Sunday, June 24, 2018

Tuition as an investment

I read the news with increasing consternation that our society has created a monstrosity such as the tuition industry. The situation is now so bad that I think personal finance gurus need to put their heads together to formulate a better framework to decide whether kids should have tuition because the consequence to  your wallet is so dire that in the BIGS FB group, professional tutor La Papillon estimates about $1,500 spent per month for four subjects.

And this is only for one child.

Tutors have a guaranteed rice-bowl due to the systemic mess the education system has created for itself.

Teachers are overworked. They have administrative work to do and have to actually teach kids how to think and do their own research. This takes time away to teach kids how to pass exams.

At the other end of the spectrum, exams have to be pitched at a level harder than the material taught because the education system also has to sift through to the population to decide who gets to qualify for the most financially rewarding jobs. If exams test at the level of what was taught in school, we would need some kind of university entrance exam to sort out the cohort further.

This gives tutors an effective playground to operate on. Tutors don't ever have to teach critical thinking or how to even behave like a human being ( Although some do out of the goodness of their hearts ). Tutors specialise in helping kids survive the Academic Hunger Games of Singapore because that's what parents pay for. This means mechanically attacking every possible question that can come out in exams.

This is why rich families have a distinct advantage. Their kids have time to pick up critical thinking and new economy skills. Learning how to pass exams is simply a monthly pay-check to a tuition agency.

Not every parent has unlimited means. I will simply suggest a controversial idea here : Tuition is an investment. Basically, it is far superior to see tuition as a means of transferring your financial capital into your child's human capital. However, you need to understand that you are in essence converting your equity, cash and bond assets into a call option on the human capital owned by your child.

Your child needs to internalise what is being taught by a tutor for this call option to come into the money. This is the part which I can't really help with because every child is unique and I do know of some kids who simply don't benefit from tuition at all.

There are some consequences of employing such an approach to tuition :

a) The better you are as investor, the less tuition you should be willing  pay for.

This always gets parent's goat when I show them my numbers.

Suppose I take the $1,500 and invest it in a portfolio yielding 10% per annum for 15 years instead of paying for my child's tuition. As a consequence of that, the child fails to make it into a local university but gets a polytechnic diploma instead. I can, as a form of compensation, give him the entire portfolio of $630,000 on the day he starts his diploma job at $2,400. If the portfolio continues to generate 10% every year, your kid would have an effective starting salary of $2,400 per month + $63,000 per year.

This is way higher than the salary of a lawyer, doctor or engineer.

b) Even if you do not buy (a), limiting tuition can be profitable.

A lot of parents protest with my idea (a). One argument is that a fresh poly grad is the last person who should be handling such large sums of money. I can accept that. After all, parents know their kids best.

( I'm sure some kids will even declare financial independence and FIRE on the first day of work ! )

Suppose (a) is too hard to accept, then perhaps reducing tuition to just one key weak subject would some sense. This basically creates an asset allocation for your child that consists of tuition and the usual asset classes subject to the Mean-Variance portfolio concepts in Finance.

Future parents may even employ a tutor and a robo-advisor to look after their kids's future.

c) Even if you ignore this idea, you have to accept that tuition has limits.

The beauty of this idea is that investing in tuition now has logical limits. You will not invest in your children's education if returns to their human capital is too low compared to your returns on financial capital.  Otherwise, you are just subsidising a a tutor's lifestyle.

The value of a degree can be low if your kids insist on studying subjects which do not lead to steady professional jobs. There are NUS degrees with a starting pay as low as  that of a high-end private degree (many SIT degrees are worse). Worst, in the future, even a professional qualification may force some kids in the future to join the gig economy.

This is also balanced by existing high-paying jobs that do not require degrees such as real estate sales and being commercial pilots.

We need a new framework to assess a child's tuition needs and I would like to launch the first salvo in this new frontier in personal finance :

"Minimise tuition, invest the rest."

It is now time that we take the "Buy term, invest the rest" war-cry and drive it against the tuition industry !

The larger tuition franchises are now starting to sound like MLM companies and insurance firms, playing along the insecurities of parents to make an extra buck.

Before I end, I want to suggest a solution for policy makers. I think teachers should be allowed to get extra allowance for staying back in school to teach the weakest students in each subject. These students will have to pay for tuition within the school system but at a rate lower than the private sector, so it should be a voluntary scheme.

If every school transforms into a tuition agency after 3pm every day, the private enterprises will find it harder to wage psychological warfare against kiasu parents.


  1. Hmm maybe can take advantage of Ceca2.0 and send the kid for Indian MBBS & come back on par with foreign talent doctors.

    $15k all in, including upper class lodging & meals.

    Or Indian LLB @ $7k.

    Invest the rest of money & try to go for that 10%pa.

    Btw don't need to gift the portfolio to the kid so early. Develop their money responsibility first. Can also structure contingent trust in case you pass away before the kid achieves sufficient "responsible status".

  2. Indian idea is quite good actually !

  3. How to get 600K if u invest $1,500 and invest it in a portfolio yielding 10% per annum?

    And to grow 10% annually is tough. Better put your kid to tuition and let him be a professional, dont try to make him to be another WB. Unfortunately, there is only one WB, dont even try to be.

  4. There are strategies that can attain 27%.

    I run a leverage portfolio that yields 10% on it's own and it has not gone bust yet.

    10% is hard but not impossible. You will be nowhere near Warren Buffett even if you can make 10% annually.

  5. "10 year plan for a fresh grad if you messed up your degree".
    - learn basic investing.
    - squirrel away cash.
    - pick up coding/Web design if you have logic skill strengths, tech sales if you have sales skill strengths, or any job you can get with best pay if you're not sure..
    New article idea?

  6. Not too sure whether this would be superior to real estate sales though...

    Coding is a skill but the foundation rests on Computer science which is an academic discipline.