Before providing any advice or recommendations, a thoughtful advisor will ask you three important questions:
“What is your investment objective?”
“What is your risk tolerance?”
“What is your timeframe?”
Getting clarity on these questions, in particular, your investment timeframe, not only leads to better recommendations, but also helps establish an investment plan built around your specific goals, tax considerations, and liquidity needs.
What is Your Investment Timeframe?
Financial planning is at its core a complex math problem that involves assumptions based on the law of large numbers, which states that the probability of a more predictable outcome increases as the sample size increases.
Modern planning taps into the extensive statistical data about historical market return patterns over full market cycles (usually about three to five years) as well as life expectancy at different ages based on actuary tables.
The planner uses this data along with your stated time frame to inform your decisions and help improve the likelihood that you won’t run out of money before reaching your goal.
For example, statistically speaking, a planner who uses average life expectancy for retirement planning could expect half of their clients to outlive their money – not good!
A common way to mitigate this shortcoming would be to use the 80th percentile of life expectancy, providing a much greater likelihood that clients won’t run out of income before they run out of breath.
How Your Investment Timeframe Impacts Generational Wealth
For families of greater wealth, running out of money is usually much less of a concern. This could allow them to lengthen their time horizon beyond the expiration date of the current generation if they can adjust their thinking to be more visionary
Passing wealth through generations of families seems like it should be easy, but reality frequently proves otherwise. Working with a multi-generational advisory team can help succeeding generations in your family connect with someone closer to their age who is more likely to relate to the way they think and communicate.
This often feels more natural and may improve the probability of long-term family financial success. It may also help you avoid the proverbial “shirtsleeves to shirtsleeves in three generations” curse, where wealth gained in one generation is frequently lost by the third.
An insightful family considers how the family’s wealth will impact future generations of their descendants. This affords them the luxury of enjoying the potentially higher returns that can come from long-term investments – and the accompanying longer-term time horizon – without as much concern for short-term liquidity needs.
This shift toward generational thinking could require the older decision-makers, often those responsible for building the family’s wealth, to look beyond their own lifetimes when making investment decisions.
Even very accomplished families who tell us they have a strong desire to do this well can feel they don’t have the time and can feel ill-equipped to excel at this task. They need and want experienced guidance, which could be even more important if inflation becomes a greater issue.