Ian answers: Congratulations, Rory, on the imminent birth of your newest child. What you have heard is essentially correct. If you are lucky enough to have the money, it may be a good idea to open investment accounts for your children immediately. When you start early, you have much more time to benefit from compound interest and potentially grow these investments.
Risk versus returns
You ask what kind of investment would be best. A tracker fund that matches movements in global equities can often deliver better returns for lower fees. Although we are not in a position to recommend any funds in particular, there are quite a few around that might meet your needs – examples might include the FT All World or the MSCI World indices.
Your children are young. A key consideration is when you would want them to access the investments and any returns that might result. I guess that each portfolio could have at least 10 years to grow; this means you should be able to take a little more investment risk.
Accepting more risk may help your investments grow faster than if simply left in a bank account. But remember: there’s no guarantee you will actually get a good return – investing can be risky.
Perhaps go global
A fund that tracks global equities rather than just one country (such as the DAX or S&P500) is typically preferred. This means investing in many countries at the same time. The result can be more opportunity for profit, while potentially spreading – or “diversifying” – the risk you are already taking by investing in equities or shares in the first place.
But keep the costs low
A further warning: fees and charges can seriously eat into any potential income or return from your investment. High fees can severely damage your position: even one or two percent a year can make a difference. This argues in favour of tracker funds (also known as passive investing) which will typically cost you less over time.
It is also worth looking into the tax laws where you live. Sometimes investments can be set up easily so no tax is paid. This can be as important as choosing a fund which charges low fees. If the fund pays regular dividends, reinvest these in the fund straight away. Many funds allow this to happen automatically. Dividend reinvestment is key to long-term investment performance.
You are potentially giving your children a great gift. So why not make it even better? Research suggests that children learn lessons about money early in life. A UK study found that people’s attitudes to money are formed as early as age seven.
If you can, add a little to your investments every year, perhaps on each child’s birthday. This could also spark useful family discussions about money, forming part of your children’s financial education. Many adults are financially illiterate: one in three cannot answer questions about things like how inflation affects the value of money or about compound interest. And financial education is surely important – if your children are to make the best choices for themselves, throughout their lives.