Ask Paul: What's the best way to invest for our baby?

Hi Paul,

I have been reading your articles, and I love your experience and guidance. I have an 11-month-old baby and as her first birthday approaches, I'm keen to start saving for her future. 

I'm torn between two options: setting up a new superannuation account in her name, or using a share trading platform to build and manage an investment portfolio. 

In both cases, my plan is to contribute automatically every month. 

Which option is likely to provide her with better long-term benefits? Would superannuation offer more security for her retirement years, or could investing in shares deliver a stronger return and greater flexibility? 

Also, would you recommend a particular super fund or suggest hiring a professional broker to manage my daughter's investments? - Katerina

Thanks for your kind words, Katerina. Having turned 70 last month, I am getting a bit long on experience.

As a friend of mine cheerfully pointed out to me at a party, 'you are now in your eighth decade'.

This I found very alarming. I have no complaints, though. A bit to my surprise, I've arrived at age 70 in really good health, with my wife, Vicki, our three grown-up kids and four grandchildren. Life has been a terrific adventure, with all the usual ups and downs and that is where experience comes from.

Money is no substitute for family, friends and good health, but it helps to make choices. I've mentioned this on a number of occasions to Money readers, but it reinforces what a good decision you are making for your baby daughter.

My dad and mum started putting small amounts of money aside for me and my sister many moons ago. They let these small amounts build up, and when the money reached about $500 in today's dollars, they bought well-known shares for us. Fast forward to when I was about 27. These small amounts invested in shares had turned into about $31,000.

Vicki and I were recently married and we were keen to buy a house. Obviously location and house size were going to be a compromise, but after a fair bit of looking around, we went for a tiny semi detached home on a very busy street, facing an industrial estate in Artarmon in Sydney.

Don't faint, Katerina, we are talking about 1982, but the little semi was $90,500. We used some savings, sold a car Vicki had for $3100 and put a deposit on the semi with a bank loan, leaving us $20,000 as my contribution towards starting a business, ipac securities, with my four partners. From there, we were on the ladder and on our way financially.

I just cannot stress how valuable it is for parents and grandparents to get an investment plan going for kids and grandkids. Without my parents' foresight, Vicki and I could have bought a home or started a business, but the money they put aside let us do both.

Sparking an interest

Another important point is that as I got to 16 years of age, I became interested in the shares my parents had bought for me.

Dad and Mum would pop the twice-yearly reinvested dividend statements on my study desk. I was doing economics at school and the statements reminded me that things like compound interest, which we were being taught, were a real thing and not just an abstract concept. Not only did these small investments give us choices, they also gave me a career because the share investments sparked my interest in money.

But now I really need to talk about you and your baby! You are on exactly the right track. The two worst money mistakes a parent can make with a child are: first, do nothing, and second, start a savings plan, but put the money in a bank account.

A bank account is great for kids, but not for long-term money. With quite low, taxable returns, after inflation a bank account is not the right place when investing for decades. As I've said a hundred times, don't have money in the bank, own the bank. We bought Commonwealth Bank shares for our kids on the float for $5.40. Today, they are some $175, plus reinvested dividends over decades.

Super is the wrong vehicle for your daughter. I can hear some surprise among Money readers. I understand this, I am a huge fan of super, but not for a baby. In super you eliminate all her flexibility. She gets the money in 60 or 70 years.

As much as I think super is super, who knows what the rules will be in six to seven decades. In my views, super is out for her. Super will work well in her working years where there is also a tax break for her. Today she pays zero tax. I hope she will use the money in her early adult years to maybe help buy a home. It is 'no' to super.

It is 'yes' to shares though. You will probably have to buy as her trustee until she is 18. This is fine, as you would be holding shares for her, you can transfer them into her name as an adult when you choose without out any capital gains tax. Eighteen may not be the right age - it would not have been for me. At 18, I would have converted the money Dad and Mum put aside for me into beer.

You could set up an online account with your bank's trading platform and easily and cheaply buy shares for her. You could also use a low-cost ETF. Possibly the simplest and best diversified solution is 
a managed fund such as Vanguard or BlackRock, where you can make an initial investment and then monthly top-ups.

Another option I have mentioned before is InvestSmart's Fundlater, but it requires a quite large initial investment of $4000. What I like about it is that they then add $6000 in an interest-free loan to make the investment $10,000. There is a monthly account-keeping fee.

With InvestSmart I am hopelessly biased, I chair the company and own shares in it. It is how we invest for our great grandkids and the app makes it very simple to follow and add birthday money and so on, but it is only one of many good choices.

I am quite unfussed about how you chose to invest in shares for your daughter. I'd take a look at these options and go with what suits you. Keeping it simple is good advice though.

Thanks for emailing me. If I am still on the planet, I'll be about 90 by the time your daughter starts to think about using this money, but good on you for helping to give her more options about her future.

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