Your kids have probably lost or broken half their Christmas toys by now and got bored of the rest. So why not start 2016 by giving them something with far greater longevity?
Investing for your children is a far better use of your money than buying yet more gadgets and gizmos. The New Year is the perfect time to get started as thoughts turn to the future. One thing is certain – your children’s prospects will be a lot brighter if you start investing on their behalf as early as you can.
Junior school
Many families set up savings accounts for their children to get them into the habit of setting a little pocket money aside. That’s fine, but it isn’t enough. Given today’s dismal savings rates, cash will never amount to much. Over the longer run, the stock market should be far more rewarding.
Setting up a tax-efficient Junior Isa is the ideal way to invest in stocks and shares. Families and friends can contribute up to £4,080 in the current tax year, with all the dividend income and capital gains free of tax. The child gets a new allowance next year as well.
Kids are alright
People who think investing is too risky for children have things the wrong way round. Children are the ideal investors because they have one big advantage over adults – time is on their side. Time is the investor’s most reliable friend, because it allows them to look beyond short-term share price swings and cash-in on long-term outperformance.
While stock markets can be volatile in the short run, they should deliver far better returns than cash over 18 years or longer, which makes children the ultimate comeback kids. In fact, you can turn market volatility to their advantage. If you commit to a regular monthly contribution you actually benefit when share prices fall, as you pick up more stock for the same payment. That contribution is worth more when markets recover.
Be young, be happy, invest Foolishly
You can invest in stocks and shares through an actively-managed fund, index tracker or portfolio of individual stocks and shares. A handful of fund managers have set up their own Junior Isa portfolios, notably investment companies such as Aberdeen, Alliance Trust, Baillie Gifford, F&C, JP Morgan and Witan. You can invest from as little as £25 a month, or lump sums from £250.
The downside is that many only offer a limited range of funds. You may prefer to set up your own portfolio via an investment platform, which should leave you free to invest in any fund or stock you like. You can’t touch the money yourself, but you can manage it on your children’s behalf until they turn 16, when they can take it over if they wish. At 18, the child is free to withdraw their money or convert it into an adult Isa and retain all its tax advantages.
A Junior Isa is a great way to cover the costs of early adult life, such as tuition fees, a property deposit or buying a car. Your children may also have learned the joys of investing, a skill that will benefit them for a lifetime.
