Andrew Hallam is the index investor for Strategy Lab. Globe Unlimited subscribers can view his model portfolio here and read more in the series online here.
Last weekend, the seemingly ageless Roger Federer was the second oldest man to play in the Wimbledon finals. Next month, he turns 34. He and his wife have two sets of twins: two boys, two girls. If he continues to defy age, Mr. Federer could end up playing tennis for his kids. He could enter teen tournaments under their names. He could help his kids eventually build ATP points of their own.
Ridiculous? Of course it is. If Mr. Federer's kids want to play tennis, they'll have to pull their own weight. Without the skills to serve, volley and crush balls from the baseline, they'll fold like boxes in a cardboard presser. Many parents recognize something similar when it comes to money.
They won't give money to their kids to help them invest, buy a car or gift money for a down payment on a home. Such parents might be aware of the Chinese proverb: Wealth doesn't pass three generations. The Chinese learned that if one generation builds wealth, the second generation maintains it and the third generation usually squanders the money.
There might be something to it. Thomas Stanley, the late author of The Millionaire Next Door coined a term: "economic outpatient care." It describes the money that adult children sometimes receive from their parents. After studying the wealthy in the United States for decades, he said such money doesn't help; it hinders.
If Dr. Stanley is right, and you want to help your kids, here are a few suggestions. Pay for part of their college education, not all of it. By earning money and shouldering some of the cost, kids will build financial muscle.
Introduce kids (the younger, the better) to the importance of saving money. Help them find ways to build an income. Open an investment account. Teach them about the stock market. Well-meaning schools do plenty of damage with stock market games. You might need to undo some of that.
Millions of school kids, for example, are encouraged to play the SIFMA Foundation's popular Stock Market Game. The company's homepage says, "Now more than ever, schools are looking for ways to meet higher education standards … to support teachers in building lifelong learning skills." SIFMA conducted a study among classes that played the game. They reported that kids' math scores improved. So did their knowledge of the stock market. The longer-term impact of the game, however, could be harmful.
Students or teams start with $100,000 in cash. The game gives no indication of how such money could realistically be acquired. Students trade their way to virtual winners. It's a short-term contest. The game is usually won by a concentrated portfolio of hare-brained penny stocks. Students learn nothing about investing's most important concepts: Invest regularly. Keep costs low. Diversify.
Instead of playing a game, kids could learn something real by investing their own money in a mutual fund.
My pick is the Tangerine Balanced Growth Portfolio. Its MER is just 1.07 per cent per year. It's also a complete portfolio, split equally into a Canadian bond index, a Canadian stock index, a U.S. stock index and international stock index. With 25 per cent in bonds, it won't sway as wildly as the stock market itself.
Parents could discuss what's under its hood. Kids could learn the benefits of dollar-cost averaging, diversification, and rebalancing (which Tangerine would automatically do each year). Investors could deposit as little as $25 per month into an Automatic Savings Program with no transaction or account fees.
There are two ways to make this happen. The parent could open a non-registered investment account in their own name and put the child's money into it. When the child reaches the age of majority (18 or 19, depending on their province) the child could become joint owner on that investment account with their parent. The parent could then decide to remove their name from the account. The parent, however, would be responsible for the account's tax implications.
Joe Snyder, a product management analyst of investments at Tangerine, offers another suggestion. "If parents want to be generous with their TFSA contribution room, they could set up a TFSA that they've earmarked for their kids. Kids and parents could contribute to the parent's account. And when the child reaches the age of majority, he or she could open their own mutual fund account with the proceeds."
The best way to help kids, it seems, isn't to give them money. That might feed them for the day, the year or the decade. But if kids build money muscle, it will feed them for a lifetime.