3 simple rules for investing for your kids
I would love to see as many parents as possible invest for their kids as it has so many benefits. However, many parents are not confident about investing as it’s not something they were taught in school. They worry about the potential risks from investing due to the news headlines they see. In my previous blog I set out why parents should consider embracing these risks.
In this blog I want to set out three simple rules to make investing simple, reduce the risk of investing and give more parents the confidence to invest for themselves and their kids.
Sticking to these rules means you will avoid many of the common mistakes that people make when investing. Hence, by adopting these rules you could be doing better than a lot of other investors who have been investing for many years.
RULE 1 - Invest in the entire market, don’t pick individual companies
People think of investing as having to pick which companies will do really well in the future, i.e. finding the next Facebook or Apple. This is very hard, even the professionals get it wrong more often than right. The key is to not invest in one company but invest in the entire stock market.
This reduces the risk that you invest in a single company and then that company goes bust and you lose most or all of your money.
By investing in the stock market (via a fund), you invest in loads of different companies at once. It means that if one company goes bust the impact is relatively small. On the upside, if there is a company that does really well, you will own some of it. You might feel that on average the companies that go bust will offset those that do really well but that’s not the case. If a company goes bust, you could lose your £100 investment and no more (as an example) but if a company does really well then that £100 could be worth thousands in the future. So making sure you have some money in lots of companies means you will benefit from companies doing really well.
A quote from one of the most famous investors, Jack Bogle (founder of Vanguard):
“Don’t find the needle in the haystack, buy the haystack”
RULE 2 - Keep costs low
There are many investment funds out there that say they can beat the market (i.e. say they can find companies that do really well) and show you charts of how they have done so over the last few years.
The issue is that these funds charge higher fees and very few are able to beat the market over the long-term (even if they have done well recently). You are best just finding a fund that doesn’t do anything other than simply investing in the entire market and, keeping your costs low.
The return you get from investing is not certain but costs are. So a certain way to improve outcomes is to reduce the costs.
To give you an example of this: a friend was investing for his kids but paying 1.5% pa for a fund to manage this. It was great he was investing, however, there was scope to do more with those investments.
He has now switched and is only paying 0.38% pa. If he was investing £50 per month, that works out to be nearly £2,000 more going to his kids.
RULE 3 - Leave the investments alone, ignore the short term
In the short term the value of investments will move all over the place and this can lead to investors getting worried and not knowing what to do and potentially doing the wrong thing.
The trick is to not act on your feelings.
This means that if your investments go up loads in the short term, don’t get over excited. If your investments go down loads, don’t worry. Your kids aren’t going to get the money for many years and what happens to the investments in the next few years will have no bearing on the price in the long-term.
Overreacting will lead you to lose money most of the time. You just need to leave the investment alone. The less you react, the better you could do.
I have been applying these 3 rules to the investments my family makes and also applied them when advising some of the largest investors in the world (governments, insurance companies and retirement schemes).
How do you do these three things?
The good news is that it is easier than ever to adopt these rules. You can invest in an index-tracking global equity fund. These are funds that invest in the global stock markets (rule 1) and just track the market rather than “try” to beat the market. As they are index-trackers, they are low cost (rule 2).
We have put together a step-by-step guide to help parents set up an investment account with an investment provider. www.bluetreesavings.com/guide
Once set up, consider paying into the fund monthly and then leave it alone (rule 3) just like you would with a savings account.
There you have it. Three simple rules that will have you investing like a professional long term investor.
ACTION: Start setting up your investment account now using our guide.
Thanks for reading!
Other related blogs:
How to save for your kids? (The benefits of investing your kid's savings)
This blog could change your kid's financial future (reducing the fear of investing)
Recommended book on investing:
'Unshakeable' by Tony Robins