How to Create Intergenerational Wealth

Some families seem to have it made. They live in safe neighborhoods. Their kids go to respected schools. They don’t live paycheck to paycheck.

This certainty and freedom is available to many more families than you probably realize. Imagine how important it is to set your family on this path.

This article looks out how to plan for and create intergenerational wealth. It goes far beyond the basics:

• Spend less than you earn.
• Get out of debt and stay out of debt.
• Pay yourself first by saving at the beginning of the month.

There is no doubt those things are important. But the real way to build intergenerational wealth is not a few tips and tricks. It is all about mindset.

Have a long-term perspective

The single most important way to generate intergenerational wealth is to have a long-term perspective.

You aren’t going to build wealth overnight in the stock market. Warren Buffett (Trades, Portfolio) has averaged returns of around 20% a year over his investing career.

You aren’t going to average 200% or 400% returns a year. You are not 20x or 40x better than Buffett. No one is.

Seth Klarman (Trades, Portfolio) is an investing genius. He has generated returns around 20% a year for decades (like Buffett). Klarman is now a billionaire. His quote below on long-term investing is especially constructive:

“The single greatest edge an investor can have is a long-term orientation.” – Seth Klarman (Trades, Portfolio)

When you focus on long-term returns, you set yourself apart from all the MBAs and analysts scouring the market and crunching numbers about what stocks will perform the best in the next three months to one year.

You can’t win at that game. But you don’t have to play that game, either.

Having a long-term perspective means investing in:

• Great businesses.
• With strong and durable competitive advantages.
• And attractive total return potential.

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” – Warren Buffett

When you invest for the long run, you will naturally look for businesses that will be around a long time – and already have a long proven record of success.

Businesses like Coca-Cola (KO, Financial), 3M (MMM, Financial) and Johnson & Johnson (JNJ, Financial) come to mind. The Dividend Aristocrats List is an excellent place to look for such businesses. It is a list of 50 businesses with 25-plus years of consecutive dividend increases. All three of the examples above are Dividend Aristocrats.

Investing in great businesses has historically produced excellent results. The image below shows the performance of the Dividend Aristocrats Index versus the Standard & Poor's 500:

Source: S&P Dividend Aristocrats Fact Sheet

There are other advantages to long-term investing as well:

1. Reducing frictional costs (including capital gains taxes) by rarely selling.
2. Greater return for your best ideas (because they compound for longer).

Have a perspective beyond yourself

Intergenerational wealth is created when you invest for beyond yourself. Instead of thinking about the minimum amount needed in retirement, think about sustainability.

A sustainable retirement portfolio (combined with any pensions, Social Security, etc.) will cover all of your retirement expenses.

This means the portfolio itself can grow year after year without the principal ever being touched. Compounding produces amazing long-term returns.

“The greatest invention of mankind is compound interest.” – Quote origin disputed, often attributed to Albert Einstein

At 9% a year $10,000 compounding becomes:

• $23,673 after 10 years.
• $56,044 after 20 years.
• $132,677 after 30 years.

Notice that time increases linearly while wealth increases exponentially. That’s the real power of compounding. For every year of extra time you are invested, you get a greater dollar amount increase in value than the previous year (assuming the same return each year). This adds up over time.

When you build a sustainable dividend growth portfolio you get two things:

1. Current income from dividends to live on now.
2. Growing principal over time benefiting from compounding.

When you have a perspective beyond yourself, your thinking of how to invest changes. Instead of chasing high yield for now, you focus on total return and wealth generation for the future.

Your children (or favorite charity) will thank you for your perspective as will your grandchildren and great-grandchildren.

Knowledge is power

Intergenerational wealth can only truly be built when the knowledge of long-term investing and compounding is passed down from generation to generation.

If you build a high quality dividend growth portfolio and your heirs add to it the "wealth snowball"Â keeps growing.

On the other hand, if your heirs sell off your dividend growth portfolio the moment they get it, the wealth snowball is melted. Intergenerational compounding is stopped in one generation.

That’s not the way it should be. Knowledge is power.

The idea of compounding and long-term investing isn’t particularly complicated. You don’t have to be a rocket scientist to hold great businesses in a portfolio and benefit from compounding.

You do have to know that it is important to do so. Again, having a long-term perspective and thinking outside of yourself is critical.

In our example earlier, I showed what happens when $10,000 is compounded at 9% over 10, 20 and 30 years. What happens over generations to that $10,000 (keep in mind, this is without saving another penny)?

• $743,575 after 50 years.
• $55.2 million after 100 years.
• $4.1 billion after 150 years.

If families were able to preserve the knowledge of compounding and invest in great businesses for the long run generation after generation, the family would become fabulously and excessively wealthy.

A $55 million portfolio puts off $1.65 million a year in dividends with a 3% yield. The 150-year portfolio would put off over $100 million a year in dividends at a 3% yield.

If your ancestors invested today’s equivalent of $10,000 in 1866, you’d be a billionaire today. What if we thought that far into the future today?

How much better off would society as a whole be if we all had a long-term perspective?

Summary of intergenerational wealth mindset

If you want to build real wealth for yourself, your children and your children’s children (and so on), then follow these three rules:

1. Invest in great businesses for the long run.
2. Understand the power of compounding.
3. Do not sell off your principal.

The one-page PDF download below expands on these three rules in a way that is simple and easy to understand.

It is a great resource to share and explain the benefits of intergenerational wealth to your family. Click here to download the one-page PDF.

As a final note, if you do not have a family, there’s no reason to only think in the short run.

Benjamin Franklin set up trusts for both Boston and Philadelphia. He put ~$125,000 (in today’s dollars) into each trust with a few guiding rules:

1. No money could be withdrawn until 100 years had passed.
2. Only a fraction could be withdrawn at the 100-year mark.
3. The total amount of funds could not be withdrawn for another 100 years.

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