It really pays to start investing for your child early.  By simply investing something every week, you can truly set your child up for life just by tapping into a magic – yet free – ingredient: starting early.

Most people have surely heard of Warren Buffett. He started investing when he was 14 years old. As a young boy, he earned money by delivering newspapers and used his savings to buy equity in a company (his own) that bought and installed pinball machines in barber shops in Omaha. Since then, he reinvested the gains of his investments.

With a current net worth of $117 billion, he comfortably sits as the fifth richest person in the world. Most of his worth results from the equity (or shares) he owns of Berkshire Hathaway (BRK.A on NYSE), the investment holding company Buffett bought in 1965.

Buffet’s Investment Secret

Surely you must be asking yourself what the is lesson that we can learn from Buffett’s investing career, and how this relates to investing for your children. Well, hopefully it should be obvious that the magic ingredient here is time.

What might surprise most people is that 97% of his net worth has accrued since his 60th birthday. Just let that sink in for a minute. If you look at the chart below you’ll see that when he was 59 years old, his net worth was (only) $3.8 billion. It was only in the last 30 years that his net worth has shot up. However, if you look over the course of his lifespan the annualised performance of his investments is 24.3%, which is impressive – not supernatural – given that you can earn 6% by taking investing in Franc’s Cash Fund without taking onboard any investment risk. So in effect, Buffett’s investment skills are just 4 times greater than a novice investor who takes on no investment risk.

Multiplying Your Child’s Investment

Compound interest (sometimes referred to as compound growth) is when the gains on an investment – either interest, dividends or capital gains – is reinvested to make more money. This is one of the wonders of investing, and the secret to Warren Buffett’s incredible investment success.

As is clear from the chart, compounding takes time to work its magic. Warren Buffett has been investing for an incredible 78 years. Most people don’t come close to that duration of investing, either because they start too late or they divest (cashing out their investments). Buffett has also lived a long time: he’s 92 and shows no signs of slowing down; he is still CEO of Berkshire Hathaway.

Your portfolio would be worth R154 million!

Ok, now that we know that the secret to future prosperity is investing for as long as possible, let’s see how this can apply to our children. Let’s say that at the birth of your child, you commit to saving R100 a week and invest it in Franc’s Equity Fund, which has returned an annualised performance of 13.5% since inception in 2000. Now let’s assume you (or your child) keep up saving R100 every week until your child turns 65 . By the time your child reaches 65, their investment portfolio could have them become a millionaire!