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How to start investing - parents' edition

March 31, 2022

Getting started

We all want to set our kids up with the best chance for the future. Short of managing to pull a property out of the bag – unlikely, we know – investing throughout their childhoods is the best way to give them a boost when they finally fly the nest.

Investing is basically buying into something you believe will increase in value over time (unlike that Beanie Babies collection, this kind of investment is actually likely to make you money.) Then, when the time comes to use that money, you can cash in what is hopefully a pot that’s bigger than the value of the money you’ve put in over the years.

We say hopefully because nothing’s guaranteed. Just like your child may seem to grow in fits and starts (with the occasional regression) investments can jump around and there’s a degree of risk involved. But if you’re in it for the long run, they’re much more likely to outperform savings. In a big way.

The general rule of thumb is that you need to be able to tie your money up for at least five years. That’s how long you’ll need to let it do its thing to ride out any bumpy bits and start seeing proper returns. You’re not going to be able to get at your money for a while, so you need to make sure you’ve got yourself covered with a rainy-day fund before you start locking any of it away. Because we all know that it never rains but it pours, and you don’t want to get caught short. Pay off any debt, clear that credit card and set aside 3–6 months of living costs as a cash buffer. Just in case…

And then you can get started. With as little as £1. That’s cheaper than a flat white! Investing isn’t all Wolf of Wall Street; it’s just about making your money work harder for your little one’s future.

What does investing look like?

There’s a range of options when it comes to investing. Although that choice can be a little overwhelming at first, it also gives you the flexibility to go for the option that’s right for you. You can invest in almost anything but here’s a rundown of the main areas for first-time investors to consider.

Stocks and shares

You’re probably imagining a bunch of traders shouting ‘Buy!’ and ‘Sell!’ at each other but at its simplest, buying stocks and shares just means buying a tiny portion of a company. The better the business does – or is predicted to do – the more each of your shares are worth and the more cash you’ll get when you sell them.

Bonds

Rather than buying a piece of a company, when you invest in bonds, you’re loaning your cash to that business. You get a set amount back at the end of the loan period and regular interest payments (called dividends) along the way. Your returns are likely to be lower than if you invest in stocks and shares, but your risk is also smaller.

Funds

Funds are the pick‘n’mix of investments. They can include stocks and shares, bonds, property and cash, all wrapped up together into one package. They’re a great way to avoid putting all your eggs in one basket by covering a range of areas – if one dips, the others should cover the shortfall.

Depending on your approach, you can choose active or passive funds. Active funds will be looked after by a fund manager who keeps an eye on everything and tweaks the selection along the way. One ‘active’ option is to invest in a mutual fund, a basket of investments that’s open to many, rather than a personalised fund of your own. There’s an economy of scale with a mutual fund as all the investors’ money is pooled together to increase buying power.

Passive funds are more hands off as they aren’t managed by anyone. Instead, they’re linked to an index or market (like the FTSE 100, the top 100 companies in the UK) and follow its performance. These funds tend to be cheaper as you’re not paying for someone’s expertise to monitor and manage them. Exchange Traded Funds (ETFs) are a special type of index fund that are divided up into shares. These are then bought and sold from other owners throughout the day on the stock exchange.

Junior ISAs

When it comes to investing for your kids, Junior ISAs (JISAs) are a pretty ideal option. Stocks and shares JISAs are a tax-free way to invest in your child’s name, ring fencing the money for them until their eighteenth birthday. They do what they say on the tin – you have an annual allowance to put in stocks, shares and other investments. It’s currently £9,000 for 2021/22 and set to stay there for 2022/23. Although only parents or guardians can open a JISA, anyone can contribute, making it the perfect option for grandparents and other family members looking to top up the pot.

Risky business?

We get it. Cash feels safe. There’s no risk and you know exactly how much you’ll get back at the end – the interest rate is right there for you to see. But even if that pile of gold coins is growing in the bank, by the time your child needs them, they might be worth less in real terms than when you started. That’s all down to the rate of inflation being higher than the savings rates you can find right now.

Risk and reward go hand in hand. The more you’re prepared to put on the line, the higher the potential reward. Before you invest it’s a good idea to have a long-term goal in mind and consider where your appetite for risk lies on the scale from cautious to adventurous. Any investment is a gamble and there is always a chance you end up with less than you put in. Or, you could end up with more…

When you’re trying to build a nest egg for your child, it’s best to not pop all those eggs in one basket. That’s where diversification comes in. Imagine a pizza where every slice has a different topping. That’s diversification. It’s where you invest in lots of different businesses and types of industries to spread the risk. So, if one of your slices turns out to not be as tasty as you’d hoped, one of the others might just smash your expectations.

Build your child’s financial future

The longer you can let your money work for you, the more you should walk away with. Not only will you hopefully be able to smooth any volatility back out over a longer period, but you’ll be able to make the most of Einstein’s 8th Wonder of the World – compound interest.

Think of a snowball rolling down a hill. It starts small, but the further it goes, the more snow it picks up and the bigger it grows. The bigger it grows, the more snow it can pick up, which makes it even bigger. Your money will do the same. You’ll start getting returns and your pot will grow. As it grows, it’ll bring in bigger returns. Then you’re in a happy cycle of growth on growth as you watch your child’s financial security snowball.

It's not child’s play, but with the right support, investing can be almost as simple as ABC. Set up your profile, set your goals and risk level and start building a strong financial future for your child today.

Want to dig a little deeper? Find out more in our Guide about saving and investing for your children's future.

Don't forget, when you invest your money is at risk. You might end up with more than you put in - or you might end up with less. And remember that what you're taxed depends on your own personal situation, and that can change in the future.