One of the things I’m most proud of this year is talking lots of kids in my high school personal finance class into opening investment accounts. The youngest was 14, the oldest 18.
If you’ve tried persuading your own kids to save money, you’ll know it’s a tough sell. The concept of delayed gratification is as appealing to teenagers as a plateful of Brussels sprouts. So I’ve developed a three-stage approach to convincing them that this strange thing called investing is actually worth a second look.
You start by asking, “Would you like to save more or spend more?” The answer is utterly predictable: Your child will want to spend more. Any teenager does.
Then ask if they want to be richer than their friends. Unless you’ve birthed another Gandhi (which would be cool) the response is also predictable.
Next comes the kicker: “Do you want to save less and end up richer?” It’s at this point that you hook them.
Go to an online compound interest calculator and ask them to consider two people, earning identical career incomes. One begins investing $100 a month between the ages of 15 and 60. The second invests $500 per month between ages 35 and 60. They each earn a 9-per-cent return.
The first person socks away $54,000 over 45 years; the second saves $150,000. But the person saving less ends up wealthier. The one saving just $54,000 over a lifetime earns $687,823. The one saving $150,000 ends up with $553,943.
When my students figure this out, they want to invest yesterday.
There are three important tenets to building wealth in the stock market: You have to invest regularly, keep investment costs low and diversify. As a busy parent, you also want your child’s investment set-up to be as seamless as possible.
There are several ways to accomplish these goals. You can, for instance, buy exchange-traded funds that track major market indexes for next to nothing. Or you can invest in a low cost balanced mutual fund.
For my money, the Streetwise Balanced fund offered by ING Direct is one of the more appealing deals on the market for novice investors. If nothing else, you can use it as a benchmark to judge other alternatives.
The Balanced portfolio consists of an indexed blend of Canadian government bonds, Canadian stocks, U.S. stocks and international stocks. With an expense ratio of 1.07 per cent, it’s less than half the cost of a typical actively managed Canadian balanced fund and its five-year return has exceeded 8 per cent.
Now, it’s not the cheapest deal on the market. And it may not do as well over the next decade as an all-stock portfolio. (For those who can stomach additional risk, ING also offers an Equity Growth portfolio.) But I believe that psychological considerations should trump other factors when you’re choosing an investing strategy for a minor.
I like the Balanced portfolio because it’s a no-fuss product, ideally suited to investors who may be depositing frequent, small amounts of money. I like it even more because its wide diversification makes it relatively stable – an important factor since kids can be spooked by stock market downturns and give up on trying to harness the magical power of compound interest. In addition, it is rebalanced annually, removing the self-scuttling market timing that foils so many investors.
You can find ETFs with lower expense ratios, but they require far more paperwork to set up. And they aren’t always cheaper for small accounts because of the trading commissions you have to pay when purchasing ETFs.
Generally, an ETF strategy will make more sense than a mutual fund when your portfolio passes the $20,000 mark, but for a kid just starting out, who intends to deposit a few dollars every month, the ING approach is ideal.
Accounts can be opened online in under 10 minutes, if you’re a current ING Direct client. If not, you can complete and print an online enrolment, sign it, and mail it off.
An Automatic Savings Program can be established with no transaction or account fees, with as little as $25 per month. ING Direct’s Joe Snyder suggests parents could use their TFSA contribution room to save “in trust” for their kids. Or they could open a non-registered (taxable) mutual fund account.
Either way, your kids will get a giant head start on building their net worth. Delayed gratification, they may learn, isn’t a plate of Brussels sprouts after all.