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One of the interesting conundrums of western society has been the hindrance of financial literacy. The institutions that proselytize are the ones who benefit. The MBA has been the de facto gatekeeper that allows for the motivated few to achieve Wall Street careers. Given the current political climate and the issues school boards are facing, it seems as though nothing will change, perhaps by design.
The difference between how the middle class and ultra-wealthy invest
Some point to the lack of financial education in the American school system. Others believe they can learn finance on their own. Several generations are all too familiar with learning the basics of bond math when they received savings bonds. I was forced to invest in Series EE savings bonds as a child. That was what your grandparents gave you, that’s what worked back then and it gave you a healthy tolerance for patience.
Patience and discipline were something we were taught to believe in. Today, that is nowhere to be found in American society. People are looking to get rich quick. Wealth creation has a new disguise — speculation.
As the pandemic showed us, lack of patience manifests as gambling in the stock market. Young people who are exposed to investing come from a foundation of social media addiction and status rewards and enter investing with the idea of short-term, quick riches. They’re being launched on a trajectory that leads to chemical dependence on day trading.
Because there’s no patience, there’s no willingness to learn any investing principles and although it’s not measured in cargo containers, America’s principal export is now financial speculation.
It’s speculation under the banner of investing, and it’s dogma the middle class subscribes to. They can’t tell you how they value Tesla, but they are evangelic about the stock price at the bar because it’s liquid…until it’s not. We have a whole generation that hasn’t seen that yet.
This is one of the main drivers that separates the middle class and the ultra-wealthy. The middle class has one investment objective: get rich quick. Twenty years of low interest rates have eroded their savings, inflation fuels their anxiety. This leads to swinging for the fences on liquid products like meme stocks, cryptocurrencies, NFTs and other high-fee novelty products. They read investments based on highest returns. Conversely, someone who is in the top 1,000th percentile has one main mission: expand their legacy.
The .001% are looking to add another layer to their legacy, or to put it another way, an extra paragraph in their 2,000-word newspaper obituary. Although most of these assets are illiquid, such as real estate, fine art or sports teams, the .001% do not view that as speculative because they can control the risk and establish the terms. When you work to achieve a legacy, you collaborate and cooperate with other wealthy families for generational sustainability.
The failure of institutions caused this gap
If you think this is almost set up by design, you are not far off. Despite being one of the most important aspects of living a successful, fulfilling life, the government has never implemented financial education as a requirement for public school curriculums. This is not by accident. We have an entire financial services industry, which I’m a part of, that benefits from the lack of this proficiency in our society.
Take the outdated institution of homeownership. It used to be considered common knowledge that buying a home was wise because that’s where your money was going to grow. Long-term job security and guaranteed pension benefits made sense in an era when America was emerging as a post-war superpower, with an unstoppable manufacturing base. Interest rates were much higher, and many pensioners were able to live comfortably. Unfortunately, it’s becoming increasingly rare for individuals to keep the same job for a long period of time.
In the years since 2001, ultra-low-interest rates have incentivized people to take monetary risks rather than encouraging them to do what their parents and grandparents used to do — save it or use it to build a business. I don’t see this changing anytime soon. When you started to see these dynastically lower interest rates, you started to see a change in society that was more consumer-oriented and people became more speculative in their investments. Lower interest rates destroyed any semblance of patient investing in the United States and globally. And people were speculating on homes they had no business buying because interest rates were so low. Today, entire cable channels are dedicated to flipping homes. When rates climb, what will happen then?
Tangentially, many decisions made at the federal level have led to an indentured society. In 2005, then-President George Bush signed The Bankruptcy Abuse Prevention and Consumer Protection Act, which declared that you could not dismiss student loans in bankruptcy. As a result, we have an entire generation of graduates shackled to a lifetime of student loan payments.
What you can do about it
Some larger, well-known wealth managers have already rolled out the red carpet to train the next generation how to make pragmatic financial decisions around formalized societies and mentorships to keep their super clients engaged. For the .001%, the burning question is, How do I want my kids to speak of me when I’m gone? Will they be equipped? What kind of message does that send if I don’t leave it all to my children? How will that impact your legacy — and theirs?
It’s not as morbid as it sounds. How do you want the epitaph to read? It’s better to answer this question sooner rather than later. Any small but meaningful change in course will help your legacy evolve faster, perhaps with more certainty. Unfortunately, people put it off hoping the worst never happens, only accelerating their regret for not making a more discernible impact sooner and making heirs feel obligated to reverse engineer that post-mortem legacy.
It all comes down to personal legitimacy. Because there is a $9 trillion wealth transfer happening in real-time, I ask emerging families how they want their epitaph to read. It forces them to think about how they want to be remembered. Some just fell into money, it gives them a crisis of existence — what do my friends think of me, am I just someone who inherited a lot of money, am I Tommy Boy?
It comes in the form of focusing on things you know in your gut you don’t want written on your tombstone — shiny objects and get-rich-quick schemes. If you want to be known as a provider or someone who has helped many people, maybe crypto trading isn’t for you, maybe you should get into real estate investment. If you are more of a mogul, Type A, maybe you should get into venture capital and work alongside people who are best in class and can add a layer to your legacy. That’s the .001%’s way of taking it with them, because when your name is on the side of a library or a building, you’ve perpetuated your legacy until the end of time.
- Ask yourself if you are evolved enough at this point in your life. Are you serious?
- If so, start to make little changes as simple as joining societies, reading books or listening to podcasts on private investment.
- Ask what your brethren are worried about, what are they investing in and why?
Don’t be afraid to make a few direct investments. Your heart is where your treasure is and it signals to other families you’re ready to have a seat at the grownup table.
It works the same with personal finance. You need to think about where you want to end up before you can commit to the lifestyle change you need to get there.
- Write the epitaph for your family’s brand. How do you want that legacy to be continued? Use that to craft your family’s Impact statement.
- Audit your current network. To do big things, you need to be with families who are more established than you. Most networks are not sophisticated enough to assess private equity investments of any kind. Full of deals, very little depth.
- Join societies and investment clubs. Focus on the clubs that invest in venture capital, private equity and commercial real estate. See what the grownup men and women are investing in. Always invest in your network.
Every generation that experiences a speculative mania feels it’s unique. This is a repeating pattern. The confluence of forces driving that mania to unprecedented heights is so uniquely powerful that it is literally crazy not to grab a board and ride the wave to riches.
Understand that it is nobody’s responsibility or obligation to undo the mistakes you made. But you can start developing an interest to reverse that course today by reframing how you look at and invest in your own legacy and your family’s legitimacy.