PATIENCE, CONSISTENCY and frugality are fine habits for an investor. They are not, however, common virtues among newborn babies. The little bundles of joy are impulsive short-term thinkers. They are also some of nature’s biggest freeloaders, living entirely beyond their means.
Many decades of life and potential returns stretch out into the future: $1,000 invested today with a real annual return of 5.2% (the average for global stocks over the past 125 years) would be worth $58,000 by the time the child is 80. If the logic is true for 20-somethings, it is truer still for infants with a horizon a couple of decades longer. All the same, for new parents with a soft spot for the magic of compounding, like your columnist, a baby presents a tantalising investment opportunity. Yet these juicy financial returns must be considered alongside another sort of investment: in the children themselves. Spending on a child’s health, education and skills can yield even higher returns (on top of helping them lead a fulfilling life). So how should a new parent think about their budding little portfolio? Investing for babies is a joy even without the tax perks. Long horizons smooth out volatility, allowing for more risk. Ian Ayres and Barry Nalebuff, two economists, propose that young workers should borrow to buy stocks, since the long-term returns to equities are (hopefully) higher than the interest on borrowing. This makes investments in human capital more appealing. In the 1970s and 1980s Gary Becker and Nigel Tomes, another pair of economists, theorised that parents were better off investing in education and skills early on. For example, teaching a child to read is not hugely expensive, but opens up huge opportunities for future earnings. Investing in financial assets starts to make sense later, once those human-capital investments encounter diminishing returns. A wealth of empirical evidence has since backed up the theory. Beyond basic skills, however, investing in human capital gets fraught. Such investments are sunk costs that cannot be liquidated. They are also infungible: tutoring in advanced maths is not the same as Chinese lessons. Children react differently (and unpredictably) to each. The extraordinarily long timeframes that make investing for babies attractive also raise uncertainty.
Perhaps the skills that are valuable today will be obsolete in an AI future?
