Investor Clinic: Young novice investor Mum needs help investing for her kids


#1

Originally published at: https://whichinvestmenttrust.com/investor-clinic-young-novice-investor-mum-needs-help-investing-for-her-kids/

A single Mum with three young children is keen to make the best use of money gifted from her father to invest for her children, but she doesn’t know where to start and is looking for your help. Name: Rachel Your Portfolio: Cash £2,000 x 3 Age range 32 How long can you keep this money invested…


#2

Hi Rachel, not sure of your forum name - I’ve found @RachelS - not sure if it is yours?

Firstly I think stock market exposed investments are the best option for your children over such a long time span but there are points for you and your Dad to consider. While history demonstrates stock markets grow strongly over time there can be times when they fall. This is when you should just sit tight and do nothing and wait for them to recover, no guarantee that they will, but if they don’t either the world is coming to an end of something similar has is about to occur. My point is you need to prepare yourself for this, the possibility for a stock market fall that is, is this something you’ve given any thought to?

I think you should invest in a mix of high growth investments and wealth protection. Healthcare/biotech or emerging markets/tech trusts for growth, something like Capital Gearing for wealth protection. Maybe on the 75%/25% growth/protection split.

I don’t know if you’re better using a child ISA or not but I suspect so. Maybe someone else knows a little more about this than I do.


#3

Hi @angieb yes @RachelS is my membership name.

To be honest we hadn’t thought about the stock market falling too much though I knew it was more risky than just putting the money in the Building Society. It is hard for us to work out what is the biggest risk because I really would be upset if when my kids reached 18 they found that the money my Dad had put away from them had been whittled away because of my poor investment choices.

Maybe the interest rates will increase and a savings account will be the best option but it’s just that right now you earn almost nothing on them.

I suppose I need to think this through a bit more.

Thanks for your advice though, it is certainly food for thought.


#4

Whatever you decide to invest in I would suggest that you use a tax wrapper such as a junior isa to avoid hassle from HMRC and avoid funds with high fees. And a word of warning. Nearly every type of investment is currently expensive in comparison to its history, so falls might precede gains.


#5

Hi Rachael, Time was, you could put money in a building society and make 1 or 2 % over inflation, safely. Which nowadays would be like getting 5%. I don’t know why building societies are not offering bigger interest. Guess they get enough coming in without having to pay for it. I have lived through several stock-market crashes, and the value of my savings has dropped several times, but always risen again. Because I had money saved for different reasons, the long term savings just came back up, even though it may take a year or so. Because of all the talk about the stock-market, the Footsy (FTSE) and other stock exchanges being higher than ever before, and all the Government money sloshing around I stopped putting extra from wages into investments, and when I had too much in the bank, bought Premium Bonds. 2015 & 2016 got no growth in my Unit Trusts or Investment Trusts, so I cashed some of them in, and bought PBs. On the theory that I was not lucky in chosing which Trust would go up, and as it was all luck anyway, I may as well trust to luck, and put the cash where it would be safe. Premium Bonds pay out for average luck, about 2%,
So with the stock market rising so well this year, I bought a selection of 5 Investment Trusts. One £1000 has grown £25 in 6 months, another, £50 and so on, the best has made £150 in 6 months. In round figures. £300, against £100 for £5000 in Premium Bonds.
In the future you may have more money to invest as a lump sum or from earnings. I wanted a motorbike as a teenager. You can buy Premium Bonds over the phone, on computer, or you can fill in a form from the Post Office.
If you decide to start investing in a UT or IT, you could phone Hargreaves Lansdown, based in Bristol. Look at their website. They can talk you through it, and have a website that is easy to use. (There are other firms of course)
I would open an ISA and buy an investment trust in your name in an ISA, just one, like City of London (CTY) or one from Foreign and Colonial. There are about 600 ITs to chose from, one of the most popular at the moment is Scottish Mortgage Investment Trust - it invests worldwide. Look them up, for sometime in the future, when you may have more to invest. But for a first timer I would suggest CTY. Because to buy 3 for your children will cost £12 each to buy, and £12 to sell, (£72) so just buy one and hold the money in your name. I’d buy 3 Premium Bonds, in your childrens’ names, and hold them for 15 or whatever years.
Best of luck.


#6

@RachelS Probably worth having a read around the topic, these types of questions are covered in the weekend newspaper finance sections.
Dug this recent article out from the Money Observer magazine which talks about the options
http://www.moneyobserver.com/our-analysis/six-financial-stocking-fillers-keep-giving-year-after-year

I would go down the stocks & shares Junior ISA option, given the time horizon for your kids. You will need to choose a low cost provider due to the relatively small amounts (so go for a % based charge, rather than fixed costs).

If you want an easy to use site, with good customer service - Hargreaves Lansdown will do. Each child will have their own account You will be charged ~£12 for each purchase/sale so I would pick a single share (same for each child, so they get the same good or bad performance). In addition to the purchase costs, you will be charged 0.45% a year - but this should be covered by the dividend payments.

In terms of an investment Trust to pick, options might be
F&C Global Smaller Companies (FCS) - good long term performer which pays a dividend
Monks (MNKS) is another good trust, slightly lower risk than Scottish Mortgage (SMT)
A more UK focused trust would be Finsbury Growth & Income (FGT)

Good luck


#7

@RachelS, one charge to check out is that for dividend re-investment. These do differ, and whilst some charge only £1.50 or so this can still be a noticeable percentage of the amount being re-invested. An alternative to this would be to go down the OEIC/ETF route and hold accumulation units - although even here there can be differences with charges for holding the different types of assets so you would have to consider which was actually the cheaper route.

Given that you rate your risk tolerance as 6 and that you do not have a great deal of investing experience then I would stick to more generalist funds and avoid more specialist ones. The latter can be a bumpy ride and can be a test of the nerves when their sector is out of favour, especially over a prolonged period. Unlike a generalist fund, the specialist manager doesn’t have anywhere else to go at those times (On this note I’d classify SMT as being generalist rather than specialist because the sectors covered will change over time, according to the managers’ views).

Is there any specific purpose for the investments if they are not to be accessed until the children are 18, .e.g. helping to fund time at university? Or it the case they they will then be free to do as they please? If there is a purpose then the usual approach would be to gradually de-risk the investments by periodically selling out of more volatile assets - which might also be prone to steep falls over short timescales (not something that you would want towards the end of your own timescale) - and to move more into lower volatility assets which should hopefully hold up better.

For instance, a 50:50 initial allocation between Scottish Mortgage and Personal Assets could be left for eight or nine years, after which the holding in SMT would gradually be reduced and the proceeds put into PNL (which assumes that: a) SMT has delivered growth, and b) both funds retain their current investment objectives).

But if the investments do not have a specific purpose then you could just leave them to grow as they are.

Note: if you do go down the route of holding the investments in an ISA in your name, then I strongly suggest that you make a will which specifically details this investment and the split between the named beneficiaries, i.e. your children, and that their shares should be net of any taxes which might become due. Even if your current circumstances mean thay your children would inherit your assets equally, those circumstances could change in the future and could mean that this would no longer be the case. It’s just to remove any doubt over what is intended. I recognise that this is rarely something which people like to consider, but with my recent personal experience in this area I can say that it should make things easier for those that have to deal with such matters in the event of the unwanted happening.

Your other consideration in this area is that your ISA does form part of your estate for the purposes of inheritance tax. This perhaps might not be a consideration at the moment, but who knows what the situation might be in 13 to 14 years’ time.


#8

Hi @arkwelder I’m not sure what the money will be used for but I think it might be university. It depends on if the children want to go to Uni. I expect they will, but if not then it would be to start their adult lives with a savings pot of money.

Thank you for you advice. I’m not sure I understood all the terms you used ( I couldn’t guess what the SMT acronym meant, probably something obvious!), but I got the gist of a lot of what you said.

Thank you very kindly.


#9

Thanks for your advice and support @scjim and for the helpful article on Money Observer, it was very kind.


#10

Thanks @Kuhncha your examples with the arithmetic were useful and helpful to me and my Father in understanding this better. Thank you very much.


#11

Thank @mickbeaman We are taking your suggestion and going for a Junior ISA. I didn’t know they existed, so thanks again :slight_smile:


#12

Thank you @angieb. Your advice is very much appreciated and very helpful for my and my Father :smile:


#13

Thanks to everyone for your help and to WhichInvestmentTrust.com - behind the scenes they’ve answered all my loads of questions. Thanks especially to Alex Simpson and Dice McCairn at Which Investment Trust.

It’s taken me a while to come back to everyone because there was just so much new information for us to get our heads around. I really think I’ve learned a lot in only a few weeks. I understand, to some extent, many terms and concepts I didn’t even know exited until a few weeks ago.

So, what we are going to do, or decided to do, so far, is to invest in Junior ISA’s for all of the kids and put them in to Investment Trusts.

We are going for three trusts per child. Tow this year and one next year. For this year we think we are going to buy Scottish Mortgage and Biotech Growth trust. Next year we will buy a safer one for won’t of a better word.

The reason for buying both of these is because they can make more money if we leave them for a long time. We won’t move them or do anything with them until the children get to 18.

The help and pointers from everyone here has been so helpful. I am recommending this to all my friends. I am so glad I found this website, completely by accident.


#14

You got some very good advice form people @RachelS Good luck and I hope it works out well for you and your family.


#15

You’re welcome, @RachelS. Just try and remember to keep your eyes shut and stick your fingers in your ears when the markets are doing as they are doing right now!

Apologies for the acronyms - I do tend to make assumptions at times (and ramble!). SMT is the code for Scottish Mortgage Trust and PNL the one for Personal Assets.


#16

I’ve been investing the maximum possible in a Junior ISA for my daughter over the last 3 years since she was born, drip-feeding in around £340 per month. The aim is to have enough in the JISA to pay her university fees when she turns 18, and if there’s any surplus, it can go towards her living costs or a deposit on a house, or whatever. We will make decisions nearer age 18 about how much to put into “safer” trusts or even cash, so we have definite sums available for the fees, and how much to leave in place to continue to grow.

I’m now stopping new investments into the JISA, and my mother is taking over, gifting my daughter about £300 a month from her pension and savings. The money will be held inside a simple trust fund, with my daughter as beneficiary and myself as trustee, and invested in investment trusts by myself on her behalf. The reason for stopping the JISA is that the trust fund money could be used before my daughter turns 18, for example to pay private school fees, if we decide this is a viable option.

The trusts I’ve invested in are, in roughly equal proportions:

3i Group (III) - private equity investment, mainly in the UK and Europe
Baillie Gifford Shin Nippon (BGS) - Japanese smaller companies
Fidelity China Special Situations (FCSS) - Chinese medium and small companies
JP Morgan US Smaller Companies (JUSC) - the name is on the tin
Monks (MNKS) - global investments similar to Scottish Mortgage
Rights and Issues (RIII) - UK small companies
Scottish Mortgage (SMT)
TR European Growth - European small companies.

New investments will be added to these and perhaps one or two extra trusts like Edinburgh Worldwide (EWI) and Pacific Horizon (PHI). I’m obviously well-exposed to small companies and there is a lot of tech and biotech in there, but from everything I’ve read, over the remaining 15 years, these are probably the best sectors to be in for long-term growth. For the moment I would not invest in defensive trusts like Personal Assets, paired with SMT, because Personal Assets will just hobble the growth performance; I can always switch into more defensive assets if we get a major downturn, though market timing is always difficult and it might be best just to sit out the downturn and wait for the recovery.


#17

@matchmade Not sure if you are wanting comments but here are some points to make: Well done for such an early start! A Bare Trust (which I think is what you have) ceases at 18. Also as you are investing in a JISA, your daughter has full control over this at 18. It is in her name. You will have no control, other than parental persuasion! If you want to have control you will need to invest in your name, earmarked for your daughter, in an ISA for example. Just thought I would make you aware of that.


#18

@matchmade , not to say you are wrong to save to pay University fees (I was doing this until I started researching how it all works), but it might be worthwhile looking at the Martin Lewis site, where he explains that paying this upfront can be the worse thing to do,
https://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes (point 15)

You are better saving the money for a house deposit etc.

Also he was on Five Live 10-1pm show( sometime around 12.30pm) explaining this to.


#19

Over 20% up in 6m Rachel. This investing lark is easy!