Lessons for later years
Start early, invest regularly and have a long-term outlook is advice I give to everyone, so John is on the right track with his idea of investing for his grandchildren.
He wants a portfolio he can top up regularly over the years. He should aim to keep costs low by investing via a single account and diversifying across a range of investments. Given John’s investment horizon, the portfolio is likely to be weighted towards Australian and global shares with a smaller allocation to defensive assets such as bonds.
John says he’s interested in a set-and-forget option so a digital investment service (or robo adviser) could be a good option.
Robo advisers recommend a portfolio of ETFs that offer diversification benefits, are very low cost and don’t require risky stock picking. Instead of investing in one or two companies such as BHP or Telstra, ETFs invest in the entire market to reduce risk.
Everything is automated and managed online so John won’t need to constantly watch markets or stress about collecting fund statements at tax time. When the grandchildren are old enough, John can give them online access so they can watch their portfolio grow.
John’s grandkids are currently under four and he plans to invest for them into early adulthood. This means they have a long investment time frame so a high-growth strategy is appropriate as they have the capacity to weather shortterm market volatility.
I’d recommend a portfolio with a 75% weighting towards growth assets such as Australian, global and emerging market shares and 25% in defensive assets like bonds and gold to cushion against falls.
John should consider the advantage of dollar cost averaging, which is the best strategy to invest periodically. Investing regularly over time can reduce the impact of short-term market moves because you invest at an “average” price over a period of time. You don’t have to try to time market entry and John could invest $250 every month to gain the benefits.
Based on Stockspot’s Topaz (higher-growth) portfolio, an initial investment of $3000 ($1000 each) and monthly top-ups of $250 over 15 years with an average net return of 9%, John’s grandchildren could potentially end up with $101,975 from his investment. If markets are weak and return only 6% over that period, the final balance would be closer to $78,606 but if the return is 12% it could be $133,206.
An investment portfolio such as this is a great way to teach children important financial lessons like the power of compound returns, the benefit of low fees, diversification and dollar cost averaging.