By Lawrence StapletonTweet
Most parents and guardians understand that putting small amounts away for their children can, over the long term, grow into a large sum of money. It’s important to make the right decision with these amounts early on because the magic ingredient to compounding interest is time.
Starting early and staying consistent is the conventional wisdom.
However, with interest rates on savings accounts and term deposits still recovering after years of historical lows, many parents are wondering where they can get the best bang for their buck. And while the banks are happy enough to pass on recent rate rises to lenders, most are yet to pass these on to savers.
So, where can parents and guardians invest $1000 for their kids? Well, the answer to this boils down to two very important questions: what are your financial goals, and how much time do you have? Ask yourself what your end goal is; will this $1000 be put towards next year’s family holiday, or helping your child get into the property market when they’re old enough?
Depending on this timeline, shifting your mindset away from piggy banks and savings accounts will be a necessary step, as families have a lot to benefit from investing in share markets.
Here are some simple ways parents can $1000 for their children right now, in line with their financial goals and timelines.
It’s no secret that investing in publicly listed Australian companies generally provides investors with superior returns from cash, over the long term.
To illustrate this further, simply look at the compounded returns of the ASX200 Accumulation Index over 20 years. This index tracks the capital growth with distributions reinvested from the largest 200 companies listed on the Australian Stock Exchange (ASX). From June 2002 to June 2022, we witnessed a compounded annual growth rate of approximately 8.1 per cent per annum (ASX: XJOAI).
Put another way, a single $1000 investment in this index back in June 2002 left untouched will have grown to $4753. Not a bad outcome for the long-term investor!
So, for parents and guardians looking to invest $1000 for 5 years or more, the Australian share market should be considered.
However, it’s important that you don’t ‘put all your eggs in one basket and invest your entire $1000 into a single stock or limit yourself to just one sector of the market.
Without appropriate diversification, parents and guardians may run the risk of exposing themselves to large swings in the value of their investment. While 5-10 years is generally enough time to ride out this volatility, it may be a better idea to consider an ETF that covers a wide range of the market, such as the Vanguard Australian Shares Index ETF (ASX: VAS). This ETF is a popular option for first-time investors and tracks the return of the S&P/ASX 300 Index, net of any fees, expenses, and tax.
Have you ever wondered where the Australian-sized equivalents of Tesla, Apple and Alibaba are?
An Australian share market is a great place for parents to invest $1000 for their children, but all things considered, there may be greater investment opportunities located offshore.
We’ve looked at the annual compounded returns of the Morgan Stanley Capital International (MSCI) World Ex-Australia Index (2022).
This index is an important barometer used by investors to determine the performance of international equity markets excluding Australia, and from June 2002 to June 2022 there has been a 6.2 per cent per annum growth rate.
Another reason why parents might choose to invest $1000 in a large, international company is to help educate their kids on investing. It might be easier to explain to a young child how, thanks to purchasing shares, they are technically a part owner of their favourite brands, such as Disney or Apple.
When it comes to investing overseas, however, diversification should still be front of mind for every investor. A good place to start might be a direct investment into an ETF tracking the largest 500 companies listed on the New York Stock Exchange, such as iShares Core S&P500 ETF (ticker symbol ASX: IVV). Through a single contribution to this ETF, you are essentially splitting your investment across 500 of the largest companies listed in the US.
For parents seeking exposure to the long-term growth potential of companies located in different countries, then the Magellan Global Fund (ASX: MGF) might be suitable.
This actively managed fund aims to achieve attractive risk-adjusted returns over the medium to long term, by investing in a select holding of some of the world’s most well-known names.
Now I know what you’re thinking. Doesn’t this contradict saying piggy banks and savings accounts aren’t the best bang for your buck?
If your financial goals are short-term in nature (i.e., less than 3 years) then chances are you are better off sticking with cash. What we mean is that if parents intend to use $1000 to fund a short-term objective such as kid’s horse-riding lessons, then you probably can’t afford to risk the volatility that comes with investing. Volatility refers to the constantly changing value of your investments, and it is inherent at any level of investing.
Cash as an investment option generally rewards investors with low (or no) return in exchange for taking on very little (or no) risk. While not the most exciting option, parents and guardians with a short-term goal might appreciate the certainty that $1000 will still be worth $1000 in less than three years’ time.
Shopping around for banks paying the highest interest on savings accounts, with the lowest fees, will go a low way in ensuring your child is financially looked after. But beware, unless the returns from interest payments keep pace with inflation, the purchasing power of your savings may erode over time.
Before deciding where to invest $1000 it is important to understand what your short- and long-term financial goals are. As a parent is this money going towards a new mountain bike for your little one at Christmas? Or will you help your child get into the property market when they’re old enough? The answer to this will help guide you on the best way to invest $1000.
As a rule of thumb, the shorter the timeline, the less risk (and therefore less growth) you are willing to accept, so saving cash might be more suitable. Conversely, the longer the timeline, the higher the risk (and therefore greater growth) you might be open to. Investing $1000 in Choosing to invest $1000 in the financial markets for the medium to long term may provide you with greater capital return and the potential to receive income along the way.
About the author: Lawrence Stapleton pictured above is the CEO & Fund Manager, Itrust Inves. This is an opinion column. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of this publication.
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