The stock market has witnessed a stunning recovery since the depths of the pandemic last year.
For instance, the technology-driven NASDAQ has surged by almost 130% since hitting its crisis low last March.
And our local index, the Straits Times Index (SGX: ^STI), is also up 7% year to date as the recovery takes hold.
And while this type of performance may not be achievable every year, the stock market’s potential to deliver better returns than other mainstream assets appears to be high.
As such, the stock market could be the perfect vehicle to invest in, on behalf of your children.
In time, doing so could provide them with the foundation for a prosperous financial future.
Long-term potential
Since the time horizon when investing for a child is extremely long, it may be possible to generate higher returns by taking on slightly more risk than usual.
Clearly, taking high risks without a commensurate increase in potential rewards is not a logical idea.
But it may be possible for an investor to consider growth companies, since high volatility may not be a cause for major concern.
For example, even if a long-term portfolio experiences significant falls in the short run, history shows that a recovery is possible in the long term.
The assumption here, of course, is that the business remains sound and can bounce back from setbacks.
A broader range of investment options creates greater flexibility when deciding where and when to invest.
Global challenges
With interest rates being set lower for longer due to battered economies around the world, the rise in property prices seems set to continue.
In recent years, property has become relatively unaffordable for many younger people.
This trend looks set to continue, with property prices in Asia shooting up as rich buyers snap up real estate.
And with monetary policy likely to remain looser than the historic ‘norm’, property prices could continue to move upwards.
Therefore, a nest egg that can be used as a deposit for a first home could be a sensible goal when investing for your child.
Even investing a relatively small sum of capital on a regular basis could lead to a significant sum due to the impact of compounding.
And with stocks having a stronger historic performance in terms of total return than property, they could outstrip the performance of the global property sector in future.
Logistics
There are various methods available when it comes to investing for your child.
Many countries offer tax advantages in doing so, with such advantages being a potential means of generating higher returns over a sustained period of time.
Investors may even seek to avoid inheritance tax in some countries, making the idea of passing down wealth to loved ones a tax efficient one.
Therefore, while it will take time to build a substantial nest egg for your children, doing so could be a worthwhile decision.
Not only could it reduce the overall tax paid, it may also provide them with an easier route to owning their first home in what could prove to be a challenging property market for first-time buyers.
Get Smart: Start young and early
The above are great reasons why you should plan to invest as early as possible for your children.
By starting young, you can harness the power of compounding to generate greater long-term returns.
Your kids may be too young to understand what you are doing now, but I can bet that they will thank you profusely later in life.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
