Money Observer’s Prudent Parent explains his investment strategy for children.
A couple of weeks after my son was born 18 months ago, I decided to take time out from the nappy-nap-burping carousel to set up a Junior Isa. I invested the money, which puts me in the minority of parents, as most opt for the safer option of cash. But given the long time horizon, the odds are firmly stacked in favour of investment winning the growth race.
Indeed, as the recently updated 2019 version of the Barclays Equity Gilt study shows, over the past decade the stockmarket has had the upper hand over cash, with UK shares delivering an annualised return of 5.8%, versus -2.5% for cash in real terms. Looking back over the past 119 years, Barclays puts the probability of equities outperforming cash over a 10-year period at 91%.
This provides plenty of comfort, given that so far my son’s Junior Isa is showing a small loss of 0.1%. I bought Aberdeen Standard Asia Focus investment trust, but if instead I had opted for the best-paying cash Junior Isa, which pays 3.6% via Coventry Building Society, the Isa would be worth more than it is today.
The rationale for selecting the trust has not changed, however. Emerging market and Asian economies are growing at a much faster rate than western counterparts – a reflection of their youthful demographics and growing middle classes. This means plenty of taxpayers and spenders, which should translate into healthy stockmarket returns in the long term.
In deciding where to invest, I opted for an investment trust on the grounds that I prefer investment trusts to open-ended funds or unit trusts. The main reason for this is that I think the managers of investment trusts are more accountable for performance because they have a board of directors to answer to.