Ultra-rich families use this tactic. And you can too.

Photograph of old family pictures laid out on a table

There is one tool that is used almost exclusively by the richest families in the world. It is completely free and can be added to a portfolio of 80.000 CHF as much as one out of 8.000.000.000 CHF.

It is called a family constitution

This is a document that lays out an individual's or family's investment philosophy and provides explicit guidelines for implementing that philosophy. Although a family constitution is designed to ensure that a fortune is preserved for generations, it is just as helpful for an individual investor. And there is a reason for this:

Colleagues, friends, family members and advisors always have advice ready for anyone who has a few thousand dollars saved up. In addition, there are hundreds of different investment options from which to choose. One is easily overwhelmed.

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

When the creator of the constitution is no longer around to manage his investments, his loved ones will be equipped with a bulletproof guide for continued success.

3 steps to build your own family constitution

Investopedia maps an example here. But first let's explore the basics of building your own system.

1. Declare your core beliefs

Outline the key attitudes that shape your worldview. They come from the heart and can reflect your philosophy of life or religion. This is also the right place to explain what influence you would like to have on the world – for example, if your success is due to a certain industry, you can express your wish to support it here in the years to come.

2. Write down your goals and policies

What are your financial goals? Here you can determine whether you want to increase or preserve your wealth and how you want to distribute the income to your family. For example, you can direct that your assets be invested conservatively and that their earnings go into a family education fund.

3. Set parameters for portfolio management

This section lists the processes for managing your portfolio. An example of an outline could be:

  • You aim for an average annual growth of 6%.
  • The assets should consist of a mixture of 70% stocks and 30% real estate.
  • Assets should be moved if losses exceed 1% for three consecutive years
  • Your cap on management fees is 1.5%.

While it's possible to make the family constitution on your own, it also has its benefits if you include your family:

  • You can get helpful ideas for creating a shared family vision
  • Your involvement will likely increase their interest in investing and improve the chances of not only continuing the legacy, but strengthening it.

Review a well-drafted family constitution

Once it's ready, you can begin to match each investment opportunity with the constitution. If they are not consistent with the beliefs, goals, policies or paraments in your constitution, they are not worth your time.

Your family constitution is effective is:

  • it is used by several people to evaluate a possibility and all come to the same conclusion
  • it is versatile – regardless of how much your investments have paid off, and even in a future where nothing looks the same as it does today!

Most financial advisors are familiar with family constitutions (they may use the term "investment policy statement"). Whether you're well-versed in investing or new to it, you can discuss your family constitution with an advisor to build a portfolio that meets your needs.

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