Investing for two or more children: Do you mirror strategies?
Junior ISAs are proving popular among parents with the latest statistics from HMRC revealing that £419m was subscribed into stocks and shares JISAs in 2018/19, up from £385m in 2017/18 and £333m the year before.
As well as up to 18 years of investment growth, the returns are also tax-free.
Maike Currie, investment director, workplace investing, at Fidelity International, says: “Junior ISAs offer parents the opportunity to save for their children without eating into their own annual ISA allowance, while allowing plenty of time for the money to grow before their child turns 18 and is able to access it themselves.
“Another attraction is that once it has been set up by the parent or legal guardian, anyone can contribute including friends and family. Any investments held within the Junior ISA are free to grow tax-free.”
But how do you invest for two or more children?
Currie says investing for two children and managing their investments fairly can often leave parents facing a number of challenges.
“Do you pick the same investments for both children? How do you make up for the shortfall one child may face due to their market timing not being as favourable as the other?
“There’s also the phenomenon often referred to ‘second sibling syndrome’, with child number two, lagging your first child when it comes to childhood memorabilia and baby photos, as well as investment returns; the latter often simply because they have had less time in the market,” she says.
While mirroring investments for both children may seem fairer, returns will still differ as initial investments will be made at different stages.
She says: “Ultimately, it comes down to personal preference. I have chosen different investments for my two children, while ensuring both are well diversified across different regions and asset classes.
“This makes for some interesting discussions and healthy investment-related sibling rivalry when they’re older. If one child’s investments seem to be outpacing the other’s by a significant margin, you can always aim to even this out when it comes to the annual ISA contributions – topping up a bit extra for the child’s whose investment returns are lagging.”
How to balance returns
For Sam Slator, director of FundCalibre, the ‘issue’ with the JISA is that it belongs to the named child, so you can’t split it equally for each child when they reach 18.
Therefore, she’s aware that returns differ, particularly where it is some years between investing for child one and child two, and as such, she attempts to balance the difference with a child pension.
Slator explains: “I started investing in my son’s JISA 10 years ago (then it was the Child Trust Fund). I used to put my child benefit money in there for him. When I was no longer eligible for child benefit, I instead put in a lower amount of £50 a month.
“When my daughter was born six years ago, I just put £50 a month in hers. When they both get money from relatives, it goes into the JISA as a lump sum and my parents also contribute monthly. But obviously my son is better off as I invested more for him at the start.
“To ‘balance’ this, I invested the same amount (£2,000) into a Junior SIPP for them both when my daughter was born. In my head, she has four years’ more growth on that than my son does, so it’ll even itself out.”
Slator added that once her eldest reaches 18, she’ll make a note of the amount of money in his JISA and then top up her daughter’s account with the same amount when she turns 18.
“By the time they get their pension I’ll probably be long gone so they can argue over that themselves!”
Risk profiles will be different
Keir Ashman, pensions and investments specialist at Bancroft Wealth says if your children are of significantly different ages, it may be better to construct their portfolios differently, as their risk profiles are likely to be different.
“If, however, they are of a similar age then the portfolios would be very similar, if not identical. The portfolio should be devised with conviction using an asset allocation model and funds recommended by a professional fund manager. It would prove a difficult conversation to one of the siblings at age 18 if you chose very different portfolios and one had performed well and the other not so,” he says.
Ashman adds that with separate portfolios, you can’t completely remove the risk of each child holding different amounts when they turn 18.
“Even if they are built with the same funds, if they are set up right after the child is born the return can vary significantly due to market timing.”
As such, he recommends investing monthly rather than as a lump sum on an annual basis to reduce the difference in final values.
“Another alternative is to pool all money into one diversified portfolio, topping this up as further children are born. You can then distribute funds gradually to the beneficiaries as and when you feel they would benefit, keeping a record of how much has been paid to each. When you want to close the fund you can make a final distribution, taking account of previous payments to ensure that each child has received a fair share.
“As a third option, you could set a target for a final value for each child and move to lower volatility investments once this has been reached. This would help to protect the fund against a sudden fall in value if you wanted the beneficiary to receive the money at a particular time, such as their 21st birthday,” he says.
Focus on starting to invest for your child/children
While strategy, allocation and diversification are important factors to consider, for Adrian Lowcock, head of personal investing at Willis Owen, the key focus is on getting started with investing and a JISA is a good place to invest money due to its tax wrapper and restriction on access.
He said: “The sooner you do, the better. Given that most families will have a lot on their hands with their children, you should make it as easy as possible to manage so you don’t have to spend time making changes.
“Unless you make the investments at the same time for each child you are likely to see some differences in performance for each child – this is unavoidable. But you can address it later by topping up the fund with less money in it.”
Lowcock suggests having a portfolio which is identical in terms of weights in each investment and therefore performance will be very similar, though the contribution dates and amounts may vary.
“I would suggest either having a one-stop multi-asset fund or a global equity fund to begin with as this gives broad diversification and can act as long-term investments.”
Currie agrees that a global equity fund may be a good option to give exposure to a spread of economies.
“This type of diversification can be useful as we do not know which economies will provide the best returns over time. With a global equity fund, the manager also has a bigger universe of shares to choose from.”
She lists the Rathbone Global Opportunities fund which seeks to invest in companies with strong future growth, that are currently under-appreciated by the market.
“It offers investors a global portfolio of predominantly mid and small cap companies selected for their growth prospects,” she says.
She adds: “If you’re investing for your child from birth, you can afford to take on more risk without worrying too much about the inevitable short-term bouts of volatility. For a newborn or toddler, emerging market funds offer the potential to tap into the superior long-term growth prospects of the developing world. Examples include the Fidelity Emerging Markets fund, which has a solid track record and is managed by Nick Price, a seasoned stock picker.”
There’s also one piece of advice to parents: “You may want to consider de-risking your investment as you near the end of the investment period. However, be careful about over-trading as there are costs involved when buying and selling funds,” Currie warns.
Ashman says if your children won’t need access to the capital for ten years or more, then a higher risk portfolio may be appropriate.
He says: “This could be used to ride the ups and downs of the investment cycle, offering a chance of higher returns as it’s more likely that any losses can be recouped if the market suffers a downturn.”