If you thought, nappies and formula were expensive, wait until you have to start paying for university education. The reality is, raising kids doesn’t come cheap. While it’s never too early to start saving for their futures, it’s not too late either. We spoke to Vivienne Taberer, portfolio manager at Investec Asset Management, about her savings plans for her sons.
I have two sons, Joshua (12) and Luke (10), and in my opinion the most important thing you can give your kids is a good education. This includes ensuring that your estate can provide in the event that you’re no longer there, but equally starting to invest for their education as soon as possible. I am fortunate that their schooling is affordable for me at this stage, so my savings plan is for their tertiary education – I want them to have every opportunity open to them once they finish school.
When they were still very small I opened investment accounts for them and regularly invest in unit trusts on their behalf. Unit trusts are an easy and flexible way to get access to financial markets. There is a huge selection available, catering for all risk profiles, from very conservative investment options (such as money market or fixed income funds) to balanced funds offering diversification across asset classes like equities, fixed income assets and offshore investments, to more aggressive funds, which have exposure to riskier asset classes like equities (the stock market).
As I am a portfolio manager and therefore in financial markets, I manage those investments on an ad hoc basis, phasing money in at attractive entry points. However, many people do not have the time, skill or experience to approach investment in this way, so for them it makes sense to invest by debit order and contribute a fixed sum on a monthly basis. This also ensures that they remain disciplined, as the money is automatically invested before they’re tempted to spend it!
The time horizon you have available to save should inform how much risk you can afford to take, i.e. how much money you can allocate to growth assets like the stock market versus more defensive investments like bonds and cash. Remember, the higher the risk, the higher the potential return over the long term, but also the greater chance of capital loss over the short term. Given that I have been saving for my sons since they were very young, they have a very long investment horizon (in excess of 15 years). This has meant that I could tilt their portfolio towards growth assets, as they have the luxury of time to ride out any short-term underperformance.
For most investors, a balanced or multi-asset fund is a simple solution and a good starting point on their investment journey. These funds are diversified across asset classes (equities, bonds and cash) and the difficult calls between asset classes are made by an investment professional.
Nevertheless, I have kept a portion (10-15%) of my sons’ investments in fixed income funds, i.e. funds which are invested in the bond market and cash and have a focus on capital preservation. This provides some comfort should it not be a good point in the market cycle when the funds may eventually be required. Imagine the market collapses 40% shortly before they go to university and you have to liquidate some of your investment to pay for the first year. Rather than being forced to lock in those losses, use the fixed income portfolio to pay for the first year. This will ensure that the bulk of the portfolio has time to recover over the subsequent years.
I’ve also opened bank accounts for the boys as they got a bit older as I want them to get the experience and learn the discipline of managing their own money. Rather than giving them cash, their pocket money is paid monthly into a debit card account and it is up to them how they spend it. Once it runs out, there’s no topping up. Now that it’s their own money, it amazes me how much less is spent at the tuck shop!