Parents everywhere want their kids to prosper. But preparing your children for the real world is a mammoth task. Lofty house prices, rising student debt and sluggish wage growth mean the younger generations need more financial support than ever.
Asset rich baby boomers may be tempted to cash in their investments to help out. But they could be jeopardising their own retirement goals in the process.
If you plan ahead, you can meet the cost of your children’s big milestones without sacrificing your own wealth. And when it comes to building a future fund, you need to consider investing. That’s because, historically, equities in particular have tended to outperform cash over the long run.
While there are never any certainties with investing, and the value of your nest egg can go down as well as up, a well diversified and carefully balanced portfolio can minimise your risks, and give you the best chance of producing the returns you need, so you may give your children a terrific head start by investing on their behalf as soon as possible.
Here are six ways you can turbo-charge your kid’s prosperity while keeping your own investments intact.
1. Figure out your investing goals
What are you investing for? How much will you need to contribute? How long have you got? These are all crucial questions. The sooner you can start, the better. For example, a parent who starts investing at birth for their child’s university education will have 18 years. The portfolio has time to absorb the turbulence of the stock market and it can afford to be invested, at least initially, in asset classes that traditionally generate higher returns over the long term — which is important considering the potentially large sums needed.
Remember that all investing is risky, with the possibility that you might not get back what you put in, but some assets are riskier than others. So shares are a good bet for a longer investing timeframe, but when you are nearing your child’s 18th birthday, you should switch into 'safer' assets (like bonds) to ensure your fund is exposed to fewer market tremors.
You can use IG’s calculator to help you set your targets and contributions.
2. Drip feed your money
Investing small amounts each month is not only more practical and affordable than making big lump sums, it actually boosts your long-term investments too. It can also reduce turbulence in your portfolio due to a concept called 'pound cost averaging'.
This means that more shares are bought when share prices are low, and fewer shares are bought when prices are high. So your portfolio is more insulated from market falls.
Read more: Pound Cost Averaging: how you can smooth your investment returns
Every little helps
Make it a habit to invest every financial contribution or windfall available. For instance, godparents or grandparents may be glad to chip into Little Jonny’s future home fund. Even if the amounts are small, they add up to a bigger starting pot that can (hopefully) grow more rapidly, not least because of the glory of compound interest, where investment returns generate their own future gains.
So if you invested £100 a month for 20 years with an average yearly return of 4.5%, the total pot would be worth nearly £40,000 — almost double the amount that would be generated without compounding.
Read more: The power of compounding: start investing early
4. Re-invest your dividends
Regular dividends are paid by certain companies to their shareholders and can be a valuable source of income. But if your goals are more long-term, you can re-invest those dividends to really pump up those returns, thanks (again) to the wonder of compounding.
Diversify, diversify, diversify
This is the one of the most important mantras of investing — with good reason. Having a decent spread of asset classes, sectors and regions in your portfolio will stop you being haunted too much by the poor performance of one company.
The general idea is to have the right mix to reflect your goals and where you’re at in your investing journey. So a portfolio invested over 20 years could be 70% equities, 30% bonds and cash, but (broadly speaking) rebalanced the other way round as you get closer to your target.
Read more: Investing: the power of diversification
6. Be patient, but watchful
It can be frustrating (and sometimes a little worrying) to wait for your investments to come good, particularly if markets are wobbling. But while some savvy investors can make a killing with regular trading, the majority should only make alterations to keep pace with their risk profile and needs, and to stop high performing investments distorting their portfolio.
If certain assets grow too much, they can end up being out of proportion in your portfolio - and probably too risky. You may want to bank some of those profits and use the money to top up some of your underperforming investments.
Now watch Andrew Craig, author of How to Own the World, explain why investing early is so important.