Investing for kids: 5 tips to turbo-charge your kids’ piggy bank
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We all want to provide our children with the best opportunities in life and with cost of living pressures continuing to increase, how can we give them a financial boost? Whether directly in shares or exchange traded funds (ETFs) for portfolio diversification, investing for kids in equity markets long-term can turbo-charge their piggy bank.
BetaShares CEO Alex Vynokur told Stockhead starting an investment portfolio on behalf of children is a great way to teach positive financial habits about the power of compounding and long-term investing.
“As an alternative to the old-fashioned piggy bank, an investment portfolio containing exchange traded funds can help create a nest egg and put cash to work,” Vynokur said.
“Over time, those savings can only help achieve their financial goals later in life, whether it be a house deposit, tertiary education or something else.”
“Just like with your own investment strategy it is helpful to first think about your circumstances, including objectives, time horizon and risk tolerance when investing on behalf of your child,” Vynokur said.
“Regularly review your portfolio and rebalance if required to ensure it still aligns with your goals.”
“Be mindful of the considerations associated with setting up an investment account on behalf of a minor, as small oversights can impact the final balance of the portfolio,” Vynokur said.
“When setting up a minor account, parents should take the time to review the fine print for account fees and other costs, including set-up fees and brokerage.”
“Consider obtaining advice about the tax implications of different approaches to investment ownership for children under 18 years of age – failure to do this might result in an unwelcome surprise come tax time,” Vynokur said.
“Either an adult can open a minor account as a trust for a child or an adult can give shares to a child.”
Both options have a tax implications to consider. High tax rates also apply on investment income such as dividends earned by minors. You can read more about tax considerations on the ATO website.
“The magic of compounding is a great way to both teach positive financial habits and add to the size of a child’s investment portfolio,” Vynokur said.
He said regular contributions are a great way to harness the power of compounding within a portfolio when investing for kids.
“Regular additional contributions help reduce some of the market timing risk within the portfolio, turn down the noise associated with market volatility and build healthy savings discipline that can form a positive lifelong habit for your young ones,” Vynokur said.
“Most importantly it helps remove the emotion from investing and allows the focus to be on long-term wealth creation.”
He said signing up for a distribution reinvestment plan or DRP is another way to take advantage of the magic of compounding within the portfolio.
“A DRP allows investors to turn income earned from company dividends within an ETF into additional units within the same fund – this will ultimately help when your child or grandchild is ready to access the nest egg that has been built for them,” he said.
Vynokur said while direct share ownership has clear benefits for certain investors, it does impose certain costs around brokerage, time, and additional concentration risk.
“Even the most well-informed investors acknowledge that stock picking is a difficult undertaking that both requires additional time to research individual companies and imposes extra costs and risks,” he said.
“Even legendary investor Warren Buffett has made it clear that he will bequeath his wealth to his family via a diversified passive investment fund.
He said a diversified all-growth ETF is a great one-stop-shop to start a wealth creation journey when investing for kids.
“When it comes to long-term wealth creation, it is very hard to go past the simple, cost-effective, and diversified nature of a well-constructed exchange traded fund,” he said.
“For example, the BetaShares All Growth ETF provides exposure to a diversified portfolio of over 8000 shares from Australia, global developed and emerging markets – offering potential for growth over the long term.
“This type of investment is a suitable building block for a well-constructed portfolio, helps remove the guesswork from investing, and saves time and risks associated with stock picking.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.