6 Key Signs Your Investments Will Build Generational Wealth

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Even for the richest families, generational wealth is hard to sustain. According to the Williams Group wealth consultancy, 70% of wealthy families lose their wealth by the second generation, and 90% lose it by the third generation. This is in spite of all the steps that these families likely take to preserve wealth within the family.

But this doesn’t mean that it’s impossible. In fact, with adequate planning in place, you can greatly improve the chances that your wealth will last for many generations to come. Here are some of the characteristics and strategies that can improve your chances. 

You Reinvest Your Dividends

If you hold investments and choose to reinvest your dividends, you’re already ahead of the game on numerous fronts. For starters, stocks that pay high dividends are typically established, well-run companies with consistent, predictable cash flow. This in turn generally makes them less volatile, which can both help protect you from significant losses and prevent you from selling out of them in a panic. Reinvestment itself can boost long-term returns as you’ll be earning compound interest on the extra shares you acquire through reinvestment. All in all, reinvestment of dividends in high-quality stocks is a good way to build and maintain wealth for future generations. 

You Own an S&P 500 Index Fund

Individual stocks can post big gains, but they can also drop 70% or more in a single year, something that the S&P 500 never has. In fact, the S&P 500’s biggest single-year loss ever was the 47.07% it fell in 1931, in the heart of the Great Depression. Best of all, the S&P 500 has always gone on to make new all-time highs, no matter how poorly it performed during a given bear market. Historically speaking, the S&P 500 has also never lost money over any 20-year period.

When you take all of these factors together, it shows that the S&P 500 index can be a less volatile, less risky investment over the long run than any individual stock. Even some well-known stocks can remain “values” for decades, and some never recover to make new highs. If you are looking to build long-term, generational wealth, it might make sense to avoid the dangers of individual stocks and own the S&P 500 index. No less than the “Oracle of Omaha” himself, billionaire investor Warren Buffett, has long endorsed the idea that S&P 500 index funds are the best choice for most investors. In his 2020 letter to his Berkshire Hathaway shareholders, Buffett explicitly said, “In my view, for most people, the best thing to do is to own the S&P 500 index fund.”

Your Heirs Are Specified — and Educated

Naming your beneficiaries — and discussing the role they play in preserving the generational wealth you are building — is a key step in the process. Without financial education, it will be difficult-to-impossible to make your wealth last even a single generation, so go out of your way to teach your heirs about the importance of capital growth and preservation. Left to their own devices, even children in wealthy families are likely to fumble the management of the money you pass on to them.

Your Investments Are in a Trust

One way to help ensure your wealth lasts for generations is to place it into a trust with specific instructions. For example, you can direct that your money is only distributed in small portions at a time, or to heirs once they reach a certain age, for example. This can help protect your assets from being raided by irresponsible beneficiaries.

You Own Assets That Generate Income

Passive income is a great way to build generational wealth. While stocks typically provide fairly reliable long-term capital appreciation, income-generating investments continue to spew out cash regardless of what the markets are doing. For example, if you own rental real estate, you’ll keep earning a monthly check as long as you can keep your units occupied. Dividend-paying stocks from reliable companies similarly pay out income every quarter, regardless of whether the market is up or down. High-quality bonds are another option.

You Avoid Investment Fads or Trends

Seemingly every year a new investing idea comes along and dominates the financial news. But typically, after speculators pile in and drive up prices, massive losses often follow. This has been seen in recent years with meme stocks and cryptocurrency, and quite notably back in 2000 with dot-com stocks. 

The Bottom Line

Just like there are many ways to build wealth, there are a number of strategies to pass it down through future generations as well. However, keeping money in a family for the long run is difficult even for the wealthiest and most financially savvy. Using the tips above can give you an increased chance of building and keeping generational wealth.  

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