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Perhaps you've started regularly putting money away for the kids. They may have received money from the grandparents, uncles or aunts. You may even have opened up a HootLoot account and created some savings goals for them. But what next? What do you actually do with the money?

This next step is one that haunts almost everyone, but it needn't be that difficult. There are a number of ways to approach the investing decision and the principles are as relevant for children's investments as they are for parents.

We have previously argued why we don't think that the junior cash ISAs is necessarily the best investment for your children; particularly at current interest rates.

Investment portfolio theory tells us that putting all of your eggs in one basket – or putting all the money in the one investment is a bad idea. Diversification is a good investment practice as it reduces risk and fits in well with the concept of goals based investing.

Goal based investing is similar to the financial concepts of ALM (Asset – Liability Management) or LDI (Liability Driven Investing) used by Insurance companies and Pension Funds. Putting all the jargon aside it can be boiled down to a simple practice of investing on the basis of the goal or objective, rather than purely on the basis of return and investment type.

Without a framework around the process there is a tendency to chase the highest return, usually relying on prior years performance or someones recommendation. Sometimes this works, but more out of luck than design.


Setting Goals 

HootLoot believes that setting identifiable goals is the best way to achieve them. An abstract savings goal to save as much money as possible is doomed to fail as it won't actually save as much money as could have been. Without a fixed target it is all too easy to borrow from the pot and justify that it doesn't matter as it has no bearing on an undefined target.

Settings fixed goals helps identify with a target and focuses on achieving them. Better, add milestones to break the task into more manageable and achievable tasks - 25%, 50%, 75% and 100%. More for bigger goals, less for simpler ones.

Savings goals and consequently goal based investing are principals upon which HootLoot has been built. Children can identify individual goals and work towards achieving them. HootLoot understands that there are different goals – not only in terms of the types of goals but also the in terms of how long it will take or when you need to achieve them. This is the reason why we have two categories of goals within HootLoot - Long Term Goals and Short Term Saving Goals.


The easiest way to illustrate this concept is to look at an example. Lets say that our dear son (DS) is now a few years older than he actually is (doesn't time fly!) and has a number of things he want - namely a new bike, a trumpet, money for university and money to buy his first car


He has gone into his HootLoot account, created them and started putting away his pocket money and some odd job money towards them. At Christmas he has convinced his aunt to help him out towards his bike savings goal. 

Now as we are imagining that DS is now 11 years old, clearly his bike and guitar are at the top of his mind, while university and cars are some way off. What does he do with this money?

He could put it in his bank account. He could put it in his ISA, He could leave it in his piggy bank or with dad, but what is the most appropriate answer?

Goals Based Approach 

For goal-based investing, the nature of the goal determines the investment strategy. We have argued that JISA (Junior ISAs) are great products if you understand their limitations – the main one being that children cannot access the money until they are 18. Fine for the university fund but not so good for that bike he's close to achieving. Bank accounts are great for immediate access to funds, but not a great investment if DS wants to see his money grow over the 7 years before he can use it.

Breaking down his savings goals into short term and long term we can define different investment strategies for DS's money. For money that he needs in the short term (bike and trumpet), capital preservation is the most important priority and so a bank account, bank of mum and dad or even the piggy bank are all acceptable solutions. DS hopes to buy these items very soon so a return on his money is not his top priority but having enough money when he goes shopping is. 

As for his university and car goals, he has more time before he needs this money, so he can commit to longer term investments and indeed more risk for greater return. HootLoot does not believe that equity markets are necessarily the best investment, but over longer time frames they do tend to perform better than alternatives available to DS (see bottom chart). Investing into a stocks and shares JISA means that he cannot access his money until the age of 18. As he doesn't need this money for a number of yeras, he will not be affected should the value of his portfolio temporarily fall during this period.


By identifying separate goals, DS can even differentiate between his long term goals. He may decide that his car is more of a necessity and doesn't want to risk not achieving that goal so may invest in a lower risk fund that offers a balance of equity, fixed income and real estate. University can be funded through student loans and repaid through his salary so he may be more adventurous and willing to take more risk for better return. He may decide to invest this in all equity – a single market tracker (FTSE-100 or All-Share), a balanced global equity tracker or even a larger portion in emerging markets if he really wants to spice things up. In doing so he is increasing his possible returns as well as the risk that he could lose some of his capital, but he is only doing it on a goal that this is appropriate for.


Monitoring Goals

Over the next 7 years, DS would hope for a better performance than a cash ISA and be closer to reaching those targets. However this doesn't mean that DS should completely set and forget his investments. Goal based investing requires DS to keep mindful of what his goals are and when they are due. As DS gets closer to the age 18, his need to be exposed to more volatile investments such as equities will reduce – much like when his parents approach their retirement.


Hopefully he will have achieved some nice returns over the years, so it is prudent to reduce risk and start to focus on capital preservation due to the impending need to access his funds (and pay his car insurance premiums!). In this case some reallocation into less volatile investments such as a cash ISAs might be appropriate, much like his parents moving out of equities and into fixed income towards retirement. He needn't do this for 100% of the investments, but an amount he feels comforatble with. The market conditions will obviously play a part in the decision making process.



As we can see, DS's investment strategy is now highly personalised according to his goals and his objectives. A single investment is obviously not suitable for DS's purposes, however this doesn't mean his solution is not simple and easily implemented – it just means that he has more than one investment.

The clearer he (or his parents) are about the goals they are saving towards the better he can match the risk/reward profile of his investments to his goals.



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