Shares for my kids - couple of questions?

[wylie]

My 18 year old son has a few thousand saved, the 15 year old about one thousand and the 11 year old about $300.

Older boy is in uni and has a part time job (not many hours per week as yet, but may increase). 15 year old son has a McDonalds interview this week so fingers crossed will have a job soon. Youngest spends his $5 per week on a can of coke and bag of lollies at the local chemist. I try to talk him into saving his money, but he pesters me so much that I allow him once a week or so to do it. One of the reasons for giving him pocket money is to give him the discretion on what to spend, so he has to make his own choices, but he would love to have more money.

We paid pocket money for the oldest boy until the finish of high school ($5 per week until grade ten, then $10 per week but he had to buy anything special he wanted, like expensive "must have" clothing, not his normal day to day needs).

If we pay the 15 year old now in advance that will come to $1300 and the 11 year old (paid in advance as above, until end of school) would get $2210. I know this doesn't allow for the fact that we may increase the amount due to inflation etc, but just on these figures I then thought that each boy could contribute $2K and we could buy $6K worth of "safe" shares.

My reasoning is that (especially the 11 year old) cannot see the point in saving his money because there is so little base to start from. If we gave him his pocket money in advance, he then has (in his eyes) a huge start and if it is invested and he can check the share price, I am hoping he will be less willing to dip into his savings.

I would still give him a little allowance as he has a few years before he can get a proper job and $5 for the oldest probably equates to $7 or so now, so he would still have a little spending money.

I have two questions -

1. Is it silly to buy shares now. I know they will crash at some stage, but hope they will grow a bit before that happens.

2. Assuming they put in $2K each, do we buy shares in their names, or (at least for the younger two) in my name as trustee?


I think it would do all the boys a world of good to be able to see their money grow (and hopefully not fall too far when the market corrects).

Wylie

 

[Andrew_A]

I have thought about what I will do in a similar situation. When I was interested in the stock market in the early 80's when at school my Dad didn't do anything to foster that interest, a small amount of real $$ to invest on my own initiative would have worked well with me. I won't make the same mistake.

STW would presently be my core choice, as it's an ETF that covers the ASX200 accumulation index with a lowish MER. As well as paying a 4.2% yield the fund is as crash proof and robust as you are likely to get imo. I'm not actually aware of the counter party risk that would be there, but imagine it's pretty darn low.

I see it as the financial markets equivalent of residential property, rock solid, boring, but likely to still be around in 20 years time and a great base upon which to build and improve.

If there is interest generated in the markets I would encourage reinvestment of dividends in individual picks and other areas, even discretionary spending.

 

[vandalic]

Sounds like a smart move, go for it. As for shares crashing, you only lose money if you realise your loss through the sale of the shares. Buy and hold

Seek some advice on what you should buy and put your plan into action.

 

[Simon]

If the shares crashing is a real fear to you then perhaps it isn't the place for you.

So what if you lose the $3000 you start with. A decent strategy should be focusing on building an asset worth millions.

THINK BIGGER

 

[wylie]

I am only slightly worried about the shares correcting because it is not my money and I don't want the kids to be disillusioned with the share market.

I have told the 18 year old that if he wants his money at some stage and his shares have dropped, we will advance him some funds so he doesn't have to sell at a bad time. I would like them to buy and hold for a long time, and watch the magic of their money growing faster than in the bank.

I didn't get worried when my super went backwards for a few years because I knew it would rally again, but I don't want to entice the kids into putting their money into shares just when they are about to crash.

I reckon there is some growth left so that they can see their money growing, before any correction, but I don't have a crystal ball .... wish I did.

Wylie

 

[Trogdor]

STW would presently be my core choice, as it's an ETF that covers the ASX200 accumulation index with a lowish MER. As well as paying a 4.2% yield the fund is as crash proof and robust as you are likely to get imo. I'm not actually aware of the counter party risk that would be there, but imagine it's pretty darn low.

I see it as the financial markets equivalent of residential property, rock solid, boring, but likely to still be around in 20 years time and a great base upon which to build and improve.

Or any of the old LICs (AFI, ARG, MLT, etc...).

 

[Andrew_A]

Or any of the old LICs (AFI, ARG, MLT, etc...).

I have had a preliminary look at LICs recently.

Same problem as I see it. They are share pickers which opens them up to the negative edge your share fund manager combats over the longer term (most under perform the general market).

Happy to be corrected on that but I didn't notice any index funds (passive management) amongst the LICs. It's the active management with attendant fees side of the equation that makes me wary.

 

[Trogdor]

I have had a preliminary look at LICs recently.

Same problem as I see it. They are share pickers which opens them up to the negative edge your share fund manager combats over the longer term (most under perform the general market).

Happy to be corrected on that but I didn't notice any index funds (passive management) amongst the LICs. It's the active management with attendant fees side of the equation that makes me wary.

I dunno. You buy a few LICs - say ARG, AFI, MLT, etc.. and your MER is 0.15 - 0.2% Much much lower than Vanguard index fund (say 0.35 - 0.8 % depending on quantity invested).

By diversifying across them you would be close, I would say, to indexing (they all hold top ASX 50 in different proportions). They dont trade very frequently to qualify for LIC CGT exemption.

Now - the sweetener - is the capital management strategies they can employ. As the shares dont trade for what the NTA is - using the 10/12 rule, they all buy back their shares when they fall below NTA, and will issue new shares sometimes above NTA. I think this is one reason they can match or beat Index funds.

Also - you can (and should) only buy them when price < NTA. In such case you get $1 for 95 cents for example.

 

[Andrew_A]

And such an approach would also be oceans better than doing nothing to teach your kids about investing. I wasn't aware the MERs were so low on those funds.

I am looking at the moment for an equal weighting (not cap weighted) index fund for the ASX200, if such a thing exists.

I would strongly encourage against an individual share picking approach though, in fact whenever people ask me for tips these days I tell them.... have you heard about property!?

I dunno. You buy a few LICs - say ARG, AFI, MLT, etc.. and your MER is 0.15 - 0.2% Much much lower than Vanguard index fund (say 0.35 - 0.8 % depending on quantity invested).

By diversifying across them you would be close, I would say, to indexing (they all hold top ASX 50 in different proportions). They dont trade very frequently to qualify for LIC CGT exemption.

Now - the sweetener - is the capital management strategies they can employ. As the shares dont trade for what the NTA is - using the 10/12 rule, they all buy back their shares when they fall below NTA, and will issue new shares sometimes above NTA. I think this is one reason they can match or beat Index funds.

Also - you can (and should) only buy them when price < NTA. In such case you get $1 for 95 cents for example.

 

[Pushka]

I decided a few years ago to invest the kids money into Colonial Investment Funds. While not as profitable as direct shares, with small amounts of money they are a good place to put the money. The returns have been way way better than just being plonked in a bank. For the under 18's, it will need to be in your name as a trustee for the child, which means you need to declare them in your tax return.

Or, as Trogdor suggested, being an Adelaide girl I have always liked Argo (ARG) which is an LIC and it invests in many blue chips. Argo used to be managed by Sir Donald Bradman. It has been a staple of my portofolios forever, and I always top up when they announce their annual Special Share Price Plan.

 

[Les]

G'day Wylie,

Take a look at www.navrainvest.com.au - only buys blue chips, but has a different way of trading that is "expected" to still provide a good return over most market types. Its trading thrives on volatility, so the recent "bull run" has not heped them to "outperform" - but 17% to 19% is not too shabby either, and a bit of steadiness of growth would probably suit younger investors anyway.

I've heard they are moving (next Fiscal Year) to charging a Management Fee (1.5% I think) - whereas, in the past, their fees were "performance based". Returns are paid quarterly but can simply be re-invested.

I know others on this forum are using them, and I'm having a good long think about doing the same. Their stated goal is to exceed 10% p.a. - but, since inception, they have regularly done WAY better than this.

Regards,

 

[keithj]

20%+ pa

I'd suggest they buy $500 each of ARG, AFI MLT - these are all quality LICs with low MERs ($500 is the minimum holding allowed officially).

Normally, every year these LICs offer a SPP (share purchase plan) of $5K to existing shareholders. These SPPs are a way of raising $$$ so they can buy more shares. They are usually offered at a discount of around 2%. These SPP simply mean you can buy shares directly from the LIC without brokerage at the discount - it's a bit of a bonus only available to existing shareholders. The 2% discount is usually taken from the weighted average closing price over the last few days.

So if you can 'lend' your kids $5K for a few weeks, they can buy $5K of a LIC at 2% discount & then sell it on the market. They pay you back the $5K & keep the $100 profit - a 20% return in a month!

The risk of course is that the share price can drop between paying for the shares & selling them - there is a gap of 2-3 weeks. However, the shareholder has about 3-4 weeks to decide if they want to participate, so if the LIC has risen in that time the actual discount can be a lot more.

 

[Sunfish]

1. Is it silly to buy shares now. I know they will crash at some stage, but hope they will grow a bit before that happens.

If you honestly believe this then you should put the money in a savings account.

 

[Andrew_A]

Worried about a crash?

Exhibit: A. The 1980's and the 2000's

Note the impressive recovery from the 87 whack. We weight such events too heavily in our minds, as they are quite rare and the risk of not investing is a potentially greater threat that is under weighted due to it being easily hidden.

Note how you would need to weight the opportunity cost of missing a slice of that massive uptrend before you were 'rewarded' for avoiding the crash.

Now if you were a share picker and chose the wrong shares, then we know what happened to the value of your paper, if you were better than the market then great, if you held the market then you recovered most of that loss by the end of the decade.

 

[GreatPig]

Andrew,

That's a very convenient place for the '80s graph to stop. If you continue it a little further, it looks like this:

And it wasn't until late 1996 that the All Ordinaries finally pushed through the level of the '87 peak. That's 9 years later - 6-7 years after the end of the decade.

GP

 

[Andrew_A]

Andrew,

That's a very convenient place for the '80s graph to stop. If you continue it a little further, it looks like this:

And it wasn't until late 1996 that the All Ordinaries finally pushed through the level of the '87 peak. That's 9 years later - 6-7 years after the end of the decade.

GP

Well where would you expect a graph of the 80's to end?

Rolling 10 year returns would be a better idea, my point was that not investing for fear of a crash might be a costly fear to have unless you have superior timing skills. Good luck with that.

If you look at when the XJO actually made new inflation adjusted highs then the picture is even bleaker. Thats CPI adjusted XJO values on the Y axis.

However why would you look at the XAO or XJO? Or why indeed would you invest to track these measures? The power of dividends is what gives the Aussie market a real kick.

The Accumulation index made new nominal highs in May 93.

 

[twobobsworth]

Not really sure if it will make much difference to the kids.

Would focus more on budgeting cashflow initiatives.

For instance, the 11 year old. Get a couple of different money boxes and label them. Savings, lollies, emergency etc... Each week spread the pocket money across the boxes.

Is the pocket money tied to performance? Do you stucture chores so there is opportunity to increase the weekly allowance?

How about the next door neighbours. Would the kids be able to mow their lawn? Wash their cars on a regular basis?

How about getting them to organise a garage sale and they can keep the proceeds.

If you have some money you want to invest for them then do it, but don't expect them to understand what you're trying to teach them.

 

[Andrew_A]

This is a clunky graph, and the XJO is based at 500 compared to the accumulation index at 1000, too lazy to go back and do it again, but you should get the idea. Start December 1979.

The power of dividends and why you should never aim to just track the XAO or XJO.

 

[Andrew_A]

I think it was Jim Rohn who said in reply to a query about teaching kids the value of things 'what difference will it make, they are just kids'.

He answered.. 'All the difference in the world."

Not really sure if it will make much difference to the kids.

Would focus more on budgeting cashflow initiatives.

For instance, the 11 year old. Get a couple of different money boxes and label them. Savings, lollies, emergency etc... Each week spread the pocket money across the boxes.

Is the pocket money tied to performance? Do you stucture chores so there is opportunity to increase the weekly allowance?

How about the next door neighbours. Would the kids be able to mow their lawn? Wash their cars on a regular basis?

How about getting them to organise a garage sale and they can keep the proceeds.

If you have some money you want to invest for them then do it, but don't expect them to understand what you're trying to teach them.

 

[twobobsworth]

yes but you have to learn to crawl first