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Investing for your children’s education: Planning for the long term and capturing the trends that come with it

Investing for your children’s education: Planning for the long term and capturing the trends that come with it

Key Takeaways:

Today, college education has become so important and common in our society so much so that it is no longer a rarity to find Diploma/Bachelor/Master/Ph.D. graduates. Needless to say, a college education can play a critical role in many aspects of our life, such as job searching, career prospects, salary hikes, quality of living, family building, and eventually, your net worth. A good education can give the basic foundation and is one of the best opportunities that all parents can give to their children. With that being said, a good education often comes with a hefty price tag, slated to snowball further in the future.

The Snowball Effect: The impending Impact of Inflation on Education CostsAccording to QS Top Universities, the total cost to complete a general Bachelor’s Degree today in the UK and the USA is estimated to be USD 143,694 and USD 167,800 respectively. In 20 years, these costs are estimated to grow to USD 234,542 and USD 316,278 respectively. This enormous sum could pose a challenge for many parents to have to save up to ensure that they will be able to put together sufficient funds for their child’s education. It is, therefore, crucial to devise plans at an early stage to ensure that these funds have enough runway to grow. Putting together a concise portfolio that emulates the relevant risk and investment portfolio will help you get to your goals.

Solutions 101: Invest your Savings wisely for your Child’s Education There are many ways to accumulate savings to pay for child education costs. Some prefer to take a more conservative approach by parking their savings for their children in bank accounts and fixed deposits (<2% p.a. interest in Singapore context) and let it grow in the long term. Whilst others choose to buy insurance endowments (yield 2 - 4%p.a. in Singapore context) for their kids to match the investment timeline for them to attend university in the future. However, the interest rates provided by these solutions in bank accounts and endowment plans may not grow synonymously with rising inflation rates. Thus parents could also take into consideration investing in other strategies as an option to grow the fund for their child's education. These investments should take into consideration the time it would take before the child goes to university as investing involves risk and liquidity issues that investors also have to take into consideration.Based on the table illustration below, in 20 years, a USD20,000 portfolio will grow to USD29,718.95 at a rate of 2%p.a. and USD93,219.14 at a rate of 8%p.a. The higher the rate of returns of your investment vehicles or longer the time horizon, the bigger your portfolio will grow in the long term. Within their acceptable risk tolerance and investment time horizon, investors can tailor and diversify their portfolios with different asset classes to achieve the targeted size of savings to fund their child education.

Discipline is Key: Form your Systematic Investment Plan (SIP) to Grow your SavingsThe simplicity of regular savings might seem minuscule but based on the illustration table below, investors can grow an initial fund of USD10,000 with monthly investments of USD500 to USD321,181.36 in 20 years at 8%p.a. return. Even at a conservative projection of 2%-4% per year, the portfolio could potentially expand to USD160,643.69 - USD200,579.70, a considerable amount that is enough to send your child to study at a university in the UK or Singapore for instance. Investors can always refer to the table below to find out the required rate of return to achieve their goals. To ensure that you achieve your set goals, there are 3 aspects you may wish to adjust: 1) Start with larger seed capital2) Increase monthly/regular investment amount3) Invest at a higher required rate of return (within an acceptable risk tolerance and time horizon)If your income rises along with the growing up of your child, you can increase the monthly investment amount to be invested in the SIP.

Different asset classes offer different rates of return in the short to long term. For example, S&P 500 (equity) has grown an average of 14.32% p.a. in the past 10 years while the return of S&P Global Developed Aggregate Ex-Collateralized Bond Index (global bonds) is 1.62% p.a. in the same period. Higher risk doesn’t always offer higher returns, for example, the Dow Jones Commodity Index Brent Crude Capped Component yielded -2.47%p.a. in the past 10 years. Additionally, investors for child education have to bear in mind that past performance doesn’t guarantee future returns. The point here is that if you have a long time horizon, or can accept higher risk, pick wisely which asset classes are suitable for you to grow the savings for child education. If you have a time horizon of fewer than 5 years to send your child to university, then you may consider investing in fixed income as it will offer you a predictable but lower return and help to preserve the capital. Besides, you can tailor the maturity of the bonds to match the child’s education timeline. In the short term, these factors play a more important role.

Fundamental Strategy: Capture the long-term Trends when InvestingThe landscape of investment markets has changed substantially over the last few decades. These days, there are some interesting themes that capture the attention and interest of long-term investors, especially institutional investors and sovereign wealth funds. As you invest for long periods you will naturally deviate to looking at fields that are relevant to your child when he/she has grown up in the future. For example, biotechnology and genome research, information technology, renewable energy, space exploration, and industries that highly value Environmental, Social, and Corporate Governance (ESG) and sustainability. Some themes like Biotechnology, Clean Energy, and New Economies in the 21st century have outperformed the S&P 500 in the past 10 years. Thematic investing in disruptive industries will play a more important role in asset management in the decades ahead.

Source: S&P Dow Jones IndicesFinal Step: Rebalance & Review your Portfolio regularly and Manage the VolatilityA portfolio review is extremely important to ensure that you are on track to meet your goals for your child’s education. Monitor the performance and volatility of your portfolio especially when the time for which your child enters university draws closer. With a certain regularity, large corrections in equity markets tend to occur in 5-7year intervals, which is also known as “drawdown risk”. As you are approaching the expected target date, managing the drawdown risk of the portfolio becomes more important, and investment should shift towards more conservative instruments with limited downside risk. A diversified portfolio is critical at all times. If some of the investments in your portfolio are lagging in performance, you may choose to monitor closely instead of selling immediately. For investments that offer good returns, you may review whether to sell for profits and invest in new opportunities in the market at that point in time. By doing so, the risk of over-exposure to a particular investment can be reduced and your portfolio would remain diversified and healthy.The Bottom LineStart planning as early as possible, the earlier you start, the longer the runway you will have to invest! You can invest with a lump sum and SIP into ETFs, mutual funds, and some managed investment vehicles (thematic investments) to achieve the targeted rate of returns and manage the volatility of your portfolio for child education. Always keep one solution for one goal and do not commingle the education fund with other purposes like retirement, property purchase, healthcare, and liquidity needs.If you would like to find out more about how Kristal.AI can curate a portfolio for your various needs, please feel free to reach out to your dedicated Kristal Advisors. If you have not signed up for an account, please sign up here!

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Interested investors may refer to our curated ETFs and funds below for investment opportunities and ideas:


C K Wong

July 2, 2021

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