As I stepped into my local supermarket this past weekend to pick up my weekly groceries, I wasn't welcomed by the usual calm a leisurely Sunday afternoon shopper, like myself, enjoys. Everything from the entrance to the tills was covered in glittering red, green and gold, flashing lights and let's not forget the unmistakable sounds of Boney M playing over the crackling stereo system.
Yes, dear reader, the festive season (or at least the retailers version of it) is undeniably upon us. With Christmas right around the corner, we turn our thoughts to what gifts to buy for family and friends.
For parents, Christmas shopping takes on a whole new level of importance, as scores of bright-eyed offspring eagerly await the opportunity to fall upon the gifts beneath the tree. The go-to options for Christmas presents are usually toys for toddlers or the latest and greatest gadgets for your teenagers. But this year, I'd like you to consider a less traditional Christmas gift, one which continues giving, long after batteries are flat and toys are broken. Yes, I'm talking about stocks.
3 Reasons to Fill The Kids' Christmas Stockings with Stocks
1. Toys and gadgets are liabilities
Toys and gadgets may be exciting at first, but your kids will eventually lose interest in them. (Some quicker than others!) You will end up having to sell them for next to nothing on eBay or pack them far away in a cupboard where they will collect dust for years to come. The fact of the matter is, toys and gadgets aren’t good investments. They depreciate from the moment of purchase.
With the latest, desirable technology on the market, I'm quite confident that your kid will have either a GoPro, iPhone, Xbox or PlayStation on their Christmas list. To put it into perspective, the retail value of the GoPro Hero 4 Black is US$499.99. Currently on eBay, the resell value is at around US$350.00, which is a 30% loss. Worst of all, it will continue to diminish in value as time progresses. On the other hand, if you buy US$500 worth of value stocks at a margin of safety you can expect great returns over the long-term.
2. The gift of education is priceless
Early financial lessons can pay massive dividends in the future. Buying your kids stocks at a young age gives you the opportunity to educate them on how to deal with finances. School curriculums lack basic financial education, leaving you responsible for teaching your children about spending, saving, budgeting and investing. If your children are financially literate, they will have a major advantage from early on in life.
Have conversations with your children about companies they love and admire. If those companies are great investments, add them to your child’s portfolio. If they aren’t, explain why it isn’t a good investment. Use the principle of buy low, sell high to get your point across. Alternatively, you can search for an investment opportunity in the same industry. One that will benefit your child’s portfolio in the long run.
By the time your child graduates from high school, s/he will have a decent sized portfolio, invaluable financial knowledge and a massive head start over his or her peers. If this is the case, you have done a wonderful job as a parent.
3. The potential for growth is phenomenal
Children have the biggest advantage of all – time.
One of Warren Buffett's biggest regrets in life, despite buying his first stock at the tender age of 11, is that he did not start investing earlier! Because he missed out on years of compounding interest.
Compounding interest is the secret to long-term investment success. Reinvesting your returns and dividends will allow you to earn interest on top of interest, causing a snowball effect. The small consistent contributions to your child’s portfolio over birthdays, Christmases and other celebrations will multiply to form a decent sized portfolio by the time your kid graduates and heads off to college.
For example, if you start by investing US$40/month (a total of US$480/year – less than the price of a GoPro Hero 4 Black), for eighteen years and achieve 10% annual returns, your child’s portfolio will be worth US$23,055.92.
The monthly deposits over eighteen years amount to US$8,640.00. The total interest you gain in that period will be US$14,415.92 - almost double the number of your total deposits. You would have actively turned US$8,640.00 into US$23,055.92. That is impressive!
This visual representation of a calculator on The Calculator Site, puts the effects compounding interest into perspective:
The benefits of giving your children stocks as presents outweighs those of expensive toys and gadgets. A traditional gift may bring fleeting pleasure, but investing for your child’s future will bring them long-term joy, security and instrumental insight into the financial world.
Need to start shopping for stocks? STRIDE is always here to assist you in picking the finest value investments at the best price and at the optimal times.