I have 3 children and would like to start an investment portfolio for them. How much do I need, and what would be the best way to do this?
Bernie in Kingscliff, NSW
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This is a great question and one I found asking myself with my children when they were young and one I encourage each and every parent to consider upon the birth of their child(ren).
The key question is the time frame involved:
- How long before it is likely for the children to draw down on their funds?
- What are the funds for?
- Do you want to provide an extra special gift for their wedding, graduation, deposit on their first home?
My thinking with our children was that it would not be before their 21st. That then enabled me to invest in growth assets - eg shares. If the time frame was less, then shares may be too risky. I always believe you need to give shares around 10 years to ensure that they have time to recover from a large fall. It is a given that there will be times shares will increase substantially, just as they will fall substantially…But over the long term they outperform the alternative of Cash and Fixed Interest.
There are several different options available:
- Index funds which can be bought on the share market which represent, for example, the ASX200 - largest 200 Australian shares,
- High Quality managed funds - which do all the hard yards for you of selecting the wheat from the chaff with which shares to buy. They don’t always get it right and there are more fund managers that underperform the index than outperform, however, the few that get it right are worth their weight in gold. There are minimum investment amounts required however.
- Geared managed funds - this takes the risk level up significantly. There are funds available that leverage up your investment internally using the dividends to pay the interest and purchasing extra shares with the geared money. For example, if you invested $1000, you may have exposure to $1500, so if the market rises 10% then you potentially receive the growth on $1500, not the $1000, however, if the market falls 10%, then you also get the drop on the $1500. You need to be very careful you choose good funds that are only investing in high-quality assets and independent research is required to verify this
Then, how much is the next question? This depends on how much you can afford but I would argue at least an initial investment of $1,000 for Index funds, $2,000 for managed funds, and $100/month ongoing if you have it.
So, what did I do? Well as an adviser I had access to quality research so I decided firstly that the time frame was no earlier than their 21st. So I had at least 15 years with my eldest child by the time I started the plan and more time with the younger 2. I chose a highly rated geared share fund. I believed in the story of the Australian share and figured if I was happy with buying Aussie shares for 15 years - why wouldn’t I be prepared to take extra risk and gear up.
The results - The ride has been scary and several times the value of the shares was right back to where we started but several times we put more in along the way at the down points and now the boys have a nice little nest egg that is worth way more than the same money invested in the bank.
The other thing to bear in mind is… Don’t let the kids know. For obvious reasons they would want it as soon as they knew…Let it be a surprise.
Also – Think about this:
If $1000 is invested for 21 years, and the rate of return is 8% pa with all dividends reinvested – that will be worth over $5000 at 21 – Standard Managed Fund
If $1000 is invested for 21 years, and the rate of return is 10% pa with all dividends reinvested – that will be worth over $7400 at 21 – Geared Managed Fund – higher risk – higher return
If $1000 is invested for 60 years, and the rate of return is 8% pa with all dividends reinvested – that will be worth over $119,000 at 60
If $1000 is invested upfront with $100/mth thereafter for 21 years, and the rate of return is 8% pa with all dividends reinvested – that will be worth over $70,000 at 21
If $1000 is invested upfront with $100/mth thereafter for 60 years, and the rate of return is 8% pa with all dividends reinvested – that will be worth over $1.8M at 60
*Tax and Inflation is ignored. Also, it is very important to consider whose name you put the investment in. Children are taxed at penalty rates on a low income, so seek advice on this one.
WARNING and Disclaimer: This is general advice and does not consider your personal circumstances. The above figures are estimates only and should not be considered fact. Do not act on this advice without seeking professional advice from an Authorised Financial Adviser.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.