Investing in stocks for your children

INVESTING for your children requires plenty of planning - for you’re saving for the long haul. 

There are many types of investments to choose from – but for those willing to take the plunge – investing in the stock market for your children can be truly rewarding.

According to UK-based investment magazine What Investment, investing in stocks and shares gives you the chance of growing your money faster.

“Some financial experts argue that as the child approaches her 18th birthday, you should move the money from stocks and shares to cash so that it is ready to be used if necessary. This also reduces the risk that a big stock market crash just before your child turns 18 will reduce the money she might need for her future.”

Fortress Capital Group chief executive officer Thomas Yong points out that when creating an investment portfolio for your children, the investment horizon will be for the long haul.

“As a result, the underlying stock investments need to be relatively mature and are strongly positioned in an industry that will remain relevant in the longer term.

“Industry relevance in this sense refers to the economic viability of the business sector as a result of changes in consumer preferences and technological shifts that may render the industry obsolete or significantly reduced.”

Yong cites the printed photography film industry as an example, where a long established industry leader such as Eastman Kodak had failed to move with the shift towards digital photography.

“In all honesty, to create an investment portfolio that requires no maintenance for say 10 to 15 years may be insurmountably too difficult. For good practice, the investment portfolio and the underlying equities should be reviewed at least annually to ensure the selected investment criteria are still met.”

When investing in stocks for your children, Areca Capital Sdn Bhd chief executive officer Danny Wong (pic)believes that parents should consider stocks that are subject to liquidity risks - essentially the risk of losing some value for converting the stocks into cash.

“Since the objective is for the long term, liquidity should not be an issue and one can take on more risks for higher returns in the long run.”

Wong believes that growth stocks are seen to be more suitable for long-term holdings, or non-classical investment opportunities that are less preferred by short-term investors.

“Typical stocks or sectors include infrastructure or utilities, real estate (land holding companies), commodities, unlisted stocks (potentially to be listed in the future), early-stage companies and capital front-load business (plantation schemes).”

Yong meanwhile opines that large capitalisation blue-chips with well-established business are preferred. These, he says, are stocks such as Tenaga Nasional Bhd (TNB), Malayan Banking Bhd (Maybank) and IHH Healthcare Bhd.

“TNB is likely to continue to have a monopoly status in the foreseeable future. As such, it is a good proxy to the country’s economic growth where the Government has committed to maintain a commendable growth rate for coming years to achieve high income status.

“The sector is currently going through a reform where a fuel-cost pass-through mechanism is introduced. This is likely to improve TNB’s earnings visibility and stability in the future.”

On Maybank, Yong says the bank was the largest, most well-established one in Malaysia by assets, with an operating history of more than half a century.

“Recently, they have also shown strength in growing regionally with acquisitions. With proven track record of the management, the company should continue to excel further. Maybank also pays dividends consistently.”

Finally, Yong notes that the healthcare industry has proven to be resilient regardless of the state of the economy, adding that it is growing at a faster pace as living standards improved, especially in emerging countries like Asean.

IHH is a one of the largest healthcare providers with a diversified portfolio of hospitals in Malaysia, Singapore, Turkey and Macedonia. Their recent venture into the Hong Kong market has reassured investors about its long-term expansions and growth prospects.” Wong says long-term investing can potentially result in superior returns through accessing risk premia (for assuming liquidity risk) and avoiding the costs sometimes associated with short-term strategies (transaction costs, forced sales, short-term behavioural investor biases).

Investing in the stock market also means high risks, but also high returns.

“The market is cyclical and there are peaks and valleys in each cycle. The gap of a high and low in short term is obvious. But in the long run these gaps are subdued and interim changes in prices are less a concern.

“When a portfolio of stocks is taking more risks, returns tend to be higher and therefore better at achieving its objective and inflationary hedge.”

For parents looking to invest in stocks and shares for their children, they need to believe in long-term superior returns, Wong says.

“Don’t be concerned with short-term volatility, cyclical events or financial crises. You need to have other reserves for short-term obligation and unforeseen payments.

“Buy some protection (insurance) for continuity of regular investment and also, always prepare for unforeseen situations.” — By Eugene Mahalingam