Investing for my kids – A Parent’s Story

Author: | Date:

My wife made a trip to the bank recently to open a Child Development Account (CDA) for my little kid. It was a trip we have been putting off for many months, but the baby will be turning one soon and we should delay it no longer.

For parents and parents to be, the government matches every dollar on your deposits up to a certain amount. The money can be spent on education and health related expenses. It is free money and the account is a no-brainer.

Mr. Friendly

The customer service officer was capable and friendly. He answered my wife’s questions professionally and rendered good help. While discharging his duties he also made small talk, chatting about kids (ours, he just finished school) and work.

Inevitable the conversation drifted to investing and growing our money. Mr Friendly then asked about the financial planning we have done for our kids.

To guard against inflation and to prepare for the kid’s tertiary education, he suggested that we commit a small portion of our income to an endowment plan. The endowment plan will provide a minimum return of approximately 3% per annum, higher than fixed deposits. Higher returns are possible but not guaranteed and are dependent on the fund’s performance.

My wife was reluctant. She mentioned that we have already started a regular savings plan for our kids to invest in the STI ETF.

Even before she could say Papa, my baby daughter has been investing her ang bao money on a monthly basis. This money is used to purchase regular amounts of STI ETF. She is the proud (though extremely minor) owner of 30 of the biggest blue chip companies in Singapore.

My wife also let on that the STI ETF have averaged close to 10% returns per annum historically. Mr Friendly seemed rather surprised.

This exchange is enlightening for two reasons.

What does the STI return?

The STI ETF is something every retail investor ought to take a closer look at. The funds track the movement of the Straits Times Index and allow the investor to own 30 of the biggest and most stable blue chip stocks in Singapore.

They are easily traded (you can purchase them through your broker just like you would purchase any stock). Unlike unit trusts with their sales charges and annual management fees, the STI ETF cost close to nothing to buy, sell and own.

Ironically, because the transaction and holding costs are so low, STI ETFs are not able to generate substantial commissions for finance professionals. Hence despite them being such an awesome investment tool, one hardly hears of advisors recommending its use.

Yet the returns on the STI far exceeds the returns of most managed funds. Alvin did a comparison and wrote about it here.

According to the SPDR STI ETF prospectus, up till 31st May 2015 the fund has returned 7.88% per annum over the past 10 years inclusive of dividends and net of all charges. This closely mirrors the performance of the Index itself. Depending on which 10 year time period you take, the returns vary. In 2013 when I wrote this article, the ten year historical returns as high as 12.7%.

Despite the STI ETF being such a great instrument, people know very little about it. Specifically, few people know the returns can be substantial. This lack of knowledge is costing many investors a lot of money over the long run.

(The STI ETF is not without its shortcomings. The Fund invests in stocks. Stocks can be volatile. In the event of a market crash, the value of your portfolio might drop by up to 50%. Invest in stocks only if you do not need the money for the next five to ten years and only if you can stomach the thought of your portfolio dropping by half)

Dollar Cost Averaging

Both our children have their own invest-saver plan with POSBank. At this moment, we have allocated $300 per month to the plan. On a monthly basis, the bank will deduct this amount from their savings account and use it to purchase the STI ETF on their behalf.

This form of investing is what finance folks term as dollar cost averaging. When the market is doing badly, the ETF actually becomes cheaper to own and our $300 dollars will be able to get us more units. When the market does well we end up buying lesser with the fixed amount. Essentially we end up buying more when it is cheap and less when stocks are expensive. Over the long run our average cost remains low.

In twenty years time we would have invested $72k in the plan (assuming no change to the monthly investments – we intend to increase the monthly investment when the market drops).

Based on a rather conservative 8%, we would be looking at a portfolio value of $177k. This compares rather favorably to an endowment plan (or worse still, a fixed deposit plan) which will produce $98k at 3% per annum.

Financial knowledge is extremely expensive

I share this not because I think my kids will be better off than other kids. Far from.

I simply want to make the point that financial knowledge (or more specifically, the lack of financial knowledge) is an expensive commodity. Compounded over time, it becomes an extremely expensive commodity.

Think about it this way. A decision made 20 years ago would have cost you easily hundreds of thousands compounded. How would our lives have turned out differently if we had made better and more informed financial decisions from the very beginning? Relying solely on the advice dispersed by advisors is not a great option anymore.

Living in this capitalistic society, we cannot afford not to understand the language of money. As parents, with our little charges depending on us, this need becomes even more pressing!

The following two tabs change content below.
Dive, snowboard and have moved house five times in the last ten years. Miraculously filled up every single page in my passport before it expired. Manage risk for a living.
  • Hi Jon,

    May I ask the investment you make for your children is from you and your spouse’s account or your use the money in your children’s account?

    Cheers,
    Naro

  • Hi Jon,

    Thank for your reply.

    I am asking because I have a joint account with my son and the money inside are his. My wife and I do not contribute to this account on a regular basis.

    My wife and I buy an endowment and life insurance for my son and the premiums are paid by us.

    So, I am wondering whether I should invest my son’s money on his behalf.

    Cheers,
    Naro

    • I understand Naro,

      For all intents and purposes, the money in the joint account are my kids’ too. It is their money and we as parents are merely stewards of it until they come of age.

      I did not hesitate to invest their money because 1. given a time horizon of 20 years, the chances of equities underperforming cash is extremely slim and 2. the price of NOT investing is way too high.

      My kids are insured and we pay their premiums too!

  • Hi Jon,
    You stated that both your children have their own invest-saver plan with POSBank.
    However I was reading on POSB website that only 18 years old and above can apply for invest-saver plan. So how did your children apply for their own plan?

    I am also looking for ways to RSP a small sum monthly from my children’s bank account into a investment account under their own name. But I can’t find a efficient way to do it, ie with their small sum, the fee is normally quite a high percentage of their investment. Do you have any recommendation for this? Thanks.

    • Hi Alex,

      You are right about kids having to be 18 years old at least. What I did was to open joint accounts with them individually and apply for the invest-saver under that account with my name. Technically not 100% their own plan but for all intents and purposes good enough for me.

      I have also been searching for an elegant and clean way to invest for kids under their own name for a long time. So I can understand your frustration on this one. The way I see it, if you want it to be cheap, do it manually every month. If you can live with the investment being under your own name, it might be easier to just do so and then transfer everything to them when they come of age. I don’t mind paying that teeny weeny bit more for the convenience and also I want them to have some ownership eventually when they are more aware of money matters, hence my choice.

      If you do find a way around, do let me know. Thanks!

  • Hi Jon, I learnt that the dividend from the STI ETF bought via the Posb saver cannot be reinvested and will be deposited into the savings account instead. This I suppose will reduce the compounding effect substantially I suppose? As such, savings for my child will not be able to reach it’s optimum amount without compounding effect am I right or wrong? I am no math person and is very new to this. Could I kindly have your advice or explanation on this?

  • >