Planning for your children’s or grandchildren’s financial future may seem complex, but it doesn’t have to be.
This article will guide you through five key investment strategies, using simple language and practical examples, comparing them to determine the best option for long-term investment.
1. Savings accounts and term deposits
For years, traditional savings accounts and term deposits have been a favoured option. They were straightforward, reliable and provided a predictable return. However, when you take inflation into account, the real returns can sometimes even be negative, meaning you might be losing purchasing power over time.
2. Individual shares
Investing in individual shares might seem appealing due to the potential for high returns. You might have heard stories of grandparents buying shares for their grandchildren that have since significantly increased in value. However, this strategy relies heavily on your ability to pick the right stocks, which is notoriously tricky even for seasoned professionals.
Putting all your eggs in one basket, or in this case, a single company, could expose your investment to unnecessary risk. Instead of instilling financial wisdom, it might inadvertently encourage a risk-prone approach to investing.
“Planning for your children’s or grandchildren’s financial future may seem complex, but it doesn’t have to be
3. Managed funds and LICs
Managed funds and Listed Investment Companies (LICs) promise to take the guesswork out of investing by diversifying your investment across multiple companies and sectors. The idea behind this strategy is to spread the risk and achieve more stable returns. However, while these funds provide a diversified investment portfolio, they’re often marred by inconsistent performance and high fees.
It’s worth noting that only around 15% of fund managers outperform the market consistently. High management fees can further eat into your returns, making these investment options less attractive in the long run.
4. Investment bonds (education bonds)
At first glance, investment or education bonds might seem like a good option. They allow for tax to be paid upfront, eliminating future tax liabilities when your child eventually receives the portfolio. However, this advantage is often overshadowed by their high costs and subpar performance.
Often, the tax benefits offered by these bonds are negated by their lacklustre returns, diminishing their overall attractiveness.
5. Exchange traded funds (ETFs)
ETFs are our top pick for an investment strategy for your child or grandchild. They offer a way to invest in a wide variety of companies, spreading the risk and increasing the chances of reaping benefits from future successful businesses. Low costs are another significant benefit of ETFs.
Lower fees mean more of your returns stay in your pocket, which over the long-term, can make a significant difference to your child’s portfolio.
When investing in ETFs for your child or grandchild, there are a few key strategies to consider. Opting for growth-focussed ETFs, contributing regularly, reinvesting any dividends and keeping fees low can create a robust investment plan for the long-term.
ETFs strike a sensible balance between risk and return, making them an ideal choice for long-term investments.
Whether you decide to manage these investments independently or use a professional service like Stockspot, it’s important that your chosen strategy aligns with your investment principles and the financial lessons you wish to impart to your child.