Ask today’s breed of investor what their investment plan or plan for financial success is, and you might hear something like this on one end of the spectrum:
“I’m hoping to hop on the next big bandwagon investment – something like crypto or NFTs back in their day. I’m hoping to time it right so I get in at the right time before it takes off with the rest of the investing public.”
On the other end of the spectrum, you might hear something like this:
“I think I want to play it safe. I’ll put my money in a 401(k) with employee matching and hope there’s enough to get me through retirement when I do retire.”
The first investment strategy is one built for disaster. Chasing the next big thing has never been an effective investment strategy. It’s gambling, and like gambling, a few people get lucky once in a while, but for the most part, the house usually wins.
The second investment strategy is a recipe for mediocrity and one that will never result in financial freedom – the ability to retire when you want.
Successful investors neither speculate nor do they settle for average. They play an entirely different investing game than everyone else. That’s because they set their heights higher than almost anyone else.
While some are trying to get rich quickly and some are just content to get by in their lifetimes, ultra-wealthy investors look beyond their lifetimes regarding their investment objectives. This desire to provide for generations beyond themselves informs their investment decisions – decisions that don’t involve the next biggest thing or 401(k)’s.
Here is what’s important to the ultra-wealthy and the seven steps to creating generational wealth:
(1) Invest for Passive Income…
If you don’t strive to invest in a way that will generate income independent of your job, you’ll never achieve financial freedom. You’ll always be tied to your job – trading time for money. Only when you invest in passive income will you be able to replace the income from your job, and only then will you be able to have the freedom to walk away from your job if you want to and set your terms and agenda for the life you want to live.
(2) Invest to Provide for Today’s Needs While Preserving Income and Assets for the Future…
Only tangible income-producing assets fit this description. Stocks and crypto don’t generate income, so there’s a guarantee that they will provide for current needs. Only certain assets like commercial real estate and investments in income-producing businesses can generate income for current needs while maintaining their value over time to provide for future generations. Then, when these assets have run their course, they’ll be exchanged for newer assets to continue the process.
(3) Partner With Experts…
You can’t generate multiple income streams on your own – not the type of income that will create generational wealth. There aren’t enough hours in the day. You’ll need to trust others and rely on the experience and expertise of others to generate multiple streams of income in your sleep. Only by leveraging the expertise of others and co-investing with partners can you free up your time to do the things you want to do.
(4) Have a Succession Plan and Educate the Next Generation…
Be sure to have adequate legal and financial measures in place to provide for a smooth succession and transition plan in place to avoid confusion and conflicts. Also, remember that you can leave all the assets to your heirs you want. Still, suppose you don’t educate them on preserving and nurturing these assets by passing on your knowledge and values. In that case, you risk the next generation squandering all of your wealth and leaving nothing for future generations.
To maintain multigenerational wealth, you must pass on the tangible assets and a legacy of financial literacy and education so future generations will know how to preserve and build on the wealth you have created and passed on.
(5) Be the Example...
Live the life you wish your heirs to emulate and explain why you choose to live the way you do. Show them the importance of delayed gratification and why it’s important to avoid debt to allocate your assets to productive uses. Show them how you think of money as more than a means to buy material objects. Teach them that money can be a tool that can be put to work to generate more money. The more money you can save by working more or making more money, or avoiding consumer debt, the more money you can put to work to grow wealth.
Leave footsteps for your heirs to follow in and explain to them why you do the things you do. Why don’t you have the 30’ boat that the neighbor down the road has? Why do you surround yourself with certain peer groups? Why do you invest the way you do? Then show them how you choose to spend your money and how you choose to give back and serve your community and fellow beings. Live the life that you hope they will emulate in their way.
(6) Embrace Illiquidity…
Embrace investing with a long view. Most investors love the liquidity of the stock and crypto markets because they can buy and dump assets at will. It allows them to jump in and out of assets and positions to chase the next big thing and new opportunities.
The problem with liquidity is it encourages herd behavior and leads to extreme volatility. Think of investing with a long view in assets with long lockup periods not as a negative but as a positive. Investing in tried and true assets with a long track record of success offers something meme stocks and crypto can’t provide – peace of mind.
Ultra-wealthy investors prefer illiquid assets because they can make their investment and give no second thought to it. They understand there may be short-term hiccups, but everything irons itself out in the long run. It’s hard to put a price on this peace of mind.
(7) Leverage the Tax Law…
To the ultra-wealthy, saving a dollar is just as valuable as making an extra dollar. The result to the bottom line is the same. That’s why they gravitate to assets that allow them to take full advantage of the tax laws.
By taking advantage of capital gains, 1031 exchange, and the various deductions, depreciation, tax reduction, and elimination provisions available to passive investments in commercial real estate and private equity, the ultra-wealthy can keep more of what they make and preserve more for future generations.
Creating generational wealth starts with creating enough wealth to sustain you and your loved ones through your lifetime then preserving and growing wealth for future generations.
Once you’ve determined to create generational wealth, it becomes a matter of implementing the appropriate steps to carry out your intentions.