Kids Investment Strategy Statement (KISS) — Part 2
Investment is not only meant for adults. One who starts investment early guarantees a healthy financial return for themselves in the future. We have seen two stages of KISS in the last part. i.e. Investing Area and Investment Process. Hereafter I will call out these two stages as IA and IP sometimes throughout this part, just for being cool by using swag abbreviations. If you don't know what is IA and IP, strictly recommended reading KISS part 1.
Financial literacy will put your kids in control of their financial situations. For example, when we are young, we develop a false depiction of money management. Especially owning a certain brand of cars like BMW, Lamborgini, or using a motorcycle in cold areas like Chicago where you can ride this two-wheeler only in summer, or using certain brands of clothes when you can buy the same apparels in cheap stores and it is going to serve the same purpose. We don't know the difference between Want vs Need. As a parent, we might have gone through this cycle and end up learning to save it, spend it, and invest it after the second stage of your life i.e. thirties or forties. What if someone started this IA and IP before you are born and what would be your net worth now? I am leaving the answer to your choice, comment on your response.
Investment Evaluation
In this stage, your kid might have learned the benefit of compound interest. The portfolio might have grown bigger and it is the time where your kids might be entering college or university. The things that your kid learns during IA and IP would make them an entrepreneur or anything. Either they can rebalance their portfolio according to their career plan or take out cash to begin the next journey. We have to observe our kids in various situations. Kids Investment evaluation is not about managing their assets rather it would be evaluating their course of actions. We have been guiding them throughout IA and IP stages with what kind of investment they should make. Now they are eligible to buy stocks on their own without parental guidance.
A young calf have no fear
The major investment mistake is overconfidence. Those who are overconfident in their abilities tend to trade more. This can further erode your real returns over time as you trade too confidently, and pay the costs. If you have invested around $40,000 in dollar cost average of $2000 per year then it could have grown up to 115,000 with 8% annual interest in the variance of 2%. We don't want our kids to lose money because of overconfidence. Either your kids should not run into a risk-averse investor by moving their money into “safer” investments right at the wrong time. Consistency is another key factor for investment. But consistency is not just about results. It’s also about being consistently disciplined, consistently diligent, and consistently determined. Once your kids become adults, they can continue their investment in different investing areas like 401K, IRA, Roth IRA, and SEP IRA. Your kids can declare themselves as financially independent. On average, kids at the age of twenties tends to take more loans and debts for their education(A), or their lifestyles (B). If your kids learn with the 4% rule, that dollar amount stays the same each year and rises only with annual inflation, then they will continue their investment without you. We can teach our kids to start their investment journey alone by fulfilling their needs till they are mature enough to handle their wants.
(A) The average debt of students when they graduated from college rose from $18,550 (in 2004) to $28,950 (in 2014), an increase of 56 percent.
(B) From 2004 to 2009, the median credit card debt among college students increased 74 percent.
Investment Return
As a parent, we should keep in mind that not all growth rates are the same. If your bank is paying you 3 percent interest on your savings, that’s pretty much guaranteed. If a savings bond is paying you 5 percent interest, that’s also darn close to a sure thing.
The stock market, however, particularly over short-term periods, is anything but a sure thing. The “returns” (what you make) of these investment classes can fluctuate dramatically from one year to the next. There are good years, great years, so-so years, and years we’d much rather forget (like 2000 and 2008). Over long periods of time, though, the stock market has averaged an annual 11 percent return.
Similarly, many individual companies remain strong for a decade or more, some even for a century. Others fail – sometimes quite quickly. In fact, the great majority of new start-up businesses fail within the first five years. If you focus on investing in truly solid, growing companies, on average you’ll be much more likely to earn something like that annual 13 percent we mentioned above. If you select one or more companies that turn out to be remarkable growers, such as Microsoft, the average growth rate for your investments might be higher than 13 percent.
No pain, No gain
So,Kids Investment return can be huge which comes with huge risk. For example, the National Gathering on Early Childhood Arrangement and Programs has found that high-quality early childhood investment can yield a $4 to $9 dollar return per $1 contributed. 2009 consider of Perry Preschool, a high-quality program for 3–5-year-olds created in Michigan within the 1960s, evaluated a return to society of between almost $7 and $12 for each $1 contributed. That said, early childhood investment stands out as a specially striking zone for huge investment return absolutely because so many chances to invest money for the long term. Kids’ investment return is not merely a number, this is your asset to leave an inheritance to your children. Since it has been proved that investment returns are high, we do have a lot of freedom in our asset allocation. Individual high-quality stocks provide higher profit gain than index or ETFs. Because of early investment and based on your kid’s age, their investment portfolio can afford to be aggressive, with high-risk-high-reward investments like stocks, international equities, and aggressive mutual funds. If your kids continue their regular contributions of $2,000 a month and can benefit from a similar rate of return of 10%, the kid’s portfolio will be worth $1.1 million by the time they reach age 16. “These aggressive investment strategies and active trading are what’s driving a high rate of return”.
You can build your kids’ portfolio according to your plan and risk assessment. It’s not always right to take a risk on your kid especially when you are saving assets for kids. Your kids’ portfolio can be the same as your portfolio. If you’re looking for a safer place to start your kids on their stock market journey than a high return portfolio, buying dividend stocks is surely something to consider. Although dividend-paying stocks don’t produce the biggest returns, it was a great way to get your kids enthused about investing. It became the foundation for their portfolio, allowing him to sprinkle in more growth stocks and other assets after they developed a basic understanding of how the stock market works. “I am investing in S&P500 index fund and Dividend fund for my one-year-old kid”.
Always think about tax too, different accounts have different tax rules. You pay taxes on Custodian account — such as dividends, interest, or earnings — generated by account assets is considered the child’s income and taxed at the child’s tax rate once the child reaches age 18. Anything over $2,100 is taxed at the parent’s rate. So return calculation will always impact of tax , charges and inflation. Learn and teach your kids but the basic message remains the same and that is the earlier you invest, the easier it is to build a significant pot of wealth.
