It has been a long time since I actually logged in to see how my kid’s investments were doing. After all, those are going to be there until they reach at least 21 years old, unless it is used for their university education. And right now, they are barely 3 and 5 years old this year.
The last time I checked their accounts was around a year ago, shortly after Chinese New Year, and at that time, I remembered their holdings were showing losses. But I was quite sure that if the investment horizon is very long (in this case, more than 15 years), then I am very confident that it would be substantially higher by the time I finally hand the account over to them.
But lo and behold, when I checked their accounts just now, both were back in the black now. What a difference one year makes! In any case, it is after Chinese New Year. And during Chinese New Year, they got Ang Baos (Red Packets). At this stage, my 3 year old daughter just plays with a particular Ang Bao if it has very nice colors, and then drops it on the floor after she loses interest. My son is slightly better, he passes it to his mum, but he has no interest in it either.
So, we consolidate all their Ang Bao after Chinese New Year, and now I am going to invest some of it into their unit trust investment account. Their portfolios are very straight forward. They only have two funds. One is an Asia Pacific equity fund and the other is a Singapore equity fund. They have no bond funds. The reason being that they don’t need it. Bond funds are there to provide stability, to reduce volatility. This is especially important if you don’t have a particularly long time horizon. But in this case, consider my children.
Do they care if the market slumps? Nope. All they care about right now, is whether we bring them to the playground downstairs to play. So, things like market volatility, portfolio volatility is irrelevant to them. They are not going to panic and take out everything at the bottom during a stock market crash. They aren’t going to scream at their dad and demand that everything be switched to a low risk low yielding savings account to “protect” their money.
Are their investment horizons long? Yes, in this case, well over 15 years, if not longer. 15 years is a long time. You could sometimes fit several market cycles into a 15 year period. Will equities outperform bonds over such a long period? It would. So, since volatility is not an issue in this case, then I would go for the asset class that would have a better performance over a very long term instead going for a more “balanced” type of portfolio.
In this same vein, I think those kids accounts, savings accounts are good in principle, but bad in execution. If you are committed to setting the money aside for your kids and you understand investing, then it shouldn’t go into a savings or kids account. The interest rate is so low you would be lucky to beat inflation. Right now, bank savings accounts will only give you 0.1%, and kid’s saving account interest rates are usually similar.
So, for my own kids, I place them into equity fund investments. I am confident that over a period of more than 15 years, they will beat the interest rates that banks are offering right now. All I need to do, is to withstand the volatility in the meantime, and can I kids handle it? Yes they can!
For example, the Singapore equity fund that both the kids have is the Aberdeen Singapore Equity Fund. Its actual annualised bid to bid performance over the last ten years is 9.28%. (Based on 26 Feb prices). This means that $10,000 invested ten years ago would be worth $24,288 or 140% more. In the same vein, $10,000 put into a savings account giving just 0.1% per year would give only $10,100 after ten years.
Assuming the fund keeps up its performance, and gives the same annualized performance over 20 years. This means that after 20 years, the same $10,000 would now be worth $58,994 while the one in the savings account would still only manage $10,201. To me, its quite clear. Am I willing to risk market volatility (which doesn’t have any effect on my kids) for substantially better returns over a very long period? The answer to that is a big “Yes!”
When my kids are old enough next time to start learning about money, I hope to use their own investment accounts to show them how money grows over time, and how much of a difference there is between “saving” money vs “investing” money.
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