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The Investing Strategy That Protects Your Family

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As the United States continues to struggle through the financial crisis, people increasingly believe that life will be harder for their children and grandchildren. If you want to protect your family for generations to come, building a legacy that will last for generations after you're gone can help keep your descendants financially secure -- even if times get tougher.

Typically, when you put together a financial plan, it focuses on you. Early in your career, you have less money to invest, but you have more time to take greater levels of risk. Later, your assets increase, but with less time before you need your money to pay for living expenses, you can't invest as aggressively. After you pass away, those safe investments usually don't fit well with the financial needs of your heirs, so they once again move those funds back into more aggressive stocks in a cycle of investing.

All that moving and trading gets the job done, but it doesn't make for very efficient multigenerational financial planning. Isn't there a better way?

Learning from endowments
In fact, there is. The investing practices of large endowments provide an alternative model for people interested in leaving legacies to their children and grandchildren. Just like a family, endowments face a constant struggle between covering current demands for funds, and ensuring that provisions are made to address needs far into the future. Balancing these two factors challenges even the largest institutions.

One major benefit from investing via the endowment model comes from how endowments typically don't make huge adjustments to their strategies over time. Instead of shuttling back and forth between high-growth investments and income-producing assets, like individuals must do, endowments typically settle on a suitable mix of different types of assets that together address the goals of everyone involved without needing constant major adjustments.

What long term really means
Often, people think of long-term investing as putting money into a stock for at least a year or two. But in the context of planning for generations to come, even 5-10 years is just an instant.

For the most die-hard buy-and-hold investors, you can find shares that have been around for decades. Here are a few examples:

Stock

Founded

Average Return Since 12/31/1969

General Electric (NYSE: GE  )

1892

12.7%

General Motors (NYSE: GM  )

1908

2.4%

IBM (NYSE: IBM  )

1910

7.6%

Caterpillar (NYSE: CAT  )

1925

9.1%

DuPont (NYSE: DD  )

1802

9.3%

Source: Yahoo! Finance.

Yet those are just the survivors out of thousands of companies, many of which have ceased to exist -- and whose shares became worthless. So even though long-range planning allows for long-term investment decisions, that doesn't mean you can necessarily expect even the most successful companies to remain good investments forever.

Mix it up
What you can do, though, is come up with a general roadmap for your legacy portfolio. It should include:

  • Income providers. Providing for future generations is worthless if you don't take care of yourself. With stable dividend payers like Pfizer (NYSE: PFE  ) , along with a healthy dose of bonds, REITs, royalty trusts, and other high-income investments, you can ensure you'll have the cash flow you need to cover expenses without tapping principal.
  • Growth engines. If you dedicate everything to income, however, you'll likely leave your children and grandchildren with a portfolio whose purchasing power ends up ravaged by inflation. To counteract that trend, high-growth stocks like Mindray Medical (NYSE: MR  ) can help your nest egg stay ahead of the cost of living.
  • Steady investment decisions. To maintain a portfolio for generations, you need a family that's dedicated to the mission behind your legacy. All it takes is one mistake to ruin a lifetime of planning, so make sure that family members in each generation understand your goals and are committed to doing their part to reach them.

The challenge of maintaining a lasting legacy is getting future generations to follow your plans. But if you succeed, you can build a financial empire that will ensure your family's financial stability far into the future.

If your biggest dream is making sure your children and grandchildren enjoy a better standard of living than you have, then legacy investing can help you achieve your dreams and give your family the comfort of financial security for lifetimes to come.

For more on long-term investing, find out:

Concerned about your family's future -- and your own? The Motley Fool's Rule Your Retirement service helps investors balance their wishes with their family's needs to find solutions that make everyone more secure. With investment recommendations and timely advice, we'll help you put together a plan that will work for you. Come see for yourself free with a 30-day trial.

Fool contributor Dan Caplinger safeguards his mother's small legacy for his daughter. He owns shares of General Electric. Pfizer is a Motley Fool Income Investor selection and a Motley Fool Inside Value pick. Mindray Medical is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps you secure.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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