Generational Wealth Transfer|Generational Wealth Transfer_Graph

The Five-Point Path to Generational Wealth Transfer - Part I

December 14, 2016

Many investors we meet with have a similar overarching goal for their investments. Simply put, they wish to protect the value of their net worth, after inflation, while covering their family’s expenses. And they want to achieve this goal over a very long time - spanning beyond their own generation. This is generational wealth transfer.

This goal of generational wealth transfer may be harder to achieve for investors today than at any time over the last half-century. Today’s difficult environment stems, in part, from two monetary policies currently in effect. The first is low interest rates, commonly called “zero interest rate policy,” or “ZIRP.”  ZIRP reduces the expected rate of return that investors can get for leaving their money in cash or cash equivalents, such as short-term government bonds.

The second policy is central bank asset purchase programs, commonly called “quantitative easing,” or “QE.” When the central bank purchases long-term bonds, stocks and/or other securities, this leads to an increase in the demand for these riskier assets and drives their prices up. In turn, the price increases reduce the future returns that investors can get for investing in these assets.

As a result of both policies, investors find themselves facing lower future returns regardless of how much risk or uncertainty they accept.

All the while, expenses – especially for investors with a multi-generational purview – have not decreased. Although the prices of many goods have decreased over the past 20 years, the expenses most often borne by parents and grandparents (education, childcare, personal healthcare and housing) have increased significantly. The interesting graph that follows is included in the article above, entitled “Why Gauging Inflation Is So Hard.”

price changes in consumer goods and services (1996-2016)

As a result of these challenges, many families believe they must either (i) accept the fact that they will leave their children with less than their family has today or (ii) take more risk than they can or should tolerate. We propose a different Five-Point Path for investors which provides the best chance of navigating today’s low-return environment and meeting investors’ long-term goals including generational wealth transfer.

  1. Follow a Value Philosophy in All Investments
  2. Maintain a Healthy Cash Buffer
  3. Invest Broadly Across Asset Classes and Geographies
  4. Avoid Unnecessary Costs and Fees
  5. Educate the Next Generation of Investors

Our upcoming newsletters will provide a summary of each of the Five Points and how investors can rise above the current low-return environment to meet their long-term goals. In the meantime, consider the following factors illustrating the challenge that investors face today:

With the earnings on both stocks and bonds at such low levels, earning satisfactory returns of, say, high single-digit levels, is a formidable challenge. To be clear, we are not prognosticating a market crash (we do not believe that we can predict the direction of the market, especially in the short term). In order to overcome today’s challenges, however, investors must approach their investing conscientiously, prudently and with a well-structured approach.


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