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 = £4.44

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 prices.

(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.

Back to UK Childrens Savings Guide

also read about Child Trust Funds