Older millennials, or younger ones who feel they need to put off saving, may be wondering: Is 40 too old to build generational wealth?
Starting a wealth-building journey after 40 can seem like a challenge or feel like it is too late to get a significant nest egg together, but thinking like this can lead to procrastination, which is the worst possible scenario, said Harp Sandhu, a financial adviser with the Sandhu Wealth advisory group at Raymond James Ltd.
“Some people think, ‘Well, if I can only put away $250 a month, it’s not even worth it.’ Every penny is worth it. Put it away. Just start,” Sandhu said.
Others may have the opposite reaction, and jump into risky investments to make up for lost time.
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“I don’t want people (in their 40s) to think that they need to be super aggressive because they’re thinking they are going to need the money right away,” said Christine Van Cauwenberghe, head of financial planning at IG Wealth Management. “Because when you talk about investing aggressively when you’re in your 40s, you could have some funds that you won’t be touching until you’re 90. You could still have a long-term time horizon.”
Gabriel Leclerc, a financial adviser at Edward Jones, said he sees many clients in their 40s come into his office wanting a more aggressive strategy “because they think they’ve missed the boat and that’s where they go first.”
But in reality, he said, rushing into more risky investments might actually set the client back.
“The (idea) that I use with clients is that we win by not losing,” said Leclerc. “The biggest piece of advice we give is to not take unnecessary risk and chase returns, or what we call market timing. These are strategies that you’re basing on best guesses. It’s not an actual strategy. It can lead to making the wrong decision. The later you are in your planning, mistakes become even more costly.”
Some risk appetite may be necessary
While advisers may find it difficult to put a number on what generational wealth means as it is unique to each family, James McCarthy, an advisor with Nicola Wealth’s Vancouver office who often works with high-net-worth clients, said, “Usually, if you’re leaving over $1.5 million or so to each child we would consider that generational wealth.”
Some appetite for risk may be necessary to start building significant wealth later in life. But investors starting out should focus on how much they invest, Sandhu said. “With an appetite for risk, it doesn’t mean we’re gambling and rolling the dice. We can look at just being a little bit more aggressive as it grows, but in the beginning, let’s figure out how much you can put away, put it away on payday, start putting away a little bit more than you think you can and just see how it goes.”
For clients who are willing to take on more risk, Sandhu said investing in real estate or individual stocks can be part of a wealth building strategy for this age group.
Actively managed investments are an important part of his wealth building strategy for clients, he said. “I would use a really good solidly managed mutual fund that I know that is not just an index fund.”
When selecting stocks, he looks for those that not only provide growth but also pay a dividend, Sandhu said.
Those with a higher risk tolerance may consider portfolio strategies that “juice it up a little bit,” putting a percentage into assets such as leveraged products that promise to boost market returns such as tripling them, Sandhu said. But, “Remember, on the downside, you’re getting triple downside too.”
The biggest issue, Van Cauwenberghe said, is looking at how much risk an investor is comfortable taking on because going beyond that threshold might lead to panic decisions or being turned off of investing completely due to a bad experience.
“Instead, you might want to think about, ‘What’s appropriate for me and what’s going to lead to the best outcomes?’ Some people might want to start by saving in a TFSA, creating a bit of an emergency fund, and creating a little bit of cash in case something goes wrong. The last thing you want to do with an emergency fund is invest it aggressively.”
The market is not a casino
Sandhu said he regularly sees the mentality that the market, if you approach it correctly, is a good way to get rich quickly.
“One of the biggest things to be careful of when people (think), ‘I’m 43 now and I haven’t done enough of this,’ don’t turn the market into a casino thinking, ‘I’ve got to score big to get it right,’ because when you swing for the fences, you either get a home run, or you completely strike out.”
Slow money in the market is the key to success, Sandhu said. But it requires being willing to ride the ups and downs with a long-term view and not make any knee-jerk decisions.
For example, data on the S&P 500 show that, since its inception in 1926, it has averaged annual returns of about 10 per cent (about 6.78 per cent after adjusting for inflation). This, however, has included several crashes and recoveries.
“The stock market will get you rich slowly, guaranteed. It always has, it always will,” Sandhu said.
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