By Michelle Burger, Client Communication
The media landscape is dominated by financial articles about the importance of saving for children and readers are bombarded with scary stories about the cost of having a child. Illustrated with all manner of graphs and charts about the large amounts you will need to take care of and support a child from birth to about 21 years old.
But it does not have to frighten you. As South Africa celebrates Youth Day, we share with you some insights about our approach; to provide you with some ideas for you and an investment strategy for your children.
As financial advisors we often come across parents with young children asking us what type of investment they should consider for their kids. We started what is popularly known as ‘The Bella Portfolio’, for our lovely daughter, now two years old.
Bella is my and senior financial planner at the Brenthurst Pretoria branch, Johan Burger’s darling little girl and the first grandchild of Magnus Heystek; the founder of Brenthurst Wealth. When she was born, we opened a unit trust investment for her with our own contributions as well as from her grandparents. The contents of the portfolio became a favourite topic for client communications and also radio shows we participate in; as many clients and listeners of the radio programmes asked what they should do for their children and grandchildren. “Oupa Magnus” always encourages us to add to her investment on her birthdays and notes that it is much more sensible than buying toys she will probably tire of within a week. He may have a point.
A regular question from parents and grandparents is about whether or not a savings account should be opened once a child is born.
A savings account? At a bank? Really? That is the last thing you should do and if you are considering it, please read on.
If you are completely new to investing, perhaps a quick tutorial on Risk versus Return would be appropriate. To put it as simply as possible, the more risk you take, the higher your possible returns. The younger you are, the more you are able to rake risk because you have more time to recoup any potential losses. Most people do not like the idea that there is a possibility of losing money, but the way the stock market works allows investors to make up for short-term losses the longer they are invested. It works in cycles but the general trend is upwards.
So the younger you are, the more risk you can afford to take. For children, we recommend a very high risk investment strategy—because the long term returns are just so much more attractive than a basic savings account at the bank that will not keep up with inflation and be eroded away by fees and taxes* over time. * More about the new tax-free savings account later.
The Bella portfolio is a straight-forward discretionary unit trust portfolio, invested in her own name, including funds that are both overweight in equities (shares) and have a considerable portion of offshore exposure.
There is a very good reason for this. Equity investment is the one asset class that has outperformed all other asset classes over the super long term and offshore diversification has been a cornerstone of the Brenthurst philosophy for quite some time. The offshore investment universe has so many more opportunities than the local market can offer and has to be included in almost every portfolio. It should be no different for children’s portfolios—probably even more so.
During the short time span of her investment, the real return on Bella’s portfolio was over 11% per year. That’s after fees and taking inflation into account (thus a nominal return of almost 16.5% per year). Based on the long term research on the asset allocation of the portfolio (consisting of data of over 100 years), it has produced a real return of almost 6% per year (a nominal return of over 11%). Compare that to a savings account which would have barely produced a real return of 1% per year.
The next step would be include a portion of the money you wish to invest for your little one in the brand new investment product called the Tax-Free Savings Account. It is possible to invest up to a maximum amount of R30 000 per annum, (per person or child) in their own name in a separate investment where no taxes will be levied—no interest, no withholding tax on dividends, and also no capital gains tax upon withdrawal. This can be done either via a lump sum or via a monthly debit order of R2 500 per month. Although there are limitations to the funds you may use in a tax free savings account your financial advisor should be able to choose some appropriate funds should this be the solution you opt for. Also keep in mind that each parent may donate up to R100, 000 per year donations-tax free! (The current lifetime allowance per person is R500 000 for the TFSA).
If you were to invest an amount of R2 500 per month (which comes to R30 000 per year) in 20 years’ time and based on a real growth rate of 11%* per year, it could be worth approximately R2.2 million. Taking inflation into account that would be about the same as R700 000 in today’s money. This could pay for your child’s university fees and perhaps a new car, or even a deposit on a property. Think of how this could give them a huge jump start in life.
Although Youth Day is historically a public holiday to commemorate the Soweto riots in 1976, today we see it as a positive day of celebrating and honouring the children of our country. Our children are our future and in order to give them best possible chance, investing in them today contributes to their success in the future. Should you wish to find out more about opening an investment for your children, please feel free to contact a financial advisor at Brenthurst without delay.
* Although the equity market has historically produced between 15-20% real return per annum, we would like to stress that the future outlook will probably need to be a bit more conservative based on the fact that we are foreseeing a more challenging economic landscape in years to come.