How I Invest for My Daughter’s Education?
Last August, I started an investment portfolio for my 1 year old daughter. The purpose is to invest for her university education which will take place around 18-20 years from now.
The common saying is “Save for their education”, but I think this thinking is flawed. Because it is very hard to save up for education, you need the savings to grow on its own too.
So I started with how much would it cost. I had the good fortune of studying overseas on a scholarship so I don’t exactly know how much it cost.
After some quick research, it seems like US$15,000 per year would be a good estimate. However, my girl would only attend university in 18-20 years from now! If inflation is around 3% each year, then it would more likely to cost US$25,000 per year. That’s about US$100,000 for a 4 year education. *Gulp*
If you would like to save for it, it will be US$5,000 each year for 20 years! That’s some high level self discipline there. What if I lose my job or I fell sick and needed money for treatment? *Gulp*
My instinct tells me that investing would be more cost effective, meaning require less money. Why? Because investing in the long run has a pretty good track record of achieving strong returns. As shown here, if you take a 10 year period of US stock market S&P 500, you are likely to achieve 7-9% per year return. Since, my girl has a 20 year period to invest, I think her chances of achieving 7-9% return per year is even higher!
Ok with some numbers on my back, let’s craft plan for little Laura. (btw, it is a fantastic name which only my wife can think of, I was thinking of naming her some GoT character initially)
How much is needed to invest?
If Laura needs US$100,000 in 20 years time, how much do I need to invest now? Assuming that it will get a CAGR of 7%. (CAGR is compounded annual growth rate)
So if you do the calculation here, you will realise that you only need to invest around $26,000 from the beginning and let the stock market does its magic for 20 years.
So that is exactly what I did, I started off with $10,000 last Aug and intend to add in another $16,000 end of this year to make up the $26,000
Why not $26,000 from the beginning? Because I don’t want to, and I don’t think I can time the market.
If I invest all my money in one block, it means I am convinced that the market is cheap at that very moment, which I am not. I never believe anyone can time the market, especially myself.
So how is Laura’s portfolio doing now?
Actually Laura’s portfolio was actually invested at a market high back in August! (I told you not to time the market) so her returns this year is not fantastic but still respectable. ~6% so far.
So now that the market is coming off a little, it might be a good time for me to invest the remaining monies at the end of the year.
We shall see. Once again, I am not interested in timing the market. I just want to spread out her investment to get an average entry price.
I intend to track her portfolio yearly as an experiment and I am confident that with a 20 year time horizon, she will emerge victorious! Education fee secured!
In the next post, I will talk about what are the investments that I made for her in this portfolio and why?
See you soon!
Investing Always,
Pete
Please refer to the disclaimer here
