Compounding is one of the most powerful wealth making techniques in existence. But few investors pay anything but the most cursory attention to it. Compounding is so powerful because it allows you to generate profits from previous profits. To understand how compounding works, you need to also understand how exponential growth works. Exponential growth means small differences in yearly profit rates can dramatically increase your investment results over the long-term.
One of the simplest ways to boost your investment returns over time is to reduce the amount you pay in taxes and fees. You don’t need any special talent to reduce these costs. The only profits that really matter are your “net real profits” – your profits after tax and inflation. Thanks to the power of compounding, even reducing your yearly costs by 1% can make a huge difference to your net real profits.
Legacy investing combines a “deep value” approach to buying stocks with an ultra long-term time horizon. This is the best way to ensure long-term portfolio growth. To understand how legacy investing works you first need to understand the difference between prices and value. And you need to have the patience to stay with your investments for the long run – that is for years, not months.
The Investment Committee is a group of family members – and sometimes non-family experts – that manages your family’s investment portfolio. It reports to the Family Council.
Investment committee members should have at least some background in finance. One family member – typically the wealth creator – should be the wealth strategist. This person should have the most experience of investing and be capable of directing the overall strategy.
- The Investment Committee is primarily composed of a group of family members. But it may also include hired professionals.
- The Investment Committee’s mandate is to protect the family wealth and manage the Family Wealth Portfolio.
- The Investment Committee maintains a big picture outlook of which market segments are most likely to perform well over the ultra-long term and oversees all strategic asset allocation decisions.
- The Investment Committee also manages the asset allocation of the family portfolio.
The following is a common narrative among wealthy families: The wealth creator dies and leaves the money to his family. But he takes his wealth creation…and investing…skills with him. Family wealth is then transferred from the widow and her children to the children of investment managers and estate planners.
Nearly every Wall Street brokerage has what is effectively a “sucker’s list.” Often, these lists are filled with the names of widows and children who were left sizeable estates without the ability to competently manage that wealth.
One of the mistakes most investors make is trying to do too much. They over diversify, often due to poor professional advice. They over trade, racking up excessive fees, commissions and trading spreads. And they over complicate, buying complex structured products or “fee machines” such as hedge funds and private equity funds. To be successful as an investor over time you need to relax and do less. Keep it simple, in other words.