Worldwide the average human lifespan is 71 years and growing. Seen through our human eyes that seems like quite a long time. It also tends to be the boundary within which most of us live our lives. Of course, when it is considered that modern humans have been around for 200,000 years, the planet is 4.5 billion years old and the universe 13.7 billion years old, our life span is rather insignificant. That said, being human animals, we all have egos that put us at the centre of our thinking. This is important as it is part of our basic instinct to survive.
Another part of this survival instinct is to see our genes continue through reproduction. We would like to see those genes flourish and hence we try to be good parents and help our offspring survive and thrive. So why is it that when it comes to our investment timescale horizons we tend to be more influenced by the boundaries of our own life timeline and hence limit the power of time within the wealth accumulation equation? This does not do justice to our children and their descendants in helping to create a financially secure future.
Lack of practice
Of course, there are examples where inter-generational investing takes place. Family offices are a classic example where family wealth is protected to avoid the old adage of ‘it takes one generation to make it, one generation to care for it and one generation to lose it’. Also the humble life insurance fund was designed to last, ensuring fairness across generations. In both situations, there is a third party who is appointed, by design, to take a long term view.
However, when you ask the average person what is their investment timescale, they will say five years, ten years or maybe a little longer but how many of them would say one hundred years or two hundred years? The financial services industry has re-enforced this timeline, ably supported by regulators who typically have quoted investment periods of three, five and ten years. If that is what the experts are saying, why would the average person in the street think any differently?
Another obvious reason why inter-generational investment is not mainstream is that for the majority of people throughout human history they have not had much excess wealth and therefore have been forced to consume what they create in their lifetime. Maybe for the lucky ones, there has been some sort of inheritance to pass down the line. However dealing with the question of how best to arrange the inheritance has not been a particularly big problem for society. Even today, in the UK, for example, the percentage of estates that pay inheritance tax is only in single digits, hence indicating that the sums passed on down the generational line are limited.
Another, more emotionally driven, barrier is the concept of delayed gratification. It is simply hard for us humans to forego a benefit today for one at a later time. This becomes even more difficult if you forego the benefit for someone else, even if this person is the product of your own flesh and blood.
Imagine if your forefathers had invested in a simple index tracker fund back in 1916 (assuming trackers had existed at the time) or had bought some property (even in an average neighborhood), had held onto it and had passed it onto you. What would that now be worth to you? If in turn you only drew the income from the investment, kept the capital value intact by holding onto them during your life and passed them to your descendants. Just imagine how valuable they would be in 2116, 2216 or beyond?
So will this inter-generational question become more relevant in the future? The answer is yes. Given that most countries have embraced capitalism to one extent or another, laws are in place which respect private ownership of wealth and the planet becomes more wealthy by the day, it is inevitable that there will be an increased number of people with a choice whether or not to consume all they create in their lifetime. This is an extension of the Great Enrichment, a phrase coined by Deirdre McCloskey, to highlight the surge of creation in Western wealth starting from 1800 and still continuing today, albeit now beyond the West.
For those who are driven to consume all they create, inter-generational investing is not a topic they need worry about. For those who will generate some excess and are confident about their descendants ability to handle wealth or even want to pursue philanthropic causes, why would you not pursue inter-generational investment timescales and plans?
So what would you do differently and what would be the benefits? Some examples
• We all know the power of compound annual growth – ‘the eighth wonder of the world’, according to Einstein. Leveraged over multiple lifetimes makes this wonder work for the investor. GBP1k invested at 4% CAGR for 30 years becomes GBP3250; GBP1k invested at 4% CAGR for 100 years becomes GBP51000 (excludes impact of inflation)
• Statistics show that to maximize returns there are a small number of stock market bull events which you must have exposure to. If you are out of the market you will miss them. Long term investing improves your chances of getting exposure to these bull events
• Avoids the emotional stress of short term market volatility and puts greater focus upon asset allocation decisions
• Increases the likelihood of protecting the capital and spending only the income, thus keeping the intergenerational equity principle, as espoused by James Tobin, in tact
• Open up investment opportunities which have long but attractive returns eg infrastructure
Investment management industry:
• Increase the stickiness of assets, supporting industry profitability
• Build a multi-life long term relationship with generations from the same families, not just individuals. This takes the family office principle and democratizes it
• Long term investment could be a partial antidote to the current consumer driven ‘now’ society by encouraging a long term stake in assets which in turn promotes a mindset of a stable and sustainable society
• Whereas we have spent the last 8 years borrowing wealth from savers and future generations to pay for the debt fueled financial crisis of 2008 (which itself has been building for a number of decades since WWII), imagine society building up a war chest of stable money, managed in a distributed fashion by individuals/families rather than politically driven centralized governments. This could help manage down future volatility and financial shocks
Making it happen
So if this a good idea, how to make it happen? Oh, for the silver bullet of solutions, but of course this does not exist. It is also tempting to look to others to make it happen such as the government, the industry, schools, parents etc. ‘Someone’ should do something about it. Well, that someone is you. Yes, movements often start one person at a time. So my recommendation is why don’t you start doing intergenerational investing, then tell your friends what you are doing and get people talking about it. Get the topic in focus and you give it a chance of flourishing.
The aborigines have a saying that ‘you should plant a tree that you will not see’. In other words, temper your ego, look beyond your own lifetime and take an investment approach which will benefit those that follow you. If we all did that, the financial legacy that we could provide to future generations could be a real gift to society.
Disclaimer: The material on this website is intended for information purposes only. We are providing general educational information on the investment industry. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular course of action. Please seek a duly licensed professional for investment advice.
Please note that the views expressed in this talk are the speaker’s own and do not necessarily constitute the views of their organisation. Thank you.