While it is easy to build wealth, making it last for generations needs careful planning, rebalancing, and reviewing of the portfolio. You often hear stories of legacy stocks that have made investors who held them for decades millionaires, but they are outliers that all investors wish to own. There is no formula to identify such stocks. Even a well-researched stock can only increase the probability of finding outliers.
Source: Getty Images
How to build generational wealth
The key to building generational wealth is to diversify your portfolio in 10–20 different growth opportunities. However, it doesn’t mean you buy and forget the stocks. In a 1988 analysis, William Samuelson and Richard Zeckhauser found that many people who inherited a portfolio from their parents and grandparents retained the asset allocation even if it meant holding risky assets. This is because the portfolio held an emotional attachment.
A famous Chinese proverb says, “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” Wealth can last generations when you don’t just pass on stocks but lessons of how to review a portfolio and shortlist investing opportunities.
Rebalancing at regular intervals is something even market indices do. The TSX 60 and the Nasdaq 100 Index review stocks quarterly, removing underperforming stocks and adding outperforming stocks. Let’s take the case of Bombardier (TSX:BBD). On June 15, 2020, it was removed from the S&P/TSX 60 Index because its share price fell below the $1 threshold. The stock returned to the Index on September 20, 2021 and has been among the best performers. This exit and reentry shows that benchmark returns are inflated as it prunes poor performers.
Those who bought Bombardier stock post-pandemic are benefiting from the recovery. Hence, it is important to review your investments and rebalance when a stock peaks. Warren Buffett sold his airline stocks in 2020 and bought energy stocks. This is because his portfolio review showed that the world has changed for both sectors.
Three Canadian stocks to build generational wealth
While it is difficult to identify outliers, you can identify future outperformers if things go as planned.
Technology ETF
The iShares NASDAQ 100 Index ETF (CAD-Hedged) (TSX: XQQ) is a good way to build generational wealth. The Technology ETF automatically rebalances portfolio companies by replicating the Nasdaq 100 Index. The index will grow as emerging technology companies get listed on Nasdaq to raise capital. Nasdaq has surged during the e-commerce rally, the crypto frenzy, the e-sports craze, and now the artificial intelligence (AI) trend.
SpaceX debuted on Nasdaq, and OpenAI and Anthropic are also considering listing here. If they are among the top 100 stocks by market cap, they will find a place in the XQQ ETF. However, this auto-rebalancing comes at a cost of a 0.35% annual management fee.
Constellation Software stock
Constellation Software (TSX: CSU) can also help you build generational wealth, as the company owns a portfolio of several vertical-specific software companies enjoying regular maintenance cash flow. It compounds its value by reinvesting this cash to buy more companies. This growth through acquisitions gives Constellation the flexibility to acquire different companies. The stock is currently trading at a lower price due to management change, but it could pick up momentum as the new CEO delivers returns.
The stock is currently facing uncertainty as software clients experiment with AI. Some are reluctant to adopt AI and retain legacy software due to the mission-critical nature of their work. Some are trying AI, but it is not known if they will pay extra for it. If companies adopt AI, Constellation will benefit from higher organic growth. If companies don’t adopt AI, Constellation will continue to earn recurring cash flow from maintenance.
Royal Bank of Canada
Royal Bank of Canada (TSX: RY) is a stock you can keep buying and selling, booking profits in a timely manner. It is a stock to hold for the long term, but recessionary fears are a time to sell the stock before it falls. The bank is too intertwined with Canada’s economy, making it a stock that will benefit from Canada’s economic growth. Thus, you can be assured that your investment will keep compounding returns even after decades.
