Bitcoin or Buffett? Mending the Investment Strategy Generation Gap
Bitcoin or Buffett? You are likely to illicit very polarizing points of view if you ask different generations of investors on their view of digital currencies or the Oracle of Omaha. While the divergent perspectives from different generations may feel extreme in 2021, it is totally natural. What’s key is that families recognize these differences and bridge the communications gap to allow for a smooth transition for both older and younger generations.
Differing approaches to investments is nothing new.
It is no surprise that two generations of investors can have drastically different opinions on everything from saving to investing. The age gap has a lot to do with this. Whereas, a Baby Boomer that has built a considerable investment portfolio is thinking about capital preservation and diversification, a Millennial with modest savings and a time horizon measured in decades is keen on making concentrated investments with huge potential gains. In addition, each generation is influenced by different events that shape their attitudes and beliefs. For example, Millennials have greater acceptance of technology, place greater value on experiences than on goods, and are socially and environmentally conscious as both consumers and investors.
Intergenerational discussions about finances are not just important, they are necessary.
While intergenerational discussions on money matters are likely to trigger difficult conversations within families, we believe that by not addressing these financial issues, many are creating challenges the entire family will eventually need to face. In a study of more than 3,200 wealthy families, The Williams Group found that 70% of families lost their family wealth during the 2nd generation, and 90% lost their wealth during the lives of the 3rd generation.
Four ways to spur collaboration within your family.
There are many topics of conversation that can spur collaboration within families. We have been fortunate to work with successful families for over four decades, and below we have highlighted some ideas that families can consider.
The financial burden facing young adults can be discouraging. Purchasing an affordable home or saving for children’s best education are not realistic options for many families. This is where parents or grandparents can step in and provide some financial assistance, while making the most out of tax-advantaged accounts. The Home Buyers’ Plan allows first-time homebuyers to make a withdrawal of up to $35,000 from an RRSP to help buy a first-time home. This not only helps with the home purchase, but also establishes a savings mechanism as the full amount withdrawn needs to be paid back over 15-year period. In reality you are borrowing interest free your own tax-deductible savings.
Grandparents can also contribute to Registered Education Savings Plans. The contributions are invested and the funds in the plans can be drawn down for children’s post-secondary education. The income and gains earned in a RESP can compound and there are no taxes payable until funds are withdrawn, and then at a very low tax rate due to tuition tax credits. In addition, the plans are eligible for federal and provincial grants that help the savings to grow.
The ascent of financial technology platforms have been a game changer for a generation of young investors. Information on everything from investing in stocks to budgeting strategies can be a few clicks away. However, when complex situations arise whether it be a rise in market volatility or seeking advice on financial planning options, professional advice is out of reach for young adults who lack the financial means to work with an advisor. The older generation can bridge the knowledge gap by introducing their family to their advisors to address questions from someone they trust. With a good understanding of the values a family shares, an advisor can help facilitate the education process for the younger generation.
The toughest challenge for many families is addressing succession issues. When to sell the family business? Do I transfer the cottage to the children? Who wants to manage the family’s real estate properties? To make these decisions families need to have discussions with those closest to them, as well as consult with external advisors.
For a growing number of the Baby Boomers, the pandemic has accelerated or heightened the need to deal with succession issues. Asset valuations are on the rise, the pace of change brought on by technology is accelerating, and there could a shift in tax policies. Families need to outline financial, estate and tax strategies so they can execute on succession plans with confidence.
Exchange of Ideas:
In a memo titled Something of Value published earlier this year, renowned investor Howard Marks describes how his perspective of investment markets evolved in 2020, after the pandemic forced Marks to share his home with his son for a brief period. Marks who in known to be an astute value investor, benefited from learning from his son who is an investor focused on growth companies in the technology sector.
Too often the clash of investment philosophies detracts from greater collaboration within families. However, having open-minded conversations can benefit older generations that can discover investment opportunities that they would not otherwise identify because of their experience and backgrounds.
Unfortunately, acting for the greater good of future generations is often overlooked. The families that can have candid conversations on financial matters increase the probability that they will transition both wealth and knowledge that was built over generations. The families who do not adapt are risking that it all fades away, and are missing the opportunity to bring closer family ties.