Discover the benefits of visionary, long-term investing 

Discover the benefits of visionary, long-term investing

Long-term investing extends far beyond the realm of day to day returns and their volatility. It’s about ensuring your actions today are made with full consideration on the impact to current and future stakeholders.  

Long-term investing extends far beyond the realm of day to day returns and their volatility. It’s about ensuring your actions today are made with full consideration on the impact to current and future stakeholders.  

This is not an easy task, given all the news and focus on stock market volatility and current affairs such as geopolitics and inflation. And that makes it a major ongoing challenge faced by intergenerational investors. But in the end, future generations will judge us, not by what we say, but by what we do.

What are intergenerational investors?

An intergenerational investor invests “across generations” for the benefit of stakeholders across multiple “generations”. They typically have an indefinite and infinite timeframe to invest. The aim is to create more money both now and for the future.

Intergenerational investing is commonly associated with university endowments, foundations, sovereign wealth funds and family offices. 

As they are focused on the very long term, intergenerational investors have more freedom of choice, which gives rise to the ability and willingness to take more risks and accept smaller short-term failures. And while small short-term failures may not be something all investors are comfortable with, there are advantages to thinking more laterally about very long-term investing, provided the right governance framework is adopted. 

When investors can see the size of their pot of money, it can be easy to forget that it’s not a pot for now. It’s a pot for forever. Consistent and persistent overspending will quickly erode the ability for the portfolio to grow over time, increasing the risk that the money will eventually run out.

Long-term investment portfolios

All investors constantly face some degree of market volatility so it’s important to build robust portfolios to capture opportunities, minimise risks and reap the benefits of true diversification.

And there are some differences when you’re constructing a portfolio that’s designed to invest forever.

  • You need growth in real (after inflation) returns to ensure the portfolio is growing at a rate that it can continue to support future generations’ needs, even while supporting current generations’ needs.
  • Risk is less about short term volatility and more about the risk of not having enough real growth over time.
  • Diversification is less about having returns that are marginally less poor than the broader market and more about ensuring your portfolio is robust for future themes/regimes (whether that is higher inflation, how it manages through the energy transition or periods of persistently higher volatility).
  • There is no need for daily liquidity of the entire portfolio, giving rise to more options for investment, with potentially smoother return patterns.

Strategies for intergenerational wealth building

When you’re investing forever, the universe of investments you can choose from is very broad. Narrowing this down is a big task.

Key impacts of inflation

Digging deeper into inflation, today’s high inflation environment presents intergenerational investors with a new challenge that many have never had to deal with before. There are two key impacts of inflation that very long-term investors must consider.

  1. Inflation increases the return hurdle required to meet their dual objectives of short-term spending and maintaining the real value of the investment over time.
  2. Inflation affects the amount of spending they require. If things cost more to buy, living expenses increase and they will need to spend more to achieve the same thing.

Adjusting the spending plan across several years to manage rising costs and inflation will impact the growth of a portfolio far more than the strategic asset allocation. Such changes require careful consideration and professional advice.

Conclusions

For intergenerational investors, enduring market volatility with a higher proportion of growth assets, and with a need for spending during market downturns can be challenging. 

Intergenerational investing requires a clear purpose and governance framework, so that a plan is in place before events happen. While it is prudent to be prepared for market downturns and unexpected events, short-term headwinds shouldn’t affect the overall mission and spending plans for intergenerational investors. 

In the end intergenerational investors are able to tolerate more risk and less liquidity and are there so they can grow a pool of money for future generations whose words of thanks will not be heard.

If you’d like to learn more about intergenerational investing, please reach out to us.

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