Oran Hall | Investment for children
QUESTION: I recently happened upon some cash, $500,000, and would like to invest it for my one-year-old son, in case anything happens to me. Can you say, given the current economic climate, where is the best place to put that money?
FINANCIAL ADVISER: You have chosen a very sober way to deal with your good fortune and I hope that your son reaps excellent rewards.
At your son’s age, you should think long term. You would be surprised to see how well a well-managed portfolio can turn out by the time he reaches adulthood even if there are setbacks along the way.
Financial markets are not linear, so you can expect some hiccups along the way. Investing early allows time for recovery when bad market conditions arise or when the decisions made are not the best.
Before you open an account for the child, you should apply for a Taxpayer Registration Number, or TRN, for him. Financial institutions will generally allow you to open an account jointly for you and him. They will require his TRN and proof of his identity. Some will accept his birth certificate.
I will not undertake to suggest at which financial institution you should open the account. You may ask people you trust who have accounts with financial institutions to advise you. You may also do your own research including sourcing information from their websites.
Notwithstanding what I said previously about time to recover from setbacks, it is important for you to be prudent. Always remember you want to put your son on a sound footing. Thus, you should aim to get good returns without taking too much risk. Having a diversified portfolio is important even for children.
If you choose to buy stocks, with guidance from a competent investment adviser, select stocks with a good track record that have good potential for long-term growth. Look also for companies that pay dividend, which you can use to buy more units.
Buy companies in different industries although the sum of money you have is relatively small. If possible, you may also opt for preference shares to generate some income. They tend to generate more income than short-term interest-bearing instruments.
This approach also reduces the risk of encroaching on the portfolio by liquidating to provide funding for purposes not included in your plan.
In fact, you should have a plan for what the money should be used for and when.
You did say that you want to have the money for him in case anything happens to you. I hope the worst does not happen but, just in case, you should put in place plans to protect his interest. Appointing a trustee should help.
You may also want to opt for unit trusts or mutual funds. There are many different types which offer various levels of diversification. Opt for funds that provide growth primarily, such as those that invest in equities, equities and real estate, or the mixed funds which also include some interest-bearing securities.
Engaging a competent investment professional to guide you is important, but you should also begin to familiarise yourself with even basic investment matters. It is never good to leave yourself in a position where you do not understand what is happening to your money.
Explain what you can to your son when he gets older and encourage him to include financial matters in his reading as he grows up.
You may also boost this portfolio by adding even small sums to it systematically over time, and keep focused on the long-term goals.
You may also consider an insurance policy with him as the beneficiary, just “in case anything happens to” you. That would provide an immediate payout for him and thus help his life to continue with some level of normality. You would need to name a trustee to manage the funds if the need arises to make a claim while he is still a minor.
If the best scenario plays out, as the funds increase and as you become more knowledgeable and confident about investment matters, you should be able to expand the instruments in which you invest his portfolio.
It is so refreshing that you have chosen to put your attention to investing the funds that came to you unexpectedly. I wish there were more people like you. Of course, I understand that not everybody is in a position to do as you plan to.
This windfall would be a godsend to others, who could find other useful purposes for it, such as reducing debt or purchasing well-needed items.
I wish you well.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.