In January this year I wrote about a lucky teenager that my friend and I were paired with for a round of golf in Melbourne.

I don’t call him lucky because he had to play with us (quite the opposite). I call him lucky because his dad invested on his behalf from day one.

I don’t know the amounts that were invested, but I do know the boy’s Dad invested in global index funds. If we use $200 per month and an annual return of 7% as an example, the young golfer would have a portfolio worth $84,000 by the time he was 18.

How amazing, I thought. And definitely something to keep in mind when we have kids of our own in a few years. I’m returning to the topic today because life comes at you fast.

By the time next January rolls around, my partner and I will be very close to welcoming our first child.

How I’m thinking about investing for my child

For some context, I should mention that my partner and I are moving back to the UK to have our kid. This obviously changes the regulatory and tax environment in which we’ll be investing for them.

In Australia investing for your kids has tax ramifications that aren’t always straightforward. In the UK it is easier because we have something called a Junior ISA.

This type of investment account can be opened for a child at birth, and up to £9,000 can be added each tax year until they turn 18. Now for the good part – there are no taxes on capital gains or income within the ISA.

Given the weather and lifestyle losses we’ll be copping, I hope you can allow us this minor win. Now let’s move on to the parts of my approach that can be replicated in Australia or wherever you are in the world.

Investing with purpose

When it comes to investing towards a long-term goal, there are going to be times when the money being contributed could be useful for other things. Having a clear sense of purpose can keep you on the right path.

The main reason I am doing this is to help my kid make the most of something they can never get back – time.

Which investor, knowing the power of compound interest as they do now, wouldn’t go back in time and invest earlier if they could?

As we touched on before, there is also the potential to give my child a meaningful financial head start by the time they are a young adult.

  • If home ownership was a goal, they wouldn’t feel quite so hopeless about getting a down payment together.
  • They could leave all of the funds invested and have a good shot at building a large nest egg, given the funds would still have decades to compound.
  • Or they could take some income from the investment (to fund a passion, perhaps) while leaving the rest invested.

I don’t really mind which one my child goes for – but at least they will have options.

I also hope it will give them an appreciation for the opportunity that stock markets give us all to build wealth through business ownership.

Taken together, these factors are my “why”.

How much am I going to invest?

I arrived at my target monthly investment by setting a long-term goal in sterling and working backwards.

I think that having £20,000 (around $41,000 Aussie) with today’s purchasing power would give my child with some solid options at age 18.

Assuming 3% annual inflation for 18 years, this would require the portfolio to be worth around GBP 34,500 or $71,000 in nominal terms by that time.

From a standing start, this would require £100 or $205 per month in contributions and a 5% annual return, both of which seem doable.

How am I going to invest the money?

Let’s start by talking about asset allocation.

The time horizon of these investments is at least 18 years, and I am seeking inflation-beating returns of at least 5% per year.

In my opinion, all roads lead to a portfolio skewed heavily (if not completely) towards equities. Now for the qualities that I would like this investment to have.

Above all, I am seeking simplicity and low costs.

Costs come straight out of returns. And when you are investing small amounts every time, even brokerage fees of $2 a pop can turn into a massive self-enforced headwind.

As for simplicity, I doubt I’ll have enough time to be picking stocks and I don’t want to hand over something complicated when the kid turns 18.

Taken together, I have chosen to take a ‘portfolio in one trade’ approach using index-tracking funds. This will allow me to set up our monthly contribution and essentially do nothing else.

If my kid wanted to adjust the portfolio in any way at 18, this would also be a lot easier for them than if I had loaded them with a dozen or more stocks.

Picking a product

As for the investment product itself, I am not completely decided yet.

It might be something as simple as a low-cost index fund of shares listed on the UK stock market. Or it may be an ‘all in one’ growth portfolio option with allocations to different stock markets globally.

There are several options of this nature available for Aussie investors.

Vanguard and Betashares, for example, both offer ‘all-in-one’ growth portfolios with no brokerage and low fees (0.27% for Vanguard’s VDGR and 0.17% for Betashares’ DHHF) when you invest directly.

To my eyes, something of this nature would make the perfect ‘set and forget’ investment over a time period as long as the one I’m looking to invest for.

Of course, these products all have their intricacies (different allocations, fees, et cetera) and should be compared carefully.

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