My two children (23 and 21) live at home and have each saved around $50,000. Neither plans to leave home in the short to medium term but one may want to travel and work overseas in the next 2-3 years. I am not really in favour of them buying a property (either together or separately) as it burdens them with a significant debt and is a major commitment. At the moment I have been putting their savings into low cost index funds (one Australian equities and the other a diversified equities fund with Vanguard). Are there other options I should steer them towards? They have no plans for any major spending.
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Hi Wil - I have two options to consider.
The first is that you might want to check what exposure to currency risk you have in the Vanguard Fund. Most international ETFs / index funds have options for 100% hedging or 0% (Hedging is just a another word for protection).
If it's been unhedged for the last few years then you probably benefited with the Aussie Dollar depreciating against the US dollar. But currency can move against you quickly, and if you're unhedged and the market is also down, it can be a double whammy. The downside of being fully hedged is that you miss out on any of the upside of currency movements. There's currently no concensus on the optimal ratio for currency hedging so most people just suggest to hedge half of your international equity exposure so at least you have both protection and some upside to benefit from.
The second option to consider is risk tolerance for your children and yourself. In Financial Planning at least 20 minutes of the consultation is set aside for a discussion on risk/return and volatility. People have many different views on what is 'risky' / 'conservative' and that applies even within the same family! Make sure everyone is on board with the current strategy.
If you uncover some concerns, it may be worth introducing some defensive assets to your portfolio, e.g. government and / or corporate bonds. You can invest through ETFs / Index funds like the Vanguard option. When the market has a major correction, the bonds will be your safety net so that if you are needing to sell, you can use these first and hopefully avoiding realising losses on the equities
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