Escaping the rat race and becoming financially free is one thing that millions of people desire. Unfortunately, it is also perhaps the most evasive thing.
The truth is that while becoming financially free is attainable to a fair number of people, only the one per cent of the one per cent manage to transcend to generational wealth.
Traditionally, generational wealth is simply assets owned that have been transferred to the next generation. According to fortune.com, $80 trillion will be passed down from today’s older generations to their children and other heirs over the next two decades.
Unfortunately, the numbers make it seem that everyone gets a share of their inheritance, but that’s definitely not the case. Also, it should be noted that most assets depreciate over time as their monetary value reduces greatly. A good example would be those over-enthusiastic investors who invested heavily in the dot com bubble in the late nineties. They probably were left standing hands akimbo when the bubble eventually burst.
This goes to show that building generational wealth is probably harder than most think. If it is that easy, then every dead man would have left some penthouse in the Maldives for his kids.
Generational Wealth Paradox: For starters, only a tiny fraction of people get generational wealth from their day jobs. Except you rise to become a top executive in a big company, it is not so feasible. For people who are that rich, it is not uncommon to discover that they own companies, invest in real estate or are shareholders in big corporations. In short, the most likely way to compound wealth is by using the multiplier effect of compounding interest and return on investment (ROI).
Risk versus Reward: Most times, the risk is directly proportional to the rewards expected when we invest. For most people who want to build long-lasting wealth, they make the mistake of looking for astronomical returns and expose themselves to very high risks.
For instance, Bitcoin, an asset classified as highly risky, has returned 18,912% to investors between the years 2010 and 2021. In comparison, SPDR Gold shares returned a meagre 61.67% in the same period. Ironically, the same BTC has lost over 50% of its value since it hit all-time highs in late 2021. The higher the reward, the higher the risk.
However, this isn’t good news for very conservative investors either. I mean, good luck starting your journey of wealth creation by investing in US Treasury bills for example that returns around 4.51% every year. Quickly, it becomes evident that refusing to take risks might just be as bad as taking risks in the first place. For one, how long is the average life expectancy of an average Nigerian? How long would it take to compound wealth that would outlive you?
Finding a balance: It is now clear that merely holding onto what you have or sticking to just your job may not be the right way to go about amassing wealth but going overboard isn’t the best either. A balance needs to be struck. A balance in terms of the risk you are willing to take, a balance in terms of the length of time you are ready to sit through and a balance in the classes of assets in your investment portfolio.
As an investor, you must know your peculiarities and preferences. For instance, your personality may not suit holding investments for longer periods. The fact that you prefer shorter-term investments doesn’t make you less of an investor.
Highlighted below are some asset classes that can help you to create generational wealth.
Real Estate: Before the global financial crisis of 2008, the prices of housing in the US and other countries have been rising at high rates. Many investors made a lot of money by capitalizing on this. Investing in real estate could be as simple as buying land this year and selling it for higher prices in the next few years or as complicated as a Joint Venture development agreement.
Most importantly, investing in real estate is not a short-term investment as some plays take years or decades to develop. Before investing in real estate you need to ask yourself hard questions. Are you ready to hold on to your investment for a long time? Are you willing to have capital tied down for some number of years? Alternatively, you can speak to a financial consultant who would help you set your investment priorities right and make better decisions.
Equity market: Owning equity is simply betting on the value of a company. Speculating growth, expansion, profit retention and increase in the price of shares in the company. Owning shares can make you exponentially rich especially when the company you invested in recorded very positive growth in that period. In 2020 for instance, Tesla soared more than 700%.
An N10,000 investment would have yielded a N70000 return on investment. Smart investors who foresaw this move must have made a killing off of it. Depending on the growth potential and the initial principal invested in a stock, the return on investment could range from something small to substantial amounts.
Cryptocurrencies: Some highly conservative investors still consider it a bubble that will go burst soon. Some think it’s a fad, but regardless of what you think, you cannot do away with the fact that investing in crypto has been a profitable endeavour for investors who came in early and took profits.
A big emphasis on profit taking. This is because compared to other asset classes the crypto markets are very volatile. It is not uncommon to see a move of 10% or more in the price of Ethereum daily. This is why it is advisable to take profits off the market when you have them.
A strategic investment in the crypto market can create wealth that some think is impossible. Due to the risk involved in investing in the crypto market, it’s advisable to invest what you can lose. In simple terms, don’t invest monies meant for critical projects, savings, or retirement benefits in the crypto market.
In summary, creating generational wealth is something many wouldn’t achieve but for the few who do the pursuit of it is well worth it. You cannot afford to rely on just your job and paycheck if you want to create long-lasting wealth.
Sure you have a very good knowledge of the investment subject. How can you help a retiry with small fund to grow it. Thanks.
That’s a deep insight in wealth management
I really enjoyed reading this article. The length was just right, and the content was thought provoking. The line, “Quickly, it becomes evident that refusing to take risks might just be as bad as taking risks in the first place.” was just spot on!
As someone who is looking into joining the stock market, I appreciated the asset class listing you provided.