The best investment for your children and grandchildren
My daughter was 18 on February 1.
We pride ourselves on our birthday cards in the Padley family - we like to pass on deep messages of truth and love.
And so it was that her birthday card from her dad went something along these lines.
"At last. At last I can start charging you rent and asking you to contribute to the utility bills and the shopping. At last you are responsible for feeding yourself. At last you can pay your mobile phone bill, parking tickets, petrol, car insurance, car service and excess when you have a crash.
"At last I can trust you, not to just put your dishes in the dishwasher, but to clean the kitchen to an adult standard.
"But, dear Jemima, let's not misunderstand each other. We don't ever want you to feel pressured to leave home; on the contrary, we want you to stay, in fact we need you to stay.
"Who else is going to cook, clean, do the laundry, drive us around, puree our meals, walk us and clean our pants as we get older. It's going to be great. We have so longed for someone to look after us rather than to be looked after by us. Welcome to adulthood, you're going to love it."
I had to work on her birthday and so it was, with her birthday as the backdrop, that a particular email, from a Marcus Today member, struck a chord.
It went like this:
"Dear Marcus, I have subscribed to your newsletter for some time now and use it most days. I find it very helpful. I wanted to seek your advice regarding my two daughters, who are 18 and 15.
"Both have a small amount to invest, $9000 and $5000 respectively. We have had a chat and we thought that, at their age, they would like to invest this in shares.
"Given their age, the pitiful interest they currently earn in the bank, and a risk conversation I have had with them, what would you recommend to be a good couple of shares or group of shares for them to start investing in, not actively trade.
"They probably would only top up, say, half-yearly after they have enough to make any new transaction worth the investment, and they would probably take a reinvestment option should this be available. Thank you in anticipation. Dad."
I get regular emails, mostly from grandparents asking what they should buy their newborn grandchildren as an introduction to the stockmarket, this falls into the same category, and here is my answer:
Dear Dad, general advice only because I do not know your particular financial circumstances.
Assuming your daughters don't want to be risking their precious early dollars on one particular stock, not take too much risk and get an introduction to the investment world, then a less volatile fund like a stock-picking Australian equity-focused listed investment company is the way to go.
Listed investment companies, managed funds and exchange-traded funds are generally a lot less volatile than one stock, representing as they do many stocks. They will have a smoother ride.
Why an LIC and not a managed fund or an ETF?
An LIC is listed on the ASX, so you can easily buy and sell it at a click of a button, and as you'll see below you want your daughters to have the power to make decisions about whether to buy and sell - it's all part of the learning curve.
Just "giving" them an investment doesn't engage them or educate them.
Through LICs you can also access some interesting fund managers.
Most funds, the big super funds, the big ETFs and the big LICs like AFIC and Argo, are largely index replicants that are now two a penny.
If you want a boring bet on the market, fine, but this is an opportunity for them to do something more interesting and engage with some of the market's most active characters, whose wisdom and performance will teach your daughters about the potential and perils of the stockmarket.
Which LIC? You could go big and boring - AFIC, for instance, is the most common gift for a newborn grandchild.
But I'd look for an LIC where there is a fund manager whose job, salary and family security relies on performance, and on that front you should start with this list.
Go to the ASX website and click "products", then "ETFs and other ETPs", then look at the quick links menu on the righthand side and click on "ETP product list". This will take you to the "LICs & LITs" tab on that page.
This list has great links to the websites of the LICs where you can check out investment philosophy and performance and see who actually runs it.
If the key to equity investment is "management, management, management", then the key to LICs and managed funds, is "management, management, management" as well.
Take an interest in the personalities behind the funds. Take an interest in their performance as well.
I could recommend a few of the best LICs but it might be a great process for you to sit down with your daughters, explain LICs to them, discuss the elements of a good fund manager (long-term consistent outperformance, their experience and a solid process) and ask your daughters to pick one each.
Try and avoid the allure of the fancy long-short, one-sector, one-international-market, one-theme funds and instead look for plain "Australian equities". These funds are going to be more educational, more personal and more easily understood.
It would be good if you can get your daughters to choose different funds, then perhaps they will gain more interest through sibling rivalry, by caring about their performance compared to that of their sister.
There is nothing quite like a 15-year-old proving she is smarter than her 18-year-old sister. Beware the stockmarket monster you create.
Finally, tell them that they don't have to hold onto their LIC forever. They can sell an LIC with a click (that's the beauty of being listed) and they can buy it back again.
Knowing they have a decision they can make gives them responsibility and teaches them about the process and pressures of managing an investment - much more fun than sticking an investment under the mattress and having faith in misguided marketing messages like "set and forget".
When should they buy and sell? Only occasionally. Most of these Australian equity LICs are "market" investments.
They are not fast moving and they are not very volatile. But maybe once or twice a year, or once or twice a decade they can save themselves many years of returns by ducking out and ducking in.
Knowing when to do that is the Holy Grail and the sooner they start understanding how hard that is the better. They will make their mistakes, and the dollars they are gifted and lose will teach them valuable lessons in return.
I wish you well - you have lucky daughters.