Where to invest to leave for your newborn child? – 04/16/2023 – From Grain to Grain

A question on Twitter today caught my attention and generated a lot of comments. The exact question was “If your child was born today and you were going to invest in an asset, hold it for 20 years, and then transfer it to him. What would it be?”

Obviously, the most important thing to leave for a child is education. However, this answer is not part of the question. So I’m not going to discuss how much more important values ​​and education are. Nor am I going to get into the debate about whether one should leave something for the child.

The question is simple, but many did not understand and indicated several assets. It was supposed to be just an instrument.

One of the most important points to consider in this matter is the financial reality of the father and his investor profile.

Several indicated the acquisition of crypto assets, such as Bitcoin. Understand, this instrument is one of the riskiest assets to invest today.

Yes, it is possible that in 20 years, Bitcoin could have a great value. However, experts point out that it is most likely that between 5 and 10 years, Bitcoin will have already been replaced by another in the same class and that has greater utility.

Most parents have their children between the ages of 25 and 45. Let’s take the midpoint of age 35.

At this age, the father is unlikely to have a large amount of resources. His savings capacity is also not the best, as he is still in the middle of his career and has several commitments.

Thus, it would be unfeasible to acquire a property for the son, as many indicated, because he is possibly still trying to buy his own house.

Additionally, he may have other children. So it would be a problem. Either he would have to buy another property, or he would have to go through the inconvenience of leaving the same property to two children. Anyone who has gone through property inventory knows the problem when the property must be divided by more than one heir. The fight is right.

Some responded by buying government bonds referenced to the IPCA, as the interest rate is very high. Undoubtedly, this answer is much better than the choice of property. But it comes down to the problem of the amount available.

The main question that a parent should think about right now is: what can I invest now that will make my child safe in any situation and that I can invest little and without compromising the budget?

I can only imagine one answer to this question: life insurance.

Being a parent is often a choice. By making this choice, you have committed to caring for this child until she is able to care for herself.

So, if you are in the beginning or middle of your career, or if you still don’t have any assets, how will the child be if something happens to you?

The insurance alternative is often frowned upon. This prejudice usually occurs due to lack of knowledge. See the simulation below.

Consider that the same 35-year-old father took out redeemable insurance with payments for 10 years and with an insured capital of R$500,000. Remember that this insured capital is corrected by the IPCA.

The father would have a commitment to pay R$ 19.7 thousand annually with this insurance. If the insured capital were doubled, that is, R$ 1 million, the annual premium paid would be doubled, that is, R$ 39.4 thousand.

The most relevant point is that right after the first payment, the child is already insured with R$ 500 thousand. This amount, most of the time, is enough to cover your education through college.

This is the case I mentioned about financial security for the child from day 1.

Now imagine that you buy the same amount in federal public bonds yielding IPCA+6% per year. Remember that income from this investment is subject to income tax. Thus, the net return on income tax and above IPCA is only 4.4% if average inflation is 5% per year.

In the case of life insurance, there is no incidence of IR on the benefit received.

If the father invests BRL 19,700 per year in government bonds with an IPCA+4.4% per year and for 10 years, it would take 26 years for the investment in government bonds to reach the insured capital of BRL 500 thousand at today’s values. That is, the child will only have the same amount of insurance when he is 26 years old. Therefore, only after I have already finished college.

I believe that any rational parent would rather be assured that their child is financially secure enough to complete college than having more money once college is over.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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