Rachel Waterhouse, CEO of Australian Shareholders’ Association
There’s an old adage: Give someone a fish, and you’ll feed them for a day. Teach them to fish, and you’ll feed them for life.
The same goes with investing: you can give people money, or teach them how to manage and grow it.
According to MoneySmart, one in three people feel stressed and overwhelmed by money. We know knowledge and skills are poor when it comes to finances.
If you have children or grandchildren, what support can you give them on their life journey? How can you ensure that anything they may earn or inherit not only supports their future, but creates a source of wealth for generations to follow?
These ideas might help:
Start with your own experiences. Kids learn by example. Talk to them about how you began on the investment ladder.
Share what you’ve learnt. Have conversations about investing. Ask questions about different companies – what they are doing well, why they think that might be. Above all, coach them to be inquisitive and to question what they are told.
Make it fun! We can all be a little competitive at times. Why not register yourself and your child/grandchild for the ASX Sharemarket Game held twice a year? It’s a good way to learn about the importance of diversification, and your own risk tolerance.
Encourage a lifelong learning approach to investing. Like adults, kids learn in different ways – some will want to read about investment, while others may prefer a video or podcast. Encourage them to assess critically information from a variety of credible sources. Most information about financial literacy will only be gleaned from outside of the school curriculum.
The Federal Government has some great sites available for older kids including MoneySmart and Money Managed for teens.
Make them aware of the benefits of compounding. Compounding interest is the backbone of building wealth and important to understand and impart to your children/grandchildren. It is interest paid on the initial principal and accumulated interest on money borrowed or invested.
It can be a good way of increasing wealth, or destroying wealth when applied to borrowings. The Moneysmart compound interest calculator is a good way to show kids how compound interest works and how it leads to different returns over different times and circumstances.
Help them to get started. It’s worth talking about the importance of an investment plan with younger people. If you want to give them practical experience, why not get started with a small parcel of shares or an Exchange Traded Fund? They might only need $500 to start investing.
Don’t forget, for children under 18, there are tax issues to consider.
According to Australian Shareholders’ Association (ASA) members, teenagers or young adults should learn to budget, try to save at least 10% of what they earn, understand the need for returns to be higher than the inflation rate, and have an investment plan.
An ASA membership is beneficial, as younger people can understand what successful investors do.
As Warren Buffett said, it’s best to start investing early. If you know what you’re doing, it can be an enjoyable pursuit and an effective way of planning for your future comfort.
You can find more information about Australian Shareholders’ Association here.
Chris Brycki, CEO of Stockspot
Saving and investing are incredibly important topics that children miss out on learning at school.
As a sharemarket evangelist, and someone who started investing as a kid, I believe children should be able to benefit from investing in the same way adults can. If more children get first-hand experience seeing the benefits of time in the market, regular saving, and compound returns, it will be one of the most valuable financial lessons they’ll get in life.
A typical story Stockspot hears from its clients is that they want to open an account for their children. The clients want to make regular deposits into the accounts (like a bank deposit) so over time, their children enjoy sharemarket returns and the benefit of compounding growth.
Some clients want their children to have university paid for, or a wedding covered or even contribute to a house deposit. All of these are becoming harder to afford if you haven’t started saving early.
For these clients, Stockspot recommends a simple, diversified Exchange Traded Fund (ETF) portfolio with low fees and a minimum investment horizon of at least seven years. These diversified ETF portfolios work the same way as a normal account with a couple of extra great features.
A benefit of these accounts compared to buying a few household-name shares (like my parents did) is that they are diversified across different countries which means children automatically become part owners of great global companies like Apple and Tesla.
These ETFs are diversified across thousands of companies – including Australian companies - so children potentially benefit regardless of which shares go up or down over the next decade.
Finding an investment product with low fees is also important. The lower the fee you pay to the seller of investment services (your broker, agent, adviser or fund manager), the more money there is left for you. Paying a few per cent per year may not sound like much, but it could easily end up making you poorer by a lot of money.
Investors should also look for products that offer automatic rebalancing [this is where asset allocations are rebalanced to achieve target portfolio weightings]. This is important for any hands-off investing and means that parents don’t have to worry about having the right investment balance or spending time watching the latest market news.
Of course, investing has its risks and there can be downsides. Market volatility is something to consider. When the sharemarket inevitably falls, ensure you’re able to sustain these falls and stay invested.
As parents and guardians, we just want the best for our children. I have two boys and have opened a Stockspot kids’ account for each of them.
I want them, and other children, to learn how money works and how compound growth can work for them. I believe this is one way to bring an awareness of what the value of things are and help them to develop good spending and saving habits as they grow up.
Australian Securities & Investments Commission (ASIC)
As the corporate regulator, ASIC is not ideally placed to provide financial advice in any detail. Every year we take to task hundreds of Australians who – well-meaning or not – provide advice they are neither authorised to give nor competent to do so.
In many cases they will face enforcement action, and whether they are finfluencers who over-reach or are out-and-out rogues looking to take advantage of you, ASIC has no intention of following their lead.
That said, ASIC can endorse the one investment choice that should never go out of style, or relevance: knowledge. Even a little can go a long way, and the lack of it can certainly make your money flee even faster.
Irrespective of your age - grandparents setting aside something for the youngsters, or the kids themselves - before you start investing you will need to get across the basics by understanding key concepts. It’s not rocket science, as they say, but it is necessary.
It starts with a plan – in this case, an investment plan. This will include the financial goals, the timeframe and how much risk you are willing to take on over that time. The fact that you are investing for another means you will need to put yourself in their shoes, as best you can.
Some investments are risker than others, so it’s important to do your research before you get going. And in that order. You’ll need to be familiar with key concepts such as risk tolerance, diversification, portfolios and of course the actual asset names.
If you’re looking to help set up a younger generation, think about when they might need access those funds. To pay for education? To buy a first home, or a second? Or to kickstart their own business…? The answer will go some way to meeting one of the key criteria: the likely timeframe.
There are different types of investments:
Clearly any legacy earmarked for another generation is more likely to be the latter option (growth investments), but that does not mean you should be oblivious to the former (defensive investments). All investment strategies and products will have their place at some stage. The question is whether they are the right fit for the investor.
Before you invest, make sure you understand: how the investment might work; how it generates a return; the risks, fees and charges for buying, selling or holding the investment; how long you should invest to receive the expected return; legal and tax implications; and how the investment will contribute to a diversified portfolio.
Given that you are establishing a plan for someone else, take on some of their thinking for them. The common sense radar is invaluable: anything that suggests you’ve stumbled on to the most unbelievable investment opportunity in a decade is probably just that: unbelievable, and a stumble.
There’s a very sensible question to ask anyone who suggests there’s easy money on offer – why are they so keen on sharing their good fortune? Scammers are skilled at convincing their prey that their investment is real, the returns are high and the risks are low. No, no and most definitely no.
ASIC’s own Moneysmart investor toolkit is one obvious place to start, and it is heartening to see such a good take-up from one key cohort.
The young people and money survey snapshot of 15 – 21 year olds showed more than half the respondents expressed an interest in learning about “how to invest money – ways to invest, types of investments and possible risks and returns.”
Of more importance, that same age group with at least one investment asset were far more likely to remain on the case, with over half (53%) monitoring their investments at least weekly, 15% reviewing fortnightly, 14% reviewing monthly, and 14% reviewing occasionally/infrequently. There is no such thing as “set and forget” for them, which is a valuable lesson in itself.
The real legacy you are providing is one of engagement. You can shape your child's or grandchild’s relationship with money from an early stage.
If they can understand early on where money comes from, where it doesn’t come from, how to budget, how to spend wisely and how to set money goals that will count for something, the gift will have been the best investment they never made.