Personal finance
COMMENTARY
Investing as easy as A, B, C ... and D
Jeffrey Ong
W hen should you introduce
the concept of investment
to your child? When they are in
primary school, secondary school
or older? It is never too early to
start teaching your children to
invest for their future. In fact, this
can be as easy as A, B, C … and D.
A for ‘Acquire’
Children should acquire from a
young age a good sense and value
of money. They should be given a
monthly allowance to meet their
expenses outside the home —
this should cover items such as
meals at school, transport costs,
entertainment expenses, and
monies for occasionally larger
expense items or toys.
This way, children will learn
the value of money — that every-
thing comes at a cost, and they
will have to budget, plan, and
manage their various expendi-
tures accordingly. Otherwise,
they have nothing left for lunch
in school. Additionally, they will
know that if they wish to acquire
a bigger ticket item, they will
have to plan for this by spend-
ing less today, and saving more
for tomorrow — they will learn
the trade-offs between current
consumption, savings and future
consumption.
B for ‘Being early’, C for
‘Compounding returns’
“Be early” when starting to save
and invest and know the power of
“compounding returns”. Children
should learn this truth early for
themselves by witnessing first-
hand the power of compounding.
To illustrate the power of in-
vesting (versus saving), Chart 1
shows that a portfolio of unit
trusts comprising small capped
stocks achieved 13.5 per cent
return per annum.
Supposing you had invested
S$10,000 for your child at birth
into unit trusts comprising small
cap stocks. At your child’s 19th
birthday, the amount would have
grown to S$120,570: Enough to
pay for a large part, if not all, of
your child’s university education.
However, if you opted to in-
vest in Singapore Government
Chart 1: Returns of stocks, bonds, bills (cash) from 1991 to 2010
S$20
Compound annual return
• Small stocks: 13.5%
• Large stocks: 9.1%
• Government bonds: 8.4%
• Treasury bills: 3.5%
10
• Inflation: 2.5%
1 often reaps greater
0.60
1991 1996
Chart 2: Regular savings plan on a quarterly basis
175% MSCI Asia-Pacific ex Japan annual returns
150%
125%
100%
75% Recession
42.8%
50%
Recession
25%
0%
-0.4% -8.5%
-25%
-50%
-75%
2001 2002
bonds or put the money into
fixed deposits, you would have
saved only S$19,700 on your
child’s 19th birthday. When your
child is mature enough to un-
derstand the value of money, he
would be able to appreciate your
decision to invest an initial sum
instead of keeping cash.
Of course, your child may
not understand the power of
compounding until he is well
in his teens. But that does not
mean that you cannot start an
investment plan early for your
child and in the meantime teach
him the importance of savings.
You can act as a “banker”
and encourage your child to
put in a consistent amount of
2001
Recession
33.3% 40.1%
17.4% 22.7%
-52.4%
2003 2004 2005 2006 2007
Source: Lipper:MSCI asia-pacific ex japan 2011
savings every week — for ex-
ample, S$2 every week and the
banker, who is yourself, will add
an interest of 13.5 per cent on it
compounded. The amount will
get to S$120,570 by the time he
is 19 years old. You can help your
child to save that S$2 every week
by using creative means, such as
using differently labelled piggy
banks for different purposes; for
example, one for charity, one for
university, one for spending on
what your child wants.
You further inculcate the
value of frugality in your child
by getting him to pay for some
items himself, such as paying for
drinks when eating out once a
week. This way, he understands
today Saturday January 7, 2012 29
The reason that a regular
savings plan often reaps greater
returns than a lump sum invest-
ment is due to “dollar cost av-
eraging”. That is, by investing a
S$12.57 fixed amount every quarter or
month, you purchase more units
when stock markets fall and pur-
chase less when stock markets
S$5.75 rise. Also, you remove the emo-
S$5.05 tions from investing, thus avoid-
ing the mistake of selling at the
bottom and buying at the peak
that most retail investors make.
S$1.97
S$1.64 The reason that a
regular savings plan
returns than a lump
sum investment is
2006 due to ‘dollar cost
Source: morningstar
averaging’. That is,
by investing a fixed
amount every quarter
S$625
or month, you purchase
S$550
more units when
S$475
stock markets fall and
S$400 purchase less when
72.1% S$325 stock markets rise.
S$250
Starting a regular savings
19.7% S$175 plan early is the start of an im-
S$100 portant learning journey that
both you and your child take.
S$25
You can start investing a fixed
S$(50) amount of S$1,000 every month
S$(125) for your children. But eventually,
2008 2009 2010 your children should co-share an
increasing amount of the regular
plan through savings from the
how much to use, how much he allowance that is given to them.
will be left with after spending. This will not only inculcate a habit
of saving part of the allowance,
‘D’ is for Discipline. but your children can also enjoy
As with matters in life worth the occasional fruits of investing
investing time, resources and by taking some profits from the
energy in, staying the course is account to treat themselves.
key. Being disciplined in invest- These few suggested steps
ing means implementing a regu- above are by no means exhaus-
lar savings plan. tive in terms of the many tools
Chart 2 shows that if you and ideas that parents can use
had invested a fixed amount to instill good habits in their
every quarter over 10 years into children. But the earlier they de-
a unit trust comprising Asia- velop these healthy habits, the
Pacific ex-Japan equities, you more rewards both parents and
would have achieved 15.4  per children will reap in the future. ¢
cent per annum. Investing a
lump sum at the start would Jeffrey Ong is the
have achieved returns of only head of investment counsellors
8.7 per cent per annum. at Standard Chartered Bank.