Investment allocations and structures that can last the test of time and how to ensure that this can be passed to the next generation of family members?

Welcome to Finance and Fury, The Say What Wednesday Edition. 

Today's question is from Mario 

Thanks so much for continuing to put together your insightful and informative podcasts. I have a question about investment strategies that last the test of time and can survive and continue into generations and generations to come.

I have often heard about investment strategies that have survived through generations where the principle continues to be managed through conservative investment where capital preservation is key and the proceeds either continue to be reinvested or passed on to family.

My question is what are your views about an ongoing investment allocation that can in fact last the test of time and How is such a structure set up and continually managed so that the investment isn’t destroyed when it passes to the next generation of family members or through turbulent times like war or global financial crisis? There are many questions that come to mind about appropriate asset allocation and who decides this, who makes decisions within the family, protection against rouge family members or decisions that could destroy everything.

As always love to hear your views and opinions?

No easy solution here – custodial risks is present in a lot of things 

Did an episode on how the wealthy preserve wealth through investments a little while back  – 

Summary – go check it out – was called: Title: How to protect an investment portfolio? And is it worth using hedging instruments or changing the assets mix? – Quick Recap https://financeandfury.com.au/how-to-protect-an-investment-portfolio-and-is-it-worth-using-hedging-instruments-or-changing-the-assets-mix/

Old money families - what it takes to preserve wealth over centuries and not just short-term cycles - the frequent reply is "a third, a third, and a third." Stands for dividing one's wealth into one-third land, one-third gold, and one-third fine art Obviously some liquidity (cash) is needed for day-to-day expenses – along with allocations to speculative portfolios This isn't an investment strategy for capital growth as much as capital preservation – i.e. will the investment be around in 100, 200, or 1000 years – Looking at centuries timeframes for investments - land, gold, and art outperform riskier assets such as shares, bonds, and cash - sound weird but a viewed from the perspective of centuries and not just years or decades Why? These don’t typically custodial risk and have intrinsic value (usable by people) Objections/issues – Share and bonds can perform well for long periods – but they and also cash all involve some claim on a third party Contain credit risk in addition, the underlying market risk – volatility Credit risk is what ruins a lot of investments - the investor is always at the mercy of the issuer Shares – Company go bankrupt and Bonds can default (no money to return for your loan) Paper currency in the history of the world has eventually proved worthless eventually – so why is it different this time? No income or yield - Warren Buffett disparages gold because it has no yield. The reason it has no yield is that has no risk when bought and stored by you personally (beyond someone stealing it). Yield is what you earn when you take risk. Gold has no credit risk, no currency risk, no maturity risk, indeed no risk of any kind. It is just gold. In contrast, Buffett's Berkshire Hathaway stock when priced not in dollars but in ounces of gold has declined in value by about 75 percent since 2000 from 280 ounces per share to 70 ounces per share. Someone who bought gold rather than Berkshire in 2000 could today buy four times as much Berkshire stock using the same gold. There has been a similar appreciation in the value of fine art. Admittedly this is a selective example. Yet it is true that over centuries it is the hard assets, not the paper assets, that retain value through collapse and catastrophe. The old money knows this—they have seen it all before. Alternatives - value of land, gold, and art is intrinsic – beyond valuations - If you own it, you own it No issuer who can suddenly make your land disappear or turn your physical gold into confetti Possible that a totalitarian regime or an invading army might confiscate tangible wealth – why I don’t like legislation Gold can also be confiscated if in bank institutions – held personally stuffed in a saddlebag or sewn into the lining of a coat and moved. Art can be removed from frames, rolled up, and carried in one's luggage – Admittedly land cannot be moved, but with good title and patience a family can reassert its claim even generations later once interlopers have been ousted No portfolio is perfect or without risk - too often we think of risk narrowly and ignore the greatest risks of all Due to short term focus – normally only happen once in a lifetime, if that – but looking through history – do happen In the form of monetary collapse, social disorder, regime change, and emergency edicts

 

Structures – Done similar eps in the past as well on companies, versus trusts or owning personally –

Now – this is Not concrete – not legal or official advice – but general in nature – options -

Start a company to hold the investments – doesn’t have a limited life – but leaves you open if you own it personally Investments - Buy Gold, Buy Land, Buy Art Can diversify into other options like shares or bonds as well – but these do carry additional issuer/custodial risks Way to pass these assets down to your family is to leave control of the directorships and ownership of the shareholding in your Will to your  To use a FT to own or not? Why not FT over company? The limited life of 80 years Bloodline trusts – Establish trusts for vesting to create new trusts

 

Issues with this – need a third party as the executor – and it is going to be costly to maintain – and no guarantee that your kids or grandkids will continue to manage the money well

That is what this comes down to – the best way to preserve wealth through generations is to educate and instil the value of money and how to manage it –

Teach kids about money – have them understand the value of it – give them control over some of it before they get it in your will –

No way to force a square peg into a circle – unfortunately some people if not educated can blow the money –

Seen two cases I advise on – both same set up of having parents pass away and kids being left with money – one had access at 18 while the other had access to 25 –

One at 18 withdrew everything and bought cars, boats, jet skis, going out/holidays and a home they couldn’t afford on cashflow – soon to be left with little – other at 25 – invested and retained and is now set up for life

If you are talking in the $10s or $100s of millions – may be worthwhile to have lawyers be the custodians and set up a complex structure – but if not any benefit can be eroded over the years from accounting and legal costs

1. Question comes back to – how much of your wealth do you need to preserve – and at what cost?

Depends on how big the next crash will be – who knows? Lessons to take away  Intrinsic Values – Wealth preservation – Shares are fine to invest in – especially after the market collapses – but only if you have confidence in them – would you use their products in a recession? Intrinsic values can become zero Gold – physical metals – silver as well Long term holdings – company won't have a limited life – but trusts do allow more flexibility Long term – the best thing you can do to preserve wealth is to educate kids and instil the value

 

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