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For wealth beyond your lifetime you’ll need a share portfolio

21 October 2020 Grant Meintjes, Head of Securities at PSG Wealth

Think of the richest people in the world, for example Warren Buffet or Bill Gates – you can attribute a great deal of their wealth to the businesses they own. And you too can be an owner of businesses by investing in stocks.

By owning shares in lucrative businesses, your share portfolio works as a compounding machine that will continue to generate wealth over the long term. If you are aiming to build generational wealth, then it is a great option because it has the potential to continue growing for decades.

With time on your side, you don’t need to time the market
Your time horizon is one of the major considerations in deciding how best to invest your money. It is a key determinant in assessing the appropriate level of risk to take on and, consequently, the types of assets to hold in an investment portfolio. With time on your side, you can take on higher levels of risk and reap the rewards associated with those riskier assets. An investor with a short-term time horizon on the other hand would be hesitant to invest in riskier assets such as equities, for fear that a pullback in the market would erode their wealth and that it would not recover before they would need to withdraw their funds. When you have time on your side, short-term fluctuations in the market are less significant.

Inflation: when time turns into an enemy
One of the biggest hindrances to building and preserving wealth over time is inflation. While it is easy enough to preserve wealth by investing in asset classes that track inflation (such as an interest-bearing account or debt instruments), in order to build generational wealth, you will need to invest in asset classes that can outpace inflation. Equities, commodities and properties have all historically proven to outperform inflation. These asset classes can be included to form part of a diversified investment portfolio through utilising products such as shares, real estate investment trusts (REITs), property stocks and exchange traded funds (ETFs) or exchange traded notes (ETNs), with commodities as the underlying instrument.

The importance of diversification in growing generational wealth
The equity market creates a mechanism for investing in inflation-beating assets, but it also gives investors the unique ability to diversify their wealth across different industries, geographical regions and asset classes in a cost-effective way.

Often, wealth is tied to a specific business or industry in which it was originally created. Additionally, investors will often invest in industries they are familiar with or involved in, as they feel they better understand the drivers of the business in relation to others. It is, however, important for investors to identify their existing exposure and diversify their wealth away from it. By diversifying your wealth across companies and industries, you reduce the risk associated with an individual company or industry.

Building a legacy away from home
Offshore investments offer two invaluable opportunities for South African investors looking to build and preserve generational wealth. Firstly, they enable diversification across different geographical regions, thereby reducing the portfolio’s exposure to country-specific risk. Secondly, they allow investors access to industries not adequately covered by the JSE listed equities. The technology and gaming industries are good examples, and both have seen phenomenal growth recently.

Leveraging your long-term approach
The longer investment horizon associated with creating generational wealth allows investors to withstand the higher levels of risk and volatility experienced in the equity market and capitalise on the rewards for these risks. This creates the perfect environment for utilising the equity market and exchange traded products not only to preserve wealth, by simply tracking inflation, but to build wealth too, using inflation-beating asset classes. With a longer time horizon and diversified offerings in the equity market, you will be able to achieve your goal of building and preserving wealth for generations to come.

 

Quick Polls

QUESTION

Which of the following business models do you favour to achieve a sustainable succession outcome in your financial advice practice?

ANSWER

[a] I will find an independent financial planner to buy my business
[b] I will sell a portion of my advice practice to a large corporate
[c] I will join a large firm and give up my independence
[d] I will invite another independent financial planner to join me
[e] I will partner with a large firm
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