One of the three rules of wealth that I encourage parents to help their kids follow is to 'Invest what you save'. A common question that I get asked is:
“We want to invest for our kids, what should we invest in?”
In this blog, I set out some tips to help you start investing for yourself and your kids.
Principles for investing
Before I go into how to start investing, I want to reiterate the four key principles for investing. If you follow these principles, then you will do better than 90% of people who invest and will be on your way to building significant wealth.
Long-term mindset - Investing is a bumpy road. Don’t expect to make vast amounts of money quickly or get disheartened if it seems like it isn’t going your way after a short period of time. Invest your money and then leave it alone, i.e. don’t think of investing as ‘buy / sell / buy / sell’. .
Don’t pick individual companies - Trying to pick which individual companies will do well or poorly is super hard. If you invest lots of money with one company and it goes bust then you can lose a lot. Consider investing in a basket (‘an index’) of companies so that you get exposure to hundreds or thousands of companies. .
Ignore the noise - This is the hardest one. When markets go down, it can feel scary (like a storm) but markets always recover if you are patient. Also, if someone tells you of how they are making loads of money investing (bitcoin, GameStop etc), remember that these short term ‘trends’ don’t last and sticking to investing in an index of companies over the long-term is the surest way to build significant wealth. .
Keep costs low - There are lots of expensive ways to invest, i.e. people telling you they can make you a lot of money if they manage your funds for you. Just remember, the more you pay in fees, the less money you are keeping (try to keep costs below 1% of the amount you invest).
Jargon Buster - What is an Index Fund?
In this blog, I focus on investing in ‘Index Funds’ as that is the easiest and cheapest way to invest. Index Funds are a way of investing that tracks the performance of a collection of companies.
For example, if you invested your money in a FTSE 100 Index Fund (or FTSE 100 Index ETF) you would be gaining exposure to the biggest 100 companies in the U.K. (with a bigger exposure to the biggest of these companies) and your investments will go up or down based on the performance of these companies as a collective.
Side note: An ETF is an 'Exchange Traded Fund' which also allows you to invest in indices.
As the fund is automatically investing in these companies based on their size, the cost is relatively low (compared to ‘active funds’ where you pay someone to make predictions about which companies will do well or not).
“By periodically investing in index funds, the know nothing investor can actually outperform most investment professionals”
Quote from Warren Buffett (one of the world’s richest people and seen by many as the greatest ever investor).
If you are finding this article interesting, please support me by ordering a copy of my book, Grandpa's Fortune Fables. The book helps kids learn about money, including investing, using fun stories.
Simple analogy for setting up an investment account
Think of the process like picking a box of chocolates.
Step 1 - Decide what types of chocolate you want in your box (e.g. a bit of every type, just milk chocolates, or just chocolates with nuts)
Step 2 - Find a box of chocolates which includes the types of chocolates you want (e.g. Cadbury’s selection box, Nestle’s Quality Street)
Step 3 - Find somewhere that sells the box of chocolates (e.g. Amazon.com, local mini-mart or supermarket)
Simple, right? Now let’s go through this same process of setting up an investment account.
3 Step Guide to Investing in Index-Funds
Here are the 3 steps which I will go through in more detail below.
Step 1 - Picking an index to invest in (what types of chocolate)
Step 2 - Finding an investment fund which invests in that index (what products sell your types of chocolates)
Step 3 - Find somewhere to buy the fund (shop that sells the box of chocolates).
You can actually skip steps 1 and 2 and go straight to step 3, if you are willing to pay a little more. I will talk about this option later.
Step 1 - Picking an index to invest in (what type of chocolates)
As a new investor, you don’t want to be investing in individual companies. You want to be picking an index (collection of companies).
Examples of indices:
Global indices: A combination of thousands of companies around the world - FTSE All Cap World index or MSCI All-World Index.
Global (socially responsible) indices: A combination of companies, from developed countries, which are socially and environmentally responsible - FTSE Developed All Cap Choice Index or MSCI World SRI Index
UK indices: A combination of the biggest companies in the UK - FTSE All-share Index or MSCI United Kingdom Index
US index: A combination of the 500 biggest companies in the US - S&P 500 Index
Whilst some people invest in a number of indices, you can gain exposure to many different companies by just investing in one broad market index (like the above).
As an example, let's assume Margaret wants to invest in companies from all around the world but wants to minimise investing in companies which aren’t making the world a better place. She therefore decides she wants to invest in the FTSE Developed All Cap Choice Index.
Step 2 - Finding an investment fund which invests in that index (what products sell your types of chocolates)
There are usually many different funds which allow you to invest in the index you’ve chosen.
Examples of funds for different indices:
Global indices: Fidelity Index World Fund or iShares MSCI World ETF or Vanguard FTSE Global All Cap Index Fund or
Global (socially responsible) indices: Legal & General MSCI World Socially Responsible Investment (SRI) Index Fund or Vanguard ESG Developed World All Cap Equity Index Fund
UK indices: iShares MSCI United Kingdom ETF or Vanguard FTSE UK All Share Index
US index: Fidelity Index US Fund or iShares Core S&P 500 ETF
These funds may vary in terms of their costs (known as ‘expense ratio’) and the minimum investment amount.
Back to our example, Margaret has decided she wants to gain access to the ‘FTSE Developed All Cap Choice Index’ via the ‘Vanguard ESG Developed World All Cap Equity Index Fund’ due to the low fees and Vanguard's solid reputation in the market.
Step 3 - Find somewhere to buy the fund (shop that sells the box of chocolates).
Once you know what fund you want to invest in (Step 2), you need to find a way to invest in that fund.
In terms of the chocolate analogy, this is finding the shop. In this case, it’s not called a shop but called a ‘broker’.
In most cases, there are many different brokers for each fund. Most of these are now fully online so you can keep your costs low. In some cases you can get direct access to funds by the fund providers to reduce costs, for example, Fidelity and Vanguard.
Examples of brokers based in different countries:
US: Charles Schwab, eToro (for ETFs), Robinhood (for ETFs)
Hong Kong: Interactive Brokers
Each broker will vary by country and in terms of how much they charge, their level of customer service and minimum investment size. One helpful website for comparing UK brokers is boringmoney.co.uk.
Tip: Don't invest via your high-street bank. They usually charge high fees and do not have the best selection of funds available.
In our example, Margaret has decided to open an account directly with Vanguard so she can invest in their Vanguard ESG Developed World All Cap Equity Index Fund. Within minutes, she’s set up an account in her kid's name and is starting to invest for her kid.
Skipping steps 1 and 2: Robo-Advisors
There are now companies which will do the first part for you. This are called 'Robo-Advisors'. You simply just say how much you want to invest and they do the rest. They charge a bit more for this (as you’d expect) but it's not necessarily a bad choice for those who want to invest a small amount and, quickly.
To give you an indication of the cost:
If you go via steps 1, 2 and 3 - you can expect to pay around 0.35% to 0.50% of the amount invested each year in fees (£3.50/£5 per £1,000 invested).
If you go straight to step 3 - you can expect to pay around 0.75% to 1.0% of the amount invested each year in fees. (£7.50/£10 per £1,000 invested).
Examples of companies that offer this service in different countries include:
(Note, this is not an exhaustive list!)
US: Betterment and Wealthfront
Singapore: StashAway and Squirrel Save
Hong Kong: StashAway
Which option is best?
Everyone will have their own opinion on the best type of chocolates but the important thing is that you have a box of chocolates.
Unfortunately I’m not allowed to state which option I believe is most suitable for new investors (as there are strict regulations about providing that specific advice).
I note that in a lot of cases, people spend too much time and money trying to figure out which option is best but in truth any option is better than not investing at all over the long-term. I talk more about this in my blog about risk here.
Each of the above examples will give you exposure to a wide range of companies. There might be times when one index does better or worse than others but remember that 90% of how well you do when investing is following the 4 principles at the start of this blog.
Summary
Whilst there are plenty of options - which can make investing seem hard - remember that getting started is 90% of the outcome. I hope this guide to investing index-funds has given you enough information to open an investment account for yourself and your kids.
Don’t delay, start investing for your kids today!
If you do have any questions then please let me know via will@bluetreesavings.com (as mentioned, I can’t provide specific advice but happy to guide you as much as possible or point you in the direction of resources to find someone who can provide specific advice).
Remember to teach your kids about the stock market by reading this blog 'How to teach my kids about the Stock Market' or ordering them a copy of Grandpa's Fortune Fables
Thanks for reading!
Will
P.S. This blog is for education purposes only and Blue Tree Savings Ltd. takes no responsibility for actions taken as a result of reading this. Blue Tree Savings Ltd has no association with, and is not compensated by, any of the investment companies mentioned in this blog.
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