by Jeffrey Ong 04:46 AM Jan 07, 2012
Article from Today Online
When should you introduce the concept of investment to your child? When they are in primary school, secondary school or older? It is never too early to start teaching your children to invest for their future. In fact, this can be as easy as A, B, C … and D.
A for 'Acquire'
Children should acquire from a young age a good sense and value of money. They should be given a monthly allowance to meet their expenses outside the home - this should cover items such as meals at school, transport costs, entertainment expenses, and monies for occasionally larger expense items or toys.
This way, children will learn the value of money - that everything comes at a cost, and they will have to budget, plan, and manage their various expenditures accordingly. Otherwise, they have nothing left for lunch in school. Additionally, they will know that if they wish to acquire a bigger ticket item, they will have to plan for this by spending less today, and saving more for tomorrow - they will learn the trade-offs between current consumption, savings and future consumption.
B for 'Being early', C for 'Compounding returns'
"Be early" when starting to save and invest and know the power of "compounding returns". Children should learn this truth early for themselves by witnessing first-hand the power of compounding.
To illustrate the power of investing (versus saving), Chart 1 shows that a portfolio of unit trusts comprising small capped stocks achieved 13.5 per cent return per annum.
Supposing you had invested S$10,000 for your child at birth into unit trusts comprising small cap stocks. At your child's 19th birthday, the amount would have grown to S$120,570: Enough to pay for a large part, if not all, of your child's university education.
However, if you opted to invest in Singapore Government bonds or put the money into fixed deposits, you would have saved only S$19,700 on your child's 19th birthday. When your child is mature enough to understand the value of money, he would be able to appreciate your decision to invest an initial sum instead of keeping cash.
Of course, your child may not understand the power of compounding until he is well in his teens. But that does not mean that you cannot start an investment plan early for your child and in the meantime teach him the importance of savings.
You can act as a "banker" and encourage your child to put in a consistent amount of savings every week - for example, S$2 every week and the banker, who is yourself, will add an interest of 13.5 per cent on it compounded. The amount will get to S$120,570 by the time he is 19 years old. You can help your child to save that S$2 every week by using creative means, such as using differently labelled piggy banks for different purposes; for example, one for charity, one for university, one for spending on what your child wants.
You further inculcate the value of frugality in your child by getting him to pay for some items himself, such as paying for drinks when eating out once a week. This way, he understands how much to use, how much he will be left with after spending.
'D' is for Discipline.
As with matters in life worth investing time, resources and energy in, staying the course is key. Being disciplined in investing means implementing a regular savings plan.
Chart 2 shows that if you had invested a fixed amount every quarter over 10 years into a unit trust comprising Asia-Pacific ex-Japan equities, you would have achieved 15.4 per cent per annum. Investing a lump sum at the start would have achieved returns of only 8.7 per cent per annum.
The reason that a regular savings plan often reaps greater returns than a lump sum investment is due to "dollar cost averaging". That is, by investing a fixed amount every quarter or month, you purchase more units when stock markets fall and purchase less when stock markets rise. Also, you remove the emotions from investing, thus avoiding the mistake of selling at the bottom and buying at the peak that most retail investors make.
Starting a regular savings plan early is the start of an important learning journey that both you and your child take. You can start investing a fixed amount of S$1,000 every month for your children. But eventually, your children should co-share an increasing amount of the regular plan through savings from the allowance that is given to them. This will not only inculcate a habit of saving part of the allowance, but your children can also enjoy the occasional fruits of investing by taking some profits from the account to treat themselves.
These few suggested steps above are by no means exhaustive in terms of the many tools and ideas that parents can use to instill good habits in their children. But the earlier they develop these healthy habits, the more rewards both parents and children will reap in the future.
Jeffrey Ong is the head of investment counsellors at Standard Chartered Bank.
Article from Today Online
