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Going to high school, having never earned anything, completely-ignoring investments, that sum looked like a lot of money to me at the time. Nonetheless, now that I know a bit more, I see how it could have been better.
Life as young adult is not getting easier at all. Everyone goes to University nowadays and competition is tougher.
Having liquidity to start your projects after high school is not a given, but it’s appreciated. Most parents or grandparents want the best for their kids so they should know that and opening a savings’account has to be done waaaaay before they turn adults.
From birth to adulthood, 18 years pass: an amazing time horizon to make long-term investments in stocks.
I started looking around the web wondering what our descendants’ best options were.
Looking at the market, the options are currently these four:
| Option | Pros | Cons |
| 1. Bank invested savings’ account | – Managed – Kid can access after certain age | – Low interest rates |
| 2. Normal Bank deposit (or mattress) | – Kid can access after certain age | – No interest rates |
| 3. Life Insurance policy on the kid | – Managed – Possible tax incentives – Life Insurance benefits – Kid can access redeem it after certain age | – Low interest rates |
| 4. Trading account on behalf of the kid | – High interest rates – Wider choice of securities | – Need of a bit knowledge – DIY, manual – Kid cannot access automatically |
Unless, the parent is a savvy investor with some prior direct trading knowledge, the Life Insurance option is often the best.
However, for such a long time horizon (18 to 21 y) it is often best to trade directly. An accumulation plan with ETFs often proves to be the best option. At the end of the day, the main goal of a kid’s savings accounts is for the kid to receive a big sum once he becomes an adult.
The market is volatile but over such a significant span of time it is expected to rise significantly and have very low risks. According to 20 years rolling averages of the S&P500 the worst average annual interest rate was 6% and the best 18%. In the worst case scenario of a crisis close to the redemption date, the young adults can wait it off and re-obtain a significant amount of value.
Just to make a simple calculation, disregarding fees. Assuming a monthly sum in a kids’saving account of €100 for 18 years since birth:
- If such amount is kept under a mattress, it will amount to €21’700 at the end.
- If it is invested in a bank, insurance company or in bonds, the kid will end up with about €24’000 to €27’000 (2 to 3% interest rates).
- If the parent buys ETFs on the S&P500 on behalf of the kid, the amount can vary from €31’000 to €96’000, averaging on €45’000 (6 to 18% interest rates).
So… what is my point here? These are simple calculations that anybody can do. However, why would you freeze capital for 2 decades to (maybe) barely beat inflation? Investing directly in ETFs, in the worst case scenario, you are still better off than investing with a bank or an insurance company…
…so Why?
I believe it’s mostly because people do not know about it, plus the operation of doing this every month for 18 years manually. I know it’s just sending €100 on a trading account and buy an ETF, but every month it can get tedious.
I would love to find an optimal solution with the following features:
- The account invests only in one standard ETF: ideally S&P500 or NASDAQ (riskier).
- The payments are like a recurring monthly subscription of a chosen amount (ideally if it can be edited over time).
- Amounts can be viewed in real time by parents and by the kids (once they made it to 18).
- Even parents /grandparents that know nothing about investments can easily subscribe.
- The ETFs are under the custody of a third party safer and independent from the provider.
- The returns are EXACTLY those of the ETFs and the fees of the kids’account are transparent, 10% would be ideal and not impact the returns significantly (so in the case of €100, €10 as a fee and €90 in ETF).
- The kids receive the credentials as a gift when they turns 18. Once entered into the account, they get a basic investment crash course to make informed decisions and, at the end of it, they get access to their ETFs. They should have the option to liquidate or keep them invested for a limited amount of years.
If you are aware of any service like this, please let me know.
