Should You Invest
In Shares For Your Child?
Childrens' Savings Guide
While investing in the stock market is always a bit riskier
than cash savings, historically the stock market has always
risen in value faster than cash over the long term.
This means that your money could potentially grow much
faster if you invest in the stock market.
In this section I am going to look at one powerful reason
for investing in the stock market - and why you should consider
saving a small amount regularly, rather than one lump sum
and nothing else.
Pound Cost Averaging (or how to
profit from market downturns)
Despite its strange-sounding name, Pound Cost Averaging
is a pretty simple concept. What it enables you to do is
to invest in the stock market without having to worry about
timing your purchases correctly.
Here's what I mean.
Let's say you are investing in an investment fund that
tracks the whole of the FTSE100 - you don't buy individual
shares, just 'investment units' in the fund. As the FTSE100
goes up and down, so does the value of your units.
You are investing £100 per month.
Month 1 unit price = £5
You buy 20 units
Month 2 unit price = £4
You buy 25 units
The average price you have paid for these units is £200/45
By month 3, the unit price has risen back to £4.50.
Although this is still lower then your month 1 purchase
price, you are already in profit because when prices were
lower, your monthly payment bought you more units than when
prices were higher.
Because of this, your average unit purchase price will
always be lower than the actual average price of the units.
By drip feeding in money to your investment each month,
you avoid the main risk of a lump sum investment
- buying at the top of the market.
Instead, you can leave your investment on auto-pilot, safe
in the knowledge that you will benefit from rising and falling
(It's true that theoretically, you could make more money
by investing all of your money at the exact lowest point
of the market, but it is very rare to guess accurately when
prices are at their lowest. You would be highly unlikely
to get it right - most professionals don't).
Start As Soon As Possible…
It almost goes without saying that just like compound interest,
pound cost averaging is most profitable over long periods
of time - as are all stock market investments.
The sooner you start, the sooner your child could be building
up a nice nest egg with which to start their adult life.
to UK Childrens Savings Guide
about Child Trust Funds