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After our recent focus on nurturing wealth that lasts generations, it’s worth exploring a powerful idea for improving long-term investment results.

There’s a tool being used almost exclusively by the world’s wealthiest families. It’s entirely free and can lend as much value to a portfolio of CHF 80,000 as it does to one of CHF 8,000,000,000.

It’s called a family constitution

Also known as an investment policy statement, it’s a document outlining a person or family’s investment philosophy, along with explicit guidelines for how it should be actioned. Despite being created to ensure that sums of wealth could last for generations, a family constitution is as helpful to a single investor as it is to a multi-generational family. Here’s why:

Colleagues, friends, family and advisors are always ready with advice for anyone who’s saved a few thousand dollars. In addition, there are hundreds of different investment opportunities to choose from. It’s easy to be overwhelmed.

Instead of suffering analysis paralysis, filtering opportunities through a family constitution can help you discard what’s unimportant and focus your attention on opportunities that align with your philosophy.

Eventually, once the constitution’s creator is no longer around to manage their investments, their loved ones will still be equipped with a bulletproof guide for continued success.

3 steps to build your own family constitution

Investopedia has an example, here. But let’s explore the foundations for building your own.

1. Explain your core beliefs

Outline the key ideas that shape your worldview. These come from the heart and may reflect your life philosophy or religion. This is also the place to explain the broader impact you’d like to have on the world – for example, if your success is thanks to a particular industry, you can articulate your wish to support it over years to come.

2. List down your goals and directions

What are your financial aspirations? Here, you can explain whether you’d like to grow or preserve your wealth and how you’d like to see earnings distributed amongst your family. For example, you may have a vision for your wealth to be invested conservatively, and for its earnings to fuel a family education fund.

3. Set portfolio management parameters

This section lists the processes for running your portfolio. An example outline could be:

  • You’re targeting an average annual growth of 6%
  • Assets should be a mix of 70% equities and 30% property
  • Assets should be moved whenever losses are over 1% for three consecutive years
  • Your limit for management fees is 1.5%

While it is possible to build your family constitution alone, there are benefits to involving your family:

  • You may get helpful ideas for shaping a collective family vision
  • Their involvement will likely increase their interest in investing, improving their chances of not just continuing, but strengthening the legacy

Testing a well-crafted family constitution

Once it’s ready, you can begin filtering every investment opportunity through the constitution. If they don’t fit with the beliefs, goals, directions or paraments in your constitution, they’re not worth your time.

You’ll know your family constitution is effective when:

  • Multiple people can evaluate an opportunity with it and arrive at the same conclusion
  • It can be followed under a wide range of circumstances. It’s actionable no matter how well your investments have performed, and even in a future that looks nothing like today!

Most financial advisors are familiar with family constitutions (they may perhaps use the term investment policy statements). So, whether you’re well-versed in investing or new to the game, bringing your family constitution to an advisor is an excellent way to build a portfolio that delivers on your vision.

About the author

Driven by a need for clarity and simplicity on all things wealth related, the i-vest team works closely with senior financial experts and advisors to dive deeper into the world of finance, investment and wealth to make it more relevant for you.

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