Back to school: how to invest for children

With the weather taking a decidedly autumnal turn and hasty arrangements to buy uniforms and stationery, there’s no mistaking September’s ‘back-to-school’ atmosphere. Little ones starting a new year also marks the culmination of some forward planning, not unlike investing for your future – and theirs. So, with (perhaps?) more time on your hands and a little less distraction, it could be an opportune time to consider that in more detail.

The gift that keeps on giving

Investing money for a child is rather like planting a tree and watching it grow. At first not much happens, but gradually, over many years, that weak sapling can transform into something magnificent.

Investments too don’t tend to change much from year to year. Progress can be slow, imperceptible at times, and with the occasional large set back. But given enough time the compounding returns of an appropriately diverse portfolio can overcome short term volatility and mature into a stately specimen. As investment legend Warren Buffett put it, “Someone's sitting in the shade today because someone planted a tree a long time ago.”

When investing for children, parents can use time to their advantage. With a Junior ISA for instance, an 18-year time frame before the money can be used, with top ups along the way, offers a great way to plan for education or other costs further down the line.

How to plan investments for children

As always in financial planning it’s necessary to start with the goal and work back from there. That can determine how much is needed and over what time. The time frame will then shape the investment strategy.

Investments for children generally have time on their side, so taking on the risk and volatility of the stock market in pursuit of higher returns is likely to be worthwhile. When investing for ten years plus, being heavily, or entirely, weighted to equities is often appropriate. Enjoying the compounding returns of growing companies will likely result in the best returns over long periods.

Remember, it’s possible to iron out volatility by contributing regularly and reinvesting any investment income. However, even with a longer horizon an investment portfolio should be diversified among different sectors and types of company to spread the risk.

If the end purpose is education costs, or perhaps a deposit on a first home that might be only a few years away, then it’s probably necessary to strip out some of the volatility of the stock market. This means using some balancing assets such as bonds, or even cash and lower risk short-dated bonds if drawing on the money is close at hand.

For anything less than five years it’s better to migrate to cash, especially now it offers a decent return that is currently outstripping inflation.

Step forward the Junior ISA

A Junior ISA is often the go-to product for housing children’s investments as it’s easy to set up, flexible and tax efficient. The tax benefits are the same as an adult ISA – no capital gains tax, and no further tax to pay on income.

Withdrawals are possible from the age of 18 when it automatically converts to an adult ISA, meaning the pot can be useful to help with the cost of university or a deposit for a house. Family friends, grandparents and other relatives can also contribute along the way up to the annual investment limit, which this tax year is £9,000 per child.

The key benefits of the Charles Stanley Direct Stocks & Shares Junior ISA:

• No set-up costs and competitive charges
• Easy to manage
• Flexible – contribute lump sums whenever you want or a monthly amount of £50 or more
• Wide investment choice
• Award-winning customer service
• Transfer in existing Junior ISAs or Child Trust Funds.

Find out more: How does a Junior ISA work?

How to select investments for children

Choosing the appropriate investment strategy for a Stocks & Shares Junior ISA depends on what the money is ultimately for and the age of the child. A ten-year plus runway favours a fuller exposure to equities, but as the time approaches when the pot is to be drawn upon – perhaps for university, a car or furnishing a new home – then care needs to be taken to take out some of the volatility. With lots of low risk investment options such as money market funds that’s relatively straightforward to manage as needed.

As for selecting individual investments for children, a lot depends on how hands on you want to be. Although it’s possible to change things as you go, what people often want is to ‘set and forget’ – decide on a broadly sensible route and leave investments to do their thing.

It can make sense follow Warren Buffett’s advice to ordinary investors and use a low-cost tracker fund for at least the core of their portfolio. He referred to the US S&P 500 index, but investors should expand that to a global tracker to provide more diversification.

For portfolios where 100% equity is not an appropriate approach, the core could be provided by a multi asset fund or investment trust that provides an appropriate mix of asset classes in one investment. Charles Stanley’s own range offers a low-cost solution and they come with no platform fees through Charles Stanley Direct.

Once a core is established, some more specialist investments can be considered for diversification and, possibly, engagement. With a typical lack of financial education in schools, it’s a good idea to introduce investment basics to kids and explain what you’re doing once they can realistically understand. Good habits are best instilled early in life. However, with investing a somewhat dry subject for many kids, a focus on individual well-known brands is worth considering, either as standalone shares or within funds with some interesting holdings.

Find out more: How to teach your children (and grandchildren) about money