Toys, clothing or money in a card used to be the gift of choice for many grandparents – but there’s a new trend that’s set to give kids a great financial start in life, with many grandparents now investing Christmas and birthday money for their grandkids instead.
Gifted money in a savings account won’t grow very far these days. Most lenders aren’t offering much above 1 per cent or 2 per cent. But if invested in growth assets such as stocks over a long period of time, that birthday and Christmas cash can give a child a huge head start in life as they face challenges including the rising cost of housing and education.
It’s powerful when you compare, for example, $10,000 invested at birth versus the same amount placed in a bank account.
At the child’s 21st birthday, they would have more than $53,000 if invested to receive an average of 8 per cent return per annum. If that same amount of money was placed in the bank, the child would only have $15,000 at age 21 (assuming a very generous 2 per cent cash interest rate).
Some people may choose to invest in blue chip shares for their children or grandchildren, such as in an Australian bank or mining company, then hold onto those stocks for the next 20 years. However, this type of set-and-forget strategy may not necessarily work so well these days.
If you have a look today at some of the top weighted stocks in the S&P 500 in the US you’ll find the tech stocks of Apple, Microsoft, Amazon and Facebook. Go back 10 years to July 2009 and the top five stocks were Exxon Mobil, General Electric, Citigroup, Microsoft, and AT&T.
Only one company has been a constant. The world changed a lot in 10 years and it’s hard to pick the stocks that will still be performing well in the next 12 months, let alone 2039!
Another investing option is to buy the whole index to diversify your risk – commonly referred to as index investing. For example, to name just two types of index options is buying the S&P 500 to get exposure to the biggest 500 companies in the US, or the ASX 200 for the biggest 200 companies in Australia.
This type of investing isn’t just limited to equities (shares). You can further diversify over other asset classes such as bonds, infrastructure, listed real estate as well as emerging markets (which includes countries such as China and India).
What’s the advantage? By not putting all your eggs in one basket you can spread your risk over multiple companies and multiple asset classes. If one asset class performs poorly, this could be compensated by the returns of other asset classes.
It is possible to invest in this way by investing in quality indexes or exchange traded funds (ETFs). Not all indexes and ETFs are the same so it pays to be aware of their differences. To do this you may need to set up a trading account with a broker so take into account how much they will charge to complete the trades.
In regards to fees, there are very low indirect fees that ETF providers charge and these are embedded in the ETF share price.
Managed funds are another example of being able to set and forget whilst getting the diversification necessary. However, usually with this management oversight comes a higher fee and that needs to be taken into account, not just performance.
There is also a new way of investing through robo-advisors.
Robo-advisers provide traditional investment management but do so online. It’s becoming more of an accessible way to get the professional investment advice without paying for the high ongoing management fees. They will usually invest over multiple asset classes in index funds and ETFs (as mentioned above) to get necessary diversification.
Not all robo-advisers are the same, though, so look into the transparency of their fees and the humans behind the technology that are making the investment decisions.
We have no guarantees what the world will look like in 20 years, but what we do know is that the world will continue to change, new businesses will rise and established business will fall.
If you are lucky enough to be in the situation to be considering starting a nest egg for your grandchild, the decisions you make now will have a huge effect on what your gift will look like in 10 or 20 years’ time.
Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.