There are several strategies you can make use of to build generational wealth for your descendants, even if your last name isn’t Buffett, Winfrey or Rockefeller.
Generational wealth is simply money that is passed down from one branch of the family tree to the next — and not from just oft-cited sources like real estate or a family-run business. Any asset of any amount can give future generations a financial leg up.
One of the easiest entrées into the world of generational wealth building is the stock market.
Decades of lower wages and discriminatory lending practices have led to an ever-widening racial wealth gap. There are no easy remedies, but there are steps you can take to narrow the wealth gap for yourself and future generations.
6 proven investing strategies for building generational wealth
There are different on-ramps to the road to future riches. But in terms of accessibility, ease and proven long-term growth potential, investing in the stock market is an ideal place to start. That’s especially true if you don’t have the upfront capital needed to get into real estate or launch and grow a business.
(Hiring a financial advisor may also be a smart first step if you are looking to develop a financial plan that will set you and your family up for future success.)
Here are six steps to seeding and tending a portfolio that will pay lasting dividends for your heirs.
1. Start the compounding clock ASAP
Compound interest is how even small savings snowball into brag-worthy sums over time. To see exactly how, take a moment to play with Bankrate’s compound interest calculator.
Now add some years (think decades) to the timeline, up the “rate of return” toggle to 7 percent (which is a conservative take on the stock market’s long-term performance), and you can see how fortunes are made.
The key is to get started with whatever means are at your disposal. That includes your pocket change (yes, micro-investing is a thing) and “free money” (like a workplace 401(k) match).
2. Put your savings on autopilot
Dollar-cost averaging, or adding money to your investments on a regular basis, is a tried-and-true strategy for nest-egg growth. By forcing you to buy at different points in time — when markets are falling, rising or just hanging steady — you average out your purchase price and avoid the temptation to try and time the market.
The set-and-forget approach is particularly powerful during times of market volatility. While your brain is urging you to stay glued to the sidelines until things settle down, the emotionless bot in charge of adding money to your brokerage account is automatically purchasing cheap shares on your behalf.
You’re already employing this investment strategy if you’re contributing to a workplace retirement plan with each paycheck. Most brokerages also allow you to schedule regular transfers from a bank account into your investment account. To rev up the results, increase your contributions over time, such as when you get a raise.
3. Keep it simple to start
Building wealth doesn’t require complex trading strategies that demand 24/7 monitoring. Investing in a low-cost index fund gets you exposure to a collection of companies without having to pick and manage a portfolio of individual stocks. Even uber-investor Warren Buffett recommends index funds as a must-have for most people.
Besides offering instant diversification, index investing saves you money on fees because you pay just a fraction of a percentage point in management costs — typically less than 0.2 percent, which is less than $20 for every $10,000 you have invested. That leaves more money for the next generation to enjoy. (Here’s a rundown of some of the lowest-cost S&P 500 index funds out there.)
Many of the best financial advisors recommend investors use index funds rather than trying to buy and sell individual stocks on their own.
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4. Make a few strategic side bets
Index investing can handily serve you well over many lifetimes. But taking on a little more risk in your portfolio can help boost your overall returns over time.
Growth investors focus on promising companies that they expect to deliver higher-than-average returns because, for example, they operate in a niche or fast-growing industry, serve an emerging market or have a unique competitive advantage. These companies tend to be much more volatile, which is why it’s important to understand the risk-reward trade-off and make smart, calculated bets.
You don’t have to have inside information or spend hours trying to divine what company might be the next Nvidia. Here, again, a mutual fund or ETF provides a way to buy a basket of potential high-growth companies and reduce your exposure to any single stock tanking your portfolio.
How big should your side bets be? That depends on your risk tolerance and how actively you want to manage your investments. A good place to start is to earmark 5 to 10 percent of the money in your portfolio for individual stocks or niche ETFs and keep the remaining 90 to 95 percent invested in index funds. This gets you exposure to the potential upside if your bets pay off but limits the downside damage if they don’t.
5. Keep a long-term perspective
Building generational wealth is a long-term endeavor, which is easy to forget with nonstop, real-time distractions egging on investors to focus on short-term results and try to “time the market.”
The problem is that investors have notoriously bad timing. They sell as their investments are dropping (locking in losses) and miss out on gains by not being fully invested when the market starts to rebound.
You don’t even have to be that off with your timing to lose out. Missing just a handful of the market’s best days over the past 30 years instead of staying fully invested would have reduced your returns by more than 50 percent, according to research from Hartford Funds. Sitting on the sidelines for the 20 or 30 best days lowered earnings by 73 and 83 percent, respectively.
| Remained fully invested all days | Missed the market’s 10 best days | Missed the market’s 20 best days | Missed the market’s 30 best days | |
|---|---|---|---|---|
| Total value of $10,000 investment in the S&P 500 after 30 years (1995-2024) |
$224,278 | $102,750 | $60,306 | $38,114 |
There’s a reason that “time in the market beats timing the market” is a popular adage: Reaping the benefits of the market’s long-term returns requires enduring short-term volatility.
Remember, the longer your investing timeframe, the more time you have to ride out the stock market’s inevitable ups and downs.
6. Preserve it for the next generation
It takes proper planning and good stewardship to ensure the fruits of your labor can continue to pay dividends for your descendants.
Estate planning ensures that your legacy is handled how you want it and not left to a probate court to decide. The key strategies here are to minimize taxes on your investments as you build your portfolio and use tools like trusts to more smoothly pass assets to your beneficiaries.
A financial advisor can craft an estate plan and make sure all the needed documents are in place. (Find a vetted pro in your area with Bankrate’s AdvisorMatch tool.) Being prepared is one of the best gifts you can leave your heirs.
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