When most investors are first getting started, they focus primarily on reaching their own financial goals. During the first few months and years that you start saving, it's sometimes hard to imagine the full power that compounding returns will eventually bring to your portfolio. Yet once you have a decade or two under your belt, you might be surprised at how well you've done. Your success may make you start thinking about not only your own financial needs, but also those of children and grandchildren.
Once you've reached this point in your financial plan, it's time to take a close look at your estate planning. A well-drafted will or revocable trust can make sure that your loved ones will continue to benefit from your financial assets after you're gone. Legal documents, however, are just one element of a successful estate plan. You also need to know how best to invest the assets you have so that both you and your heirs will get the most from your money. Picking the right investments for the job will make a world of difference to the people who inherit them.
Go for big gains
In general, as you grow older, financial advisors will tell you that you should reduce your exposure to risky investments like stocks in favor of safer assets like bonds and bank CDs. If you're only concerned with your own financial well-being, this advice makes a lot of sense. Your primary source of income is your savings nest egg, so you need to be careful not to endanger it unnecessarily.
Once you have enough money to provide for your own needs, however, you can afford to take on more risk with what's left over. In fact, the tax laws encourage you to take big risks with money you plan to leave to your heirs. If you have an investment that has huge capital gains, you'd have to pay taxes on those gains if you sold them yourself. But if your heirs inherit that investment, the tax liability disappears.
So when it comes to picking investments that your heirs will appreciate, it pays to hit for the fences. That doesn't mean that you should ramp up the risk for your entire portfolio. Instead, take a portion of your portfolio and decide how you can take a bit of extra risk to make more capital gains. If you have most of your money in the bank, then buying a few solid stocks like Microsoft (Nasdaq: MSFT ) and General Electric (NYSE: GE ) can help you diversify your portfolio. On the other hand, if you've already got blue-chip stocks among your holdings, consider branching out with small-cap stocks like Hidden Gems recommendation Middleby (Nasdaq: MIDD ) or international companies such as those you'll find in our Global Gains newsletter. This strategy can result in huge rewards for your family, without adding much risk to your overall investments.
Achieving financial success for yourself is a worthy goal. But if you've already got more than you need, finding and buying the best stocks for your heirs will let you leave a legacy for generations to come.
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Fool contributor Dan Caplinger was lucky enough to have a mom who thought of his financial security, and he's starting to do the same for his daughter. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy will last for generations.