Earned Wealth vs. Inherited Wealth: Should You Have Different Investing Strategies for Both?

How should people approach the management of inherited money, and should their strategy be any different from those who don't have such a windfall? Moreover, if you're fortunate enough to inherit a fortune and also have a successful career or business, should your approach to investing differ for your inherited wealth versus your earned income?

The answers to these questions are complex and depend on various factors, including individual risk profiles, needs, attitudes toward money, and personal preferences. For those who inherit significant wealth, the primary focus often shifts to wealth preservation.

Wealth preservation is crucial for those with substantial inherited assets, aiming to protect and maintain their value across generations. It's essential not only for the continuity of wealth but also for managing the assets efficiently, ensuring they are safeguarded against risks like inflation. Proper wealth preservation strategies can help protect inherited money, utilising various financial management and taxation methods.

Inheritance: The Case for Wealth Preservation

Wealth preservation is the paramount concern of most old money elite who have inherited significant amounts of money from their parents or other close relatives.

In fact, as essential as it is, wealth preservation is oftentimes a missed step when it comes both to wealth creation as well as wealth transfer from one generation to another. While most elderly people are risk-averse and like to earn a modest interest income on their accumulated assets, whether earned or inherited, young people, who are actively earning, are risk-takers and often tap capital markets in order to try and grow their wealth exponentially.

While the process of wealth creation is geared towards generating a high yield for the long term, wealth preservation, on the other hand, focuses on protecting the accumulated investments such that they can be managed passively, withdrawn in an appropriate and tax-efficient manner, while at the same time being shielded against the scourge of inflation.

Wealth preservation, done properly, can help an investor effectively protect the value of their inherited money. This can be done by protecting the value of one’s investments using several strategies involving financial management and taxation.

Strategies for Wealth Preservation

So, what is the best strategy that a person can employ to protect their wealth in the long term?

Frankly, there is no straight answer to this question, as it depends on a person’s individual circumstances.

Depending on one’s goals, only then can one actually decide on how some or all of these strategies will benefit one’s situation currently and in the future.

Having said that, there are some general strategies that one can follow in order to try and preserve the value of one’s inherited wealth.

Diversification

The dictum of diversification holds good both for building wealth as well as for efficiently protecting inherited assets. As goes the old saying, “Don’t put all your eggs in one basket.”

Investors with large sums of money, whether inherited or earned, should diversify their assets across all major asset classes—debt, equity, gold, real estate, and even art and alternate investments. Not only will this help them maximize their returns, it will also help them hedge against losses in one or more asset classes at different points in time.

Asset Allocation

While diversification across different asset classes is one thing, asset allocation is quite another. Asset allocation basically refers to the proportion of money that should be allocated across different asset classes like equity, real estate, gold, debt, and even crypto. A proper asset allocation can not only help hedge against inflation but can also ensure that the well-diversified portfolio keeps beating inflation over the long term and therefore keeps compounding.

Most nouveau riche investors are often not particularly well-versed with the concept of asset allocation, while mature investors, who belong to the old money elite, are smarter with their money.

Goals

Active earners are often advised to go in for goal-based investing. But if you have inherited a big pile of money, you can bypass a few steps and achieve a lot of the same goals that it might take someone trying to accumulate wealth actively over a few decades.

A big inheritance allows you to fund several financial goals that may otherwise have been tough to achieve.

For one, an inheritance does away with the need to buy expensive insurance policies. After all, health or life insurance buys you or your family financial protection in case of an eventuality. It helps pay for steep medical bills or helps keep the family afloat if the earning member dies prematurely. But when you have an inheritance, you already have that financial protection and don’t therefore need to go in for big life insurance policies or health covers. You can instead deploy your active earnings or the income generated from the invested wealth to better use and compound your money even faster.

Second, an inheritance can also ensure that you can afford to take time off for and also pay for good but expensive higher education for yourself or even your spouse or send your kids to good schools and colleges, all without having to go in for expensive education loans. This way, you can give yourself and your family members a good chance at having a great, high-earning career.

Like with education, you also do not need to go in for a home loan if you have inherited enough money to buy an expensive house in a good part of town. Not only will doing so improve the quality of your life, over time, a good property, at a premium location, will appreciate, effectively generating even more wealth for the coming generations.

In fact, when you have a large inheritance, the family can enjoy your current active incomes without any fear of not being able to meet any future goals. This can accord a lot of freedom and a great deal of latitude to many of life’s decisions, which those without an inheritance can either never take or have to wait for very long for.

Generational Wealth

Most households struggle to build long-term wealth to meet all their goals for one lifetime. But when you have an inheritance, you can future-proof your family and build generational wealth that can last several generations. This can be done by creating private family trusts that can hold assets, which can then be passed easily from one generation to the next.

In fact, an inheritance allows you to take a long-term view of financial goals without the need to worry about any short-term volatility or setbacks. You also don’t need to worry about timing the stock markets or indulging in undue risks that could erode large portions of your hard-earned wealth.

If you have had a long-term dream of starting your own business, an inheritance can help you take the plunge, knowing well that any potential failure is hedged financially.

Conclusion

You have to be lucky to get an inheritance. But those of you who do come into such luck should make judicious use of that money and make it work for you such that your life and that of those coming after you becomes better.

Whether you have an inheritance or have accumulated your own earned money, you need to make sure that the pot of wealth is safe from prying eyes of other family members, friends, or anyone else who may try and gain control over it. It is common for those around you to make demands on your inherited money when they see you have come into big money. It is therefore your duty to protect your money and put it to use judiciously, whether you have earned it or inherited it.