Source : the age
We’ve been saving small weekly amounts for our kids in a bank account for eight years, but the balance and interest earned are minimal. The bank offers an option to invest the funds in the stock market, though we have no experience. As our children near 18, what’s the best way to grow their savings before they leave home?
Thanks for your question. Return and risk are inextricably linked. Whilst the return on your bank savings have been low, they do come with essentially no risk, given government guarantees on top of strong Australian banking regulations.
Investing for your children over the long term may require a bit of risk.Credit: Simon Letch
To achieve greater returns, it would be necessary to take on extra risk. That risk most commonly takes the form of volatility – values going up and down. That is certainly the case with the share investment option that your bank is proposing.
To manage risk of this kind, your investment time frame is the key. For an investment typically described as “balanced”, a three-year minimum investment time frame is advised. For a “growth” investment, five years.
Because these investments experience volatility, they need to be held long enough so that the periods of positive return comfortably outweigh any negatives. As a rough guide, stock markets decline about one in every four years.
The positive years outweigh the negative years, both in number and in total return, but if you are unlucky enough to get one of the negative years in your first year of investing, then you need enough subsequent positive years to recover and achieve a good outcome.
In deciding whether you change your children’s savings from a bank account to an investment, first be cognisant that to achieve higher returns, you must necessarily accept higher risk. If this is unpalatable, you should remain where you are.
The second consideration is the timeframe. You mentioned your children are nearing 18. How much longer will they stay at home? If it’s only a year or two, then remaining in a bank account is likely the most sensible course of action.
But if you think they might be at home more than three years, and are comfortable accepting some volatility, then perhaps you could consider moving to an investment account to help the balance grow.
How can we reinvest proceeds from the sale of an investment property in a way that’s relatively safe but still offers reasonable returns? We can’t contribute to super, but we’re looking for something like our super fund’s balanced fund – ideally with franked income to help offset tax. We’re aware of term deposits (low returns) and ETFs (more risk and involvement), but are there any other suitable options?
Yes, there are certainly investment solutions that have the look and feel of a super fund, but operate outside the superannuation environment. Most commonly these days, such investments are run through a wrap facility, which handles all your administration, providing information on franking credits, dividend income, capital gains, and the like.
Within a wrap account, most providers will provide you with access to hundreds, if not thousands of different investment options, enabling you to diversify across fund managers and strategies, with many that are similar, if not identical, to the balanced fund that you use within your super account.
As you will hold this investment in your personal name, income will be taxable, however as you mentioned, provided you have reasonable exposure to Australian shares, the investment will throw off franking credits, and these may be sufficient to offset any tax liability.
Paul Benson is a certified financial planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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