My daughter was eighteen yesterday. We pride ourselves on our Birthday cards in the Padley family, we like to pass 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 servicing and the 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 when 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 eighteenth 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 eighteen and fifteen. Both have a small amount to invest, $9,000 and $5,000 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 stock market, 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 a listed investment company not a managed fund or an exchange-traded fund? A listed investment company is listed, so you can easily buy and sell it on 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 listed investment companies you can also access some interesting fund managers. Most funds, the big Super funds, the big exchange-traded funds and the big listed investment companies 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 markets most active characters whose wisdom and performance will teach your daughters about the potential and perils of the stock market.
Which listed investment company? You could go big and boring, that might suit, AFIC for instance is the most common gift for a newborn grandchild, but I'd look for a listed investment company 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 right-hand side and click on ETP Product list. This should put you on the LICs & LITs tab on that page. Or just click here
This list has great links to the websites of the LICs where you can check out investment philosophy, performance and see who actually runs it. If the key to equity investment is ‘Management Management Management’, then the key to listed investment companies, 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 listed investment companies but it might be a great process for you to sit down with your daughters, explain listed investment companies to them (click here), 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 fifteen-year-old proving they are smarter than their eighteen-year-old sister. Beware the stock market monster you create.
Finally, tell them that they don’t have to hold on to their listed investment company forever. They can sell a listed investment company 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 listed investment companies 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. Regards Marcus.”
(I wrote an article about watching the fund managers – click here – that names some of the better boutique managers)