Sunday, June 21, 2015

Some thoughts on parenting on Father's Day.

Thought I'd share some thoughts on parenting.

Giving parenting advice is inherently dangerous for us bloggers because we wouldn't really know what to expect from our kids in the future. Even the children of ministers and top lawyers end up being sidelined by the education system and fathers typically end up paying to send them overseas for a "paper thosai" qualification.

I count myself lucky that my 4-year-old daughter, Clio, is a normal and healthy kid. Other than trying to issue her own currency 2 weeks ago after my mum pretended that she has no money left and trying to mimic Donald Trump's hilarious speech, Clio has not really demonstrated any real talent yet. The only thing she inherited from me so far is that she likes to sing and tries to mimic pop lyrics as she is unable to read yet.

Statistically, I believe that Clio, like most Singaporeans in her generation, will struggle with getting a seat in a local university.

I don't know very much on parenting, I have read many books on child development but I do not conscientiously apply the principles I pick up from those books. One thing I don't do is to stop my mum every-time she says that Clio is smart or pan-lai ( even though me and my wife do not do this on a regular basis as its bad for her intellectual development ).

The insight I wish today on Father's Day is the concept of capital transfer to future generations.

Parents transfer wealth in two ways which I believe should be equivalent to each other if proper planning takes place.

a) Transfer of Financial Capital

Transfer for capital assets happen upon death or on special events. Money and financial securities changes hands from parents to children when parent's die or feel that children are ready to take over some of the assets. This is dominant form of wealth transfer which presents a lot of problems ( or lucrative fees for lawyers ). Asian children are sometimes not ready to take on this amount of wealth and have a strong propensity to spend it all away.

My personal philosophy is teach my kids to manage their wealth properly. Not just in terms of learning how to save, but they also need to play with the capital markets early in life.

b) Transfer of Human Capital

The second form of transfer is the transfer of human capital. The parent makes a wealth deduction to increase the human capital of their children.

This is a huge industry in Singapore. Parents can spend thousands a month to give their kids tuition. The best tutors can be a as rich as hedge fund managers.

On a very disturbing note, there are now camps to prepare children to get into the Gifted education program. I read brochures threatening parents that if their kids are really gifted and nothing is being done to give them special training, they would get bored and would lose interest in their studies.

The first important insight is to recognise what tuition and these gifted boot-camps are, a means of transforming financial capital into your kid's human capital.

c) Balancing financial and human capital transfer is the killer app of parenting.

With the realisation that everything is just a form of capital transfer, parents should be able to move more tactically when making decisions to develop their kids.

Suppose you spend $2,000 a month on tuition and boot-camps, and you believe that if you do this from age 3 until the age of 18, you would be able to push your child into a university program. It is helpful to ask yourself whether you can invest this same $2,000 in a portfolio to generate passive income for your kid such that when he graduates from a polytechnic, the passive income and his salary would be higher than his starting pay as a fresh graduate.

As it turns out that compounded at 7%, paying $2000 for 15 years ends up with a pretty large portfolio of $650,000.

Your kid can get enough capital to build a start-up with that amount of cash.

d) Why I lean towards financial capital transfer.

It can be argued that being somewhat against tuition, I am less kiasu than other parents, but I want to argue that I am actually more kiasu.

When your kids enter an expensive Montessori program or attend an expensive play-school, is there documented evidence that these children go on to university programs after accounting for social economic factors and other variables ? Instead, if a parent were to invest a bit of his own time, he can teach his kids to use Khan Academy and Coursera to pick up skills based on the child's own personal interest.

The statistical evidence for the return of a portfolio of equities, however, is easily accessible over the web. With a time horizon of 15 to 20 years, the odds of a portfolio beating inflation is definitely higher than the odds of your kids getting into law or medical school in NUS.  

Of course, to be able to balance the extent of human and capital transfer, you will need to be intimately familiar with the strengths and weaknesses of your child and make decisions accordingly. I believe that tuition should be targeted at the crucial subjects your kid is hopeless at but must pass to get into a good tertiary institution (Like EL1), or at subjects where your kid is so good at, a slight nudge from a trained coach can get your kid into the Olympiads.

It is entirely possible that your kid would not make it academically but can succeed as an entrepreneur instead and would appreciate financial capital instead.



 










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