Generational Wealth Strategies - Give $46k to your child

Happy Monday, wealthy people! 
On my to-do list for the New Year’s Resolutions was to set up an investment account for my young boy so that I can save (and invest the money) for him. That sent me wayyyy down a rabbit hole of calculations and considerations for what I thought was a simple task, ha!

Below, I’m sharing some of my key calculations that are a need-to-know. Whether or not you have dependents, the statistics below show beautifully the power of saving and investing, with time as your best friend. The longer your time horizon, the more the compounding magic works. And while the earlier you start, the better, it’s never too late to begin.

In today’s email:

👉 Stock Market Update - World Map

👉 Generational Wealth Strategies - Give your child $46,864

👉 How to find International Stock Funds

Grab your latte and let’s get started!

– Margarita T., CFA

MARKETS

World Map Performance for Year-to-Date period, as of January, 19, 2024.
Source: Morningstar, using Morningstar Country Indexes.

👉 After a soft start to the year, the S&P 500 Index reached an all-time high last week, as of January 19, 2023. The usual suspects–the tech stocks–like NVIDIA and Meta, were top performers and boosted the index. CNN’s Fear and Greed Index is solidly on “Greed”, and interestingly, when looking at its sub-components, they are also mostly on Greed (unlike what we saw for most of 2023). Watch for Tesla and Netflix reporting earnings this week.

👉 We’re watching: Red Sea attacks by Houthi militants are causing chaos on global freight shipping. Ships are rerouted away from the Suez Canal to around Africa, causing delays and skyrocketing shipping and insurance costs. Reuters estimates the new route adds 10 extra days and an extra $1 million in fuel costs for a shipment from Asia to Europe. Companies like Volvo and Tesla have reported pausing production in some plants due to supply shortages from this disruption. Why we care: this can snowball into another inflation problem for Europe just as it is managing to weather another winter without a second energy price shock.

👉 Meta is buying 350,000 NVIDIA H100 graphics cards for a whopping $9 billion in its continued push into Artificial Intelligence or as Zuckerberg calls it Artificial General Intelligence (as close to a human as possible). AI can certainly improve Facebook’s core business with better content recommendations and higher return-on-investing advertising. But one has to wonder if this massive move into a new technology can play out as well as Zuckerberg’s other move: the metaverse.

👉 Wayfair laid off 13% of its workforce, mostly in middle management roles, a week after the CEO told them to work harder. The move aims to save $240 million. Unsurprisingly, the market loved the news, with the stock up more than 10% on Friday. Capitalism can be cruel.

👉 Chinese shares have continued to decline so far this year, with one of the largest brokers in the country banning short selling altogether (i.e., does not allow people to bet that the market will fall). The CSI 300 Index (measures top 300 stocks in Shanghai & Shenzhen stock exchanges) is down more than 6% so far this year and Bloomberg reports record outflows from mutual funds in the country after a tough year.

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Register for free here.

GENERATIONAL WEALTH STRATEGIES

How do you save for your children?

Assumptions used (not guaranteed): 8% global stock market return, deposits made at the beginning of the month, and monthly compounding. Does NOT take into account inflation and taxes.

In the above chart, you can see two scenarios where investing $50 or $100 per month can turn into thousands of dollars to help your child as they venture into adulthood.

Let’s look at one of the two scenarios: If you start investing $100 per month from the day your child is born until they are 18, assuming an 8% return for global stock markets*, your money could grow to $46,864 by the time your child turns 18. 

That’s above a 100% return, or more than 2x your own money (p.s., you put in a total of $21,600 of your own money over 18 years x $100/ month x 12 months). $46,864 is a nice sum of money to pay for college expenses or a gap year to travel the world before college.

If you could have invested all the money you saved–the total $21,600–on the day the child was born, that would have grown to $86,000. But not a lot of people have this much cash lying around, especially with a newborn. Instead, saving it gradually, $100 a month, is a realistic way for parents to grow generational wealth.

If you stopped adding $100/month when your child reached 18 and just kept the $46,864 invested for another 12 years, until they became 30 years old, the money could grow further to $118,011. How about a home downpayment as a wedding gift? The ideas are endless 🤩.

Just remember, investing as early as possible is one of the most important things.

*this return is not guaranteed. In the last 30 years, as of December 31, 2023, the MSCI World Index (Net), which is a good indicator of global stock markets, returned a little over 8%. It does not account for inflation (which averages 2.2% in Europe and 3% in US over a long term), taxes or other trading expenses. This is not financial advice. Investing involves risk, including loss of principal. Indexes are unmanaged.

SIP OF FINANCE KNOWLEDGE

 3 TYPES OF INTERNATIONAL STOCK FUNDS 

  1. Global Developed Funds. These invest the entire world’s stock markets, BUT typically only in Developed markets, not Emerging or Frontier markets.

    • Look for “World” and “Global” in the fund name. A commonly used index for this type of fund is the MSCI World Index.

  2. Global Developed + Emerging Market Funds. These funds invest globally as well, but they explicitly include Emerging Markets (and typically exclude Frontier Markets).

    • Look for “All Country World” in the fund name. A commonly used index for this type of fund is the MSCI All Country World Index.

  3. International Funds. These funds invest globally but typically exclude the US. (cue: eye-roll. They are “international” for US investors, but if you live outside the US, they might include your country, so they are not that “international” to you. It is what it is… It’s a US-centric global financial system 🙃)

    • These funds typically include only Developed Markets.

    • Look for “International” in the fund name. Commonly used indexes for this type of fund are the MSCI World ex US Index and the FTSE EAFE Index (“EAFE” stands for Europe, Asia and Far East).

Market Classifications: Developed markets have mature and well-established financial systems (e.g., US, EU, Japan), while Emerging Markets are experiencing rapid growth but may have higher volatility (e.g., India, Brazil, China). Frontier markets are less developed with smaller markets and greater risk (e.g., Vietnam, Nigeria, Kuwait).

BINGEWORTHY

🎙️ Podcast: It's Officially Negotiation Season—Here's What Works, by Money with Katie. Must-listen before you write your self-assessment and that year-end salary negotiation.

🎬 Show: BitConned, a Netflix Documentary about Centra, one of the bigger crypto fraud schemes. 

📚 Book: The Lean Startup - a must-read for any entrepreneur who wants to increase her chances of actually making it and not throwing years of her life into futile guesswork.

⚙️ Worksheet: Our Financial Goals Tracker.xls you might have missed from last week.

Finance Latte AB is not a registered investment advisor. This content is for informational purposes only and should not be interpreted as investment or tax advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice. Past performance does not guarantee future results. Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment. View our Privacy Policy and Terms of Service.

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