth and tax-efficient transfer of wealth. Remember, your ability to positively impact future generations is only as good as the plan you have in place to transfer your wealth to them when the time comes.
Take your time when building your wealth transfer strategy and think about how and when you plan to pass down the investments you’ve worked so hard to build.
Financial Education and Values
Perhaps the most critical aspect of building generational wealth is imparting financial knowledge and values to the next generation.
Educating them about managing finances, understanding the value of
Generational Wealth Can be Both Good and Bad
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Generational wealth, while a powerful tool for financial security and opportunity, can have very different impacts on families.
Everyone always dreams of making or having more
To illustrate this point (and show that
The Positive Impact: Garrett Gee and Family
Image source: Why Fil-Am Snapchat millionaire kept working after $54-M jackpot | ABS-CBN News
After selling Scan, a mobile scanning app he co-founded to Snapchat in 2014 for a deal valued at $54 million, entrepreneur Garrett Gee and his family began a unique journey.
Instead of using the proceeds from this deal to buy fancy things or live in a bigger house, the Gees chose a different path. Garrett and his wife Jessica sold most of their possessions and embarked on a world tour using only the
Their story reflects a profound understanding of the value of experiences over material wealth and the importance of living within one’s means. By not touching the Snapchat deal
The Negative Impact: The Redstone Families Billion Dollar Empire
Image Source: Inside the Raging Legal Battle over Sumner Redstone’s Final Days | Vanity Fair
In contrast to the Gees, the story of the Redstone family, known for their billion-dollar media empire, showcases the potential pitfalls of generational wealth. The Redstones’ tale is marked by public legal battles, family disputes, and challenges related to governance and succession within their business empire. People close to Sumner Redstone fought, clawed, and backstabbed each other to get a piece of his fortune. His family nearly fell apart and despite being one of the wealthiest families in the world, the Redstones were jealous, angry, and downright miserable.
These stories of the Gee and Redstone families illustrate the dual nature of generational wealth: it can be a source of positive empowerment and freedom when managed with foresight and responsibility, or a catalyst for conflict and detrimental behavior in the absence of strong values and governance structures.
When starting out on building your own generational wealth, it will be up to you to decide which family you want to emulate. Having generational wealth won’t solve all your problems, and most importantly, the values you prioritize while building your wealth will have larger consequences on how the next generation treats your fortune.
Key Assets & Areas to Invest in When Building Generational Wealth
Image Source: What 145 Years Of Returns Tells Us About Real Estate vs. Stocks | Bigger Pockets
Building generational wealth involves a well-thought-out plan in a variety of assets.
Each type of investment carries its own set of risks and rewards, and the key to success lies in diversification and understanding the unique characteristics of each. Here’s a look at some critical investment areas when building out your portfolio:
Growth Stocks
Historically, growth stocks have offered higher returns than other areas of the market. For instance, the Russell 1000 Growth Index, which measures the performance of growth stocks in the U.S., has consistently outperformed the broader stock market over long periods. It reported an annual average return of about 15.89% over the past ten years, compared to the S&P 500’s average of approximately 13.88% in the same period.
To get some investment ideas on which growth stocks could be a potential fit in your portfolio, check out some other articles by Edge Investments analysts here, here, and here.
Real Estate
Real estate investments have been a reliable source of wealth creation. According to the National Association of Realtors, the median sales price of U.S. homes has consistently risen over the years, with an average annual appreciation rate of around 3-5%. This, combined with potential rental income, makes real estate a staple for any generational wealth portfolio.
Physical Assets
Physical assets like art and/or other collectibles can also be part of a generational wealth-building strategy. These assets often hold their value and can even appreciate over time, especially in the face of inflation or economic downturns. The key is to have a deep understanding of what you’re investing in, as these markets can be very nuanced and complex.
Business Ownership
The profitability of building a family business can vary widely, but successful enterprises can be one of the most powerful ways to build significant wealth. For instance, the average profit margin for privately held companies in the U.S. was reported to be around 8.9% in 2020, with many sectors experiencing higher margins.
Venture Capital
Venture capital is undoubtably a high-risk, high-reward investment. According to the National Venture Capital Association, venture capital-backed companies have significantly outperformed public markets in the U.S. over the last 15 years. For example, the 10-year VC Index return as of 2020 stood at 14.1%, compared to the S&P 500’s 13.9% in the same period.
Each of these asset classes contributes uniquely to the creation of generational wealth. Growth stocks and small caps offer high potential returns but come with greater volatility. Real estate and physical assets provide more stability and tangible value. Business ownership offers control and potential for great cashflow, while venture capital can open doors to innovative, high-growth companies.
The key to successful generational wealth building lies in a balanced and diversified investment strategy, aligning these assets with your risk tolerance and long-term financial goals.
Guidelines for Creating Generational Wealth
In order to create generational wealth, we can’t just focus on investing in the right assets; it’s also about how you manage those assets.
Here are some key guidelines covering both how to manage risk, as well as some personal finance tips to help keep your priorities in check.
Asset Allocation
Diversifying your investments is crucial. A well-balanced portfolio across different asset classes (like stocks, bonds, real estate, and alternative investments) will reduce risk and improve returns over time. This allocation should align with your risk tolerance, investment horizon, and financial goals.
Risk Management
Effective risk management involves understanding and mitigating the risks associated with each investment. This means not putting all your eggs in one basket, regularly reviewing your investments, and adjusting your portfolio in response to changing market conditions and personal circumstances.
Capital Preservation
The adage “you only have to get rich once” is especially relevant in generational wealth. While wealth creation is crucial, preserving that wealth is equally important. Capital preservation is about safeguarding the principal by investing in lower-risk assets and employing strategies like hedging. Remember, losing
Calculated Risks
Taking calculated risks means carefully evaluating potential investments, understanding the upside and downside, and making informed decisions. It’s not about avoiding risk altogether but about taking smart risks where the potential reward justifies the risk taken.
Prioritizing Income Generation Over Expense Cutting
While being frugal is important, focusing on increasing your income has far greater potential for wealth creation. This can mean advancing in your career, starting a business, or investing in income-generating assets. The idea is to grow the wealth pie rather than just reducing the slice you use.
Patience
We’ve already talked about this once before, but it’s important to bring it up again: Building generational wealth is a long-term game. It requires patience and the understanding that significant wealth accumulation usually doesn’t happen overnight. It’s about staying the course, even when markets fluctuate, and keeping your eyes on the long-term goals.
Cash Flow is King
Lastly, cash flow is critical in building financial success and significant wealth creation. Investments that generate regular income can provide financial stability and reinvestment opportunities. This steady cash flow can be pivotal in managing expenses, reinvesting in growth opportunities, and ensuring liquidity for unforeseen circumstances.
By following these guidelines, you can strategically build and maintain wealth that not only benefits you but also sets the foundation for future generations. Remember, the journey to generational wealth is as much about how you manage your assets as it is about the assets you choose to invest in.
Conclusion: Why is Generational Wealth Important
Image Source: Are You Lifting Up Others?. As Easter approaches I feel driven to… | by Josh Shannonhouse | Medium
Whereas many think building generational wealth only gives people the ability to buy fancy things, the truth of the matter is having substantial and lasting wealth, provides so much more. From peace of mind to enjoying new experiences, generational wealth is a game-changer for setting up the next generation for success.
As we finish up this article, I want to leave our readers with the true benefits of having generational wealth. This list goes beyond the obvious of having lots of financial resources is good, and instead, focuses on the more important aspects as to why doing everything you can to build substantial wealth for you and your family is absolutely worth it.
Freedom and Flexibility: Generational wealth provides a unique form of freedom – the freedom from financial worries and the flexibility to make life choices not constrained by immediate economic needs. It offers families the ability to pursue their passions, whether that be education, entrepreneurship, or philanthropy, without the burden of financial insecurity.
Creating a Lasting Legacy: More than just financial security, generational wealth allows for the creation of a legacy. It’s about passing down not just assets, but values, traditions, and a foundation upon which successive generations can build.
Empowering Future Generations: Perhaps the most significant aspect of generational wealth is the ability to give something meaningful to your children and grandchildren. It’s not merely about leaving them with financial assets; it’s about providing them with the tools and resources to succeed, the wisdom to manage wealth responsibly, and the vision to continue the family’s legacy.
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