Top investment choices for children

It is always a little daunting to decide how to invest money on behalf of our children. There are so many variables that affect our investment choices.  Some are practical like the possibility to easily access the funds in case of need and others are cultural or personal like the propensity to buy riskier assets or the need to deny access to the money to chidren beyond the 18 years old legal threshold.

In this infographics we have compared the hard numbers of the Return on Investment for 4 popular classes of investment choices for children.

We have taken £1,000 invested in 2005 (launch of the Child Trust Fund scheme) and looked at how different investment options have performed thorughout the following 10 years. 

children investments, HootLoot, junior ISAs

 For comparability and simplicity we have assumed that the cash Junior ISA is invested in the best rate each year. Pre JISA we have used the best CTF cash rate. Transaction costs or other costs have not been included.

Stocks beat cash

Despite the most serious financial crisis of all times happened in the middle of the observed time horizon, we are still seeing much higher returns from shares than any other investment / saving option. Of course in the short term there are fluctuations and if one had to reedem all investments in 2008, the stock ISAs would have looked worse than the cash and bond options. However this is only true of one year out of 10! In any other year, stocks have greately outperformed bonds and shares.

If you think the stock market is for you and can deal with some fluctuations, here are some tips to maximise your children's returns when buying shares:

1- Start at birth. The natural advantage for children's investments is TIME. Make the most out of it and start investing when they are born.  

2- Lock them up. (the money, of course, not the children). Locking money in an ISA or a mutual fund for as long as possible will minimise transaction costs and withdrawl fees. This should not be difficult to do with children's investments as by law they couldnot access the money before they are 18 years old anyway.

3 - Buy low cost. Exchange Traded Funds (ETFs) are a great alternative to conventional mutual funds as they require very little management, hence come with low management fees. These are funds that are traded daily on exchanges so they are easy to buy and sell. They are the "no-brainer" product in asset management because there is no stock picking by any smart fund manager: the money is invested by replicating the same shares in the same proportion of the one of major indices. For instance a FTSE 100 ETF will buy shares in the top 100 companies that trade in the FTSE 100 index.

If you believe, like we do, that in a long time horizon (10 years or more) the large majority (if not all!) of the mutual funds products will not beat the market, then this is a great option to maximise your stock market exposure. After all the most popular expression in trading shares is "the Trend is your Friend".

But what about property?

We haven't really included this option in our analysis because it is not common to invest your children's savings into property. The high starting investment in the form of a house deposit and the inhability to take leverage in the child's name means property is not the best suited medium for strict children's investments.

However many parents in the UK prefer to invest every single penny (including their children's) into their homes.

When time comes that children must flee the nest, it is common to sell off the large family house, repay whatever is left of the mortgage (generally a small amount following 15/20 years of repayments and property appreciation), downsize down to a smaller property more suitable for an elderly couple and hand over the chunky capital gain to the children to cover University costs or their own home deposit.

Thanks to the sky rocketing property appreciation rates throughout the UK in the last 10-15 years, so far this has prooven to be an alternative winning family investment strategy to Stock ISAs, as this chart from the Office of National Statistics can show us.

Property Index Value, UK, 2004 -2014

ONS house prices, HootLoot, Children investmentsSource: Office for National Statistics

 Whatever you preference is, this analysis shows that it is quite pointless to invest money destined for children in either cash or low yield bond products.  Stocks come with risks and costs but there are ways to minimise these and tailor make them for our purpose.




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