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Why I Invested My Son’s Ang Pao Money In Stocks Instead Of Endowment Plans & ETFs

Opinions, Parenting, Personal Finance

Written by:

Alvin Chow

All parents want the best for their children.

So do I.

My son was lucky to receive $2,500 worth of Ang Pao money from friends and relatives. As someone who teaches investing, I knew that putting the money in fixed deposits wasn’t the best option. Most of them barely beat the inflation rate over the long run.

While most parents prefer to buy funds or endowment plans because of the convenience and low level of knowledge required to invest, I prefer to grow the money through stock investment.

Stock investment offers one of the highest returns if done properly. I also considered the fact that he was only a few months old and time is his advantage. He can ride out the ups and downs of the market and end up with greater wealth compared to most funds or endowment plans.

So I had a discussion with my wife and she agreed for me to risk our son’s money. She probably had the confidence because I have made money in stocks through our joint investment account.

Don’t get me wrong, I am not encouraging you to follow me. I did it because I have a proven investment strategy, and I don’t mind spending the effort to manage his investments. Plus, my spouse was also open to the idea.

Why Stocks, And Not Endowment Plans Or ETFs?

Assuming he gets additional $2,500 a year to add to his investment capital, he will have $52,500 over 21 years. These are investible money because his expenses and insurance have been taken care of (by me and my wife).

If he has bought an endowment for 21 years at an assumed, typical rate of return of 3% per year, he would end up with $76,342.

If he has invested in an index ETF such as the STI ETF and assuming a rate of return of 7%, he would end up with $122,514 at age 21.

But…if I manage his investments well and grow them at 12% per year, the amount would compound to $231,257!

I don’t know about you. Having another $100k over 21 years is definitely worth my time and effort to invest for him.

He could use this money for his studies (if he wants to).

Most importantly, I would like to impart my investing knowledge to him so he can continue to grow the money. A lifeskill that he can survive on with sufficient capital. Provided, he has the interest in investing because it is something that I cannot force onto him.

I will be utterly disappointed if he wants to use the money to buy a car at age 21. Or worst, since owning a car may not be a trend in year 2,038, he may spend it on some virtual reality machine to live his remaining life in the virtual world.

Alas, I cannot just focus on growing his money but, must also inculcate the right money values in him.

Why I Invested In Overseas Stocks

In order to start investing for my son, I have to open an investment account on his behalf. He was still too young to open one at 2 months old.

Usually we would start investing in our home country before venturing into foreign countries. But I did not want to mix his stocks together with mine in the CDP, in case I mixed up the ownership of stocks over time. Hence, I decided to open a custodian account dedicated for him and to keep our investments separate.

A custodian account would normally charge a fee of $2 per counter per month. This is not cost effective given his small amount of starting capital.

I decided to open an FSMOne account that allows me to trade Hong Kong stocks without paying any custodian fee (for now). It was suitable as Hong Kong was one of the more undervalued markets that I was familiar with.

It was difficult to diversify $2,500, so I have to look for only one stock to invest.

Unlike Singapore where the lot sizes are fixed at 100 shares per lot, Hong Kong has varying lot sizes. My first choice stock exceeded $2,500 for one lot so I had to look for other undervalued stocks.

Interestingly, I came across a hotel stock in my stock screen and I remembered watching a documentary about its 150th anniversary – The Peninsula Hong Kong. It was a grand hotel for the high society.

Hong Kong & Shanghai Hotels Group (HKSE:0045)

The company that owns this hotel is Hong Kong & Shanghai Hotels Group (HKSE:0045). It was founded by the Kadoorie family who has a combined shareholding of 58.99%. The Kadoorie are Jews originated from Baghdad, Iraq.

The company has hotels, commercial and office buildings around the world. It also owns other services such as the iconic tram service at The Peak.

Valuation: 50% Below Fair Value (CNAV) & Positive Cash Flow

All these assets were selling at 50 percent below their value. It was pretty illogical to me and hence I was willing to take a position in it.

Moreover the company had a positive cash flow and low debt, which means that it is not going to be in trouble any time soon. The possible reason for such undervaluation was that their earnings were not impressive with a rather high PE ratio of 22. The dividend yield was also low at 2%.

But I am a contrarian as I prefer to buy assets on the cheap. Earnings can be volatile and likes to throw ugly surprises once in a while, so I am more comfortable investing in assets.

The lot size of 500 shares was affordable at a price of HK$9.33. I bought 1,500 shares for him in total. This was in 5 Jun 2017.

He is a lucky boy. The share price quickly soared beyond HK$10.

My wife was concerned that the quick rise might be followed by a quick fall. She was uncomfortable so we decided to sell it for him. I wouldn’t have sold it if it was my investment. The share price was still far from the valuation of HK$21. But it was my son’s money and my wife has a say in it.

So I sold the stock on 26 Jun 2017 for HK$11.06, making a 18% in a span of 21 days.

The stock went up as high as HK$17 after I have sold it but eventually retreated to HK$12+ in the recent month.

No regrets.

We can’t buy at the bottom and sell at the top and I think making 18% for his first stock in a short span of time is a good result after all.

I have since redeployed his capital to a more undervalued Hong Kong stock.

2 thoughts on “Why I Invested My Son’s Ang Pao Money In Stocks Instead Of Endowment Plans & ETFs”

  1. this is very interesting. I wonder what is the next stock you are looking in ?
    Tell me if i did the right thing.
    10 years ago, when my son was 3, i bought an insurance policy where an annual premium of $1200 goes to cover for 100K death benefits/100 k Critical illness/100 k tpd and $1,800 goes into investment. Total premium for him per year is $3k

    It was invested in Singapore managed fund. I never seriously read the policy or how track how the fund was performing . Recently, i took a look, the fund is climbing… i went to the counter and wanted to terminate the policy and the lady give me a ‘scolding’. You see, after 10 years, the total cash from my pocket was 30k, if terminate the policy, i could get back 33k. my intention was to withdraw the money and buy a pure WL policy without investment. After listening to the counter, i only withdraw 30k, and i kept the policy . Did i make a mistake ?

    Reply
    • Hi ling,

      You have the right to terminate the policy and withdraw the full amount. By just keeping 3k value in the policy and assuming that you will not top up additional premium in future, the value should not be able to sustain for whole life coverage. You should get a revised benefit illustration from the insurer to check the projected value of the plan.

      To switch to a new whole life plan for protection, you should be aware that any pre-existing medical conditions will not be covered under the new plan. 100k coverage for age 13 male should cost much lesser than $3k per year. Do drop me an email at Louis@drwealth.com if you need my assistance on the quotation and comparison

      Louis
      Trainer at Dr Wealth

      Reply

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