03 May 2017
Alex, currently expecting her fourth baby, contacted us because she has got into a muddle over her Junior ISAs and wanted BM’s thoughts on stocks and shares JISAs and/or independent advice.
She researched a good few options on the net and after nearly 2yrs of “dithering”, finally took the plunge and opened up three stocks and shares JISA for her children aged 9yrs, 7yrs and 2yrs with Hargreaves Lansdown. She transferred the two older children’s child trust fund accounts from The Children’s Mutual (A Foresters Company) to Hargreaves Lansdown's Portfolio+ service and opened a JISA under the same service for her younger child.
She opted for a multi-manager ‘adventurous growth’ investment fund for her youngest and is now worried this might be too risky. She’s also interested in whether it is more beneficial making regular but small monthly savings contributions OR one lump sum into the fund once every 6 months or so. Here’s what Holly said:
"I love the idea of 2 years of “dithering”! I have done that about loads of things too! Well done for sorting this out.
The term ‘risk’ is misleading I think. What is riskier? Lying in bed for 18 years or running about a busy City? It depends if the risk is getting run over by a bus, or of turning into a big, bored unhealthy blob! In this example, cash would be the very safe bed option and shares would be the running around option.
Over 18 years, shares are apparently 99% more likely to do better than cash. They have also offered better protection against inflation in the past and with interest at 0.25% today, I’d argue that’s likely to continue. So investing for a 2 year old is exactly when we should be looking to ‘riskier’ investments – to stay in the ‘cotton wool bed’ of cash doesn’t really make sense.
You do have to accept that markets will go up and down like fury and it’s bumpy – but even your 9 year old has a long enough run at this for shares to be what I think is the sensible choice. My kid's JISAs are with Hargreaves in even spicier stuff. However no-one can guarantee that the world won’t go crazy and you do have to accept that returns are not guaranteed.
So your selection doesn’t feel imprudent. I think it’s really important we explain the difference between investment risk (volatility) and being cavalier or imprudent. Does that make sense?
On your choice of platform, Hargreaves is not the cheapest but they offer decent value and they are big and solid. The Multi-Manager options they have are pricier than picking your own funds. It’s like a ready-meal versus choosing the ingredients and making the meal. But for less confident investors it’s not a bad approach.
A cheaper option would be the Vanguard LifeStrategy 100% option, also available through the Hargreaves platform. This is a “passive fund” and costs 0.24% instead of the HL Multi-Manager UK Growth which is 1.39%. But they’re different beasts. Passive funds are where computers just pick the world’s biggest stocks in proportion to their size. And if oil is out of favour, well you still have the oil shares. And if retail is going gang-busters, well you don’t get any more than the proportionate weighting. You are buying the average.
Active managers cost more because they employ expensive people to make a bet on which stocks will do better – if they love M&S, they can buy twice as much of it. If they hate easyJet they can sell it all. Passive guys can’t do this. They have to hold what we call the ‘index weighting’ – if HSBC is 5% of the main basket of shares, the FTSE 100, they have to hold 5% in HSBC shares. This decision is up to you.
The good active guys will do better than the passive guys. But by definition, after fees, more than half the active guys will not do as well as the passive guys. So you can pay more fees for muppets! I have some passive stuff but more than half of my personal money is in active.
On your monthly saving question, I suspect that setting up a direct debit is the easiest. Then you don’t have to remember to do anything. There’s also something to be said for ‘dribbling in’ as you will never get stuck investing a big chunk when the market is sky-high.
I think your basic course of action is fine. You could always get cracking with the monthly direct debit for the multi-manager funds you select – and review after a year. As the fund builds in value you can see if it makes sense to move to the more expensive Portfolio+ option on Hargreaves OR to include a lump sum of the cheaper passive funds which will bring overall costs down."