Help - How do I invest my childrens inheritence money

[Admin]

Hi All, both of my kids, Caitlin (27 years old) and Lachlan (24 years old), have received $50,000 each from my mother in law's estate but I am so scared how to advise them on what to do. They both want to invest at the best return/risk ratio to get the best out of the money to buy their own nome in years to come. I spoke to the bank and all they offered was Term Deposit at around the low 4% when superannuation investments are getting around 8% by highly respected companies. Both of my kids are working full time.

 

So any advice would be helpful as I am very confused on how to best help them. (PM me if you like to keep it private)

 

I acknowlege that any ideas are not financial advice, I just want some advice to steer me a direction that might help or help to educate me as I know nothing other than a bank

[gareth lacey]

the rules on super have relaxed a bit in recent years , my advise ,put into their super  i think from memory 30k is a 1 off a year

 

[Grumpy Old Nasho]

Make it low risk for a start. And don't be fooled by superannuation's 8%, there's too many takers. Also superannuation needs to be monitored for fluctuations and volatility which may not be fully understood by young adults. As an ordinary worker, I lost ten years of gains in the 2008 crash, I was back to square one. I couldn't draw the money out because I had not yet retired, so I moved it to the Cash portfolio and left it there. Cash is like term deposits, and you don't lose any of it.

 

I also had bank accounts and bank term deposits which I salary sacrificed into, a small amount each week. This built up and the returns started to overtake my Super returns. In the end Super was insignificant and my Bank account strategy paid off, beating my Super by hundreds of thousands of dollars, even after paying tax on my earnings. After retirement I was in a position to pay cash for a residential property to max $250k, with funds left over. And I didn't start early, I started late in the day.

 

There was no bank fees, just continuous interest three months at a time, heaps of it, it left my Super in it's dust, regardless of what my Super portfolios were.

 

 

 

 

 

 

 

Edited 6 hours ago by Grumpy Old Nasho

[facthunter]

Some funds have costs that eat into your investment. The industry funds are the Best there.. Nev

[Jerry_Atrick]

Hi Ian,

 

My first thought is speak to a trusted financial advisor. $100K is probably not a lot for most of them, but importantly, your kids are young and this could be the kick start for them to invest to earn and not save. Yuor strategy with your bank savings did very well.. I am guessing it was compounded or sem compounded interest that was being paid (and by semi compounding, I mean left the interest payments paid on whatever frequency in the account to add to the principal on which the interest is being paid). 

 

I am no financial adviser, and if you look at my current personal financial position, you would probably want to do the opposite of what I have done, but FWIW, which is nothing really, when investing, you have to consider at least the following:

• Purpose and Time Horizon: In this case, you are saying they want to buy a house and at 27 and 24 repextively, I would say the time horizon  to  utilise the funds and any growth will be shorter than 10 years. 
• Risk aversion: From the purpose, I would suggest there shouuld be a low tolerance to risk. In investing, like most other things, there is suaully a risk v reward gradient - the higher the risk, the exponentially higher the reward you should seek, because at anything greater than 10% risk, you should assume you will lose it. The timeframe is relatively short and the purpose is a major capital purchase. I would suggest a very low risk tolerance
• Strategy of investment: Do you want to max returns or ensure the amount preserves its purchasing power/value. We all think max the returns, but I would argue, with a low tolerance to risk, it is more about preservation/modest growth - i.e. safety rather than squeezing every drop yu can from it. That is my opinion, yours or your kids may be entirely differnt.
• Costs and Charges: Whatever you choose there's a cost, and an opportunity cost. What may seem a "small" charge (2%) is actually high and can cost you much more, especially over time. In the EU, all unit based investmen companies have to publish the effect of their costs on projected earnings versus the cost free projected returns and the graph differences are very telling. Also remember, for unit trusts and the like, there is often trailing comissions paid to agents for years - the life of the investment. But. don't be too stingy about it. If you are paying two percent and they are giving you a 20% return, bersus paying 0.5% for a 10% return, well, I would rather take the former. It's a minefield. 
• Taxes, which is another cost at the end of the day. There are tax efficient vehicles in Australia for investments held over 10 years, but you generally always pay some. I would suggest a short term super fund investment is not the way to go as therewill be taxes and exit fees (ooh, I forgot to mention those earlier - they can be a bummer on unlisted funds). Australia has about the worst tax regime for personal investoers. Even the US has tax free investment accounts. In the UK and Europe, there are tax free accounts - UK has ISAs - up to £20K per year can be invested and returns are entirely tax free. Also, we pay zwero input tax into Super and 25% of contributions can be withdrawn tax free after 55 years of age. 

 

It sounds like you are pretty averse to risk, but also the time horizon and purpose would mean you would want more fo a defensive strategy than a aggresive one. The infation rate in Aus at the moment is 3.8%, so a 4% term deposit is treading water - sort of. If it is compounded daily, then it can grow very much quicker than inflation as the rate curve becomes exponential-ishh0. House price inflation in the areas your kids want to buy is more important - how can you invest and keep pace with that? Also, I read that Chalmers is considering a cap of two homes for negative gearing, and I am guessing the removal of the CGT allowance on residential property investors, which personally should have been done years ago and contributes far more to house price inflation than the immigration issue (which also does contribute). Also strengthening Anti Money Laundering riles for real estate agents and solicitors shouldl also have been done years ago. These measures will slow house price inflation, but it will still be more than the inflation rate. 

 

What that may mean though, is that they want to get on the housing ladder sooner rather than later, even with the changes.

 

I am sure there are other consisderations than the above.. Personally, an ETF that has a mix of growth hedged by defensive positions would be where I would go for. While it is very low cost here, and online brokers don't charge a fee (they get a 0.05% commission, generally), they tend to perform to the market. 

 

Despite the market turmoil, over the last 10 years, the NDX (Nasdaq top 100, I think) has performed remarkably:

 

But note, while over the longer term, index finds do well, there is a lot of short term volatility and they may slump right when you want to cash in.

 

There are other options than the financial markets. Despite the potential cap on negative gearing and the CGT allowance changes that may be coming, it may be worth them pooling their cash and earnings and investing in property rentals. Also, not necessarily residential. Quality commerical stuff such as medical centres, etc on maintaining leases are great and you would be surprised how you can access finance to this stuff. But also residential investments will help combat house price inflation and they can use the increase in equity over time (especially if they make improvements that add value) as collateral to expand their portfolio, and in 10 years they may have enough being generated from a portfolio to afford them each a house and some passive income to boot. 

 

The long and short of it is that they have to look at their life aims (maybe not focus on using the money to buy a house but set themselves up spo they can buy a house if that makes sense), do their research and look beyond the traditional financial markets investing . 

 

Hope that helps a bit