In the first of a series of articles discussing ways to invest for specific goals, we look at funding a private school place for your child and the important implications this can have for your investment strategy.
A lot of the principles of investing apply in all cases, regardless of the specific reasons you are trying to grow your money, or what you ultimately plan to spend it on.
Golden rules such as having sufficient diversification and doing plenty of research always apply.
However, when it comes to specific goals, there are some things that become more relevant and important in certain scenarios than in others.
Consider the case of saving to put a child through private school. Funding a place can be a large and long financial commitment.
If your child starts from primary age and goes all the way through to A-levels, you are looking at 13 years, and many thousands of pounds; often into six figures, depending on the schools in question.
You may be lucky enough to have savings set aside for such an event, or have received help from relatives, perhaps a lump sum to get you started. This too will need investing appropriately.
So, what are the characteristics of financing school fees that could have a bearing on how you invest?
If you know early on that you want to send a child to private school, you have a highly valuable five-year window from when they are born to the primary school start age.
If you are only keen on sending them to a private secondary school, you have 11 years.
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The earlier you start investing after their birth, the better. The good news is that if you have a full five or even 11 years in hand your options are very wide.
Crucially, you can afford to target higher-risk investments ,which can produce the best returns. There’s no need to squirrel away cash or target very low risk, low return options in the early stages of your journey.
A well-diversified portfolio of equities funds is highly likely to reward you nicely over five or more years.
Bear in mind the US accounts for over half of the global stock market by weighting and has many of the world’s best companies, so a healthy allocation somewhere over 50% is sensible.
If you are starting early enough, you may also wish to consider emerging markets funds. Typically, emerging markets funds are more volatile than developed markets, but the upside is they can outperform in growth terms.
This is why they make a lot of sense for investors who have a good number of years before they need to cash in.
Accumulating capital is just stage one. You will also want to consider tapering down into cash as the age at which the child will start at the school nears, and continue this gradually through the years.
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This is because the stock market can be volatile over short time frames. The precise speed at which you switch your investments into cash will be an individual choice and you may wish to consult a financial adviser.
Certainly, you would want to have enough cash stashed away to cover a couple of years’ fees at any one time. This would allow you to rest easy and wait it out if there is a fall in the stock market, like the one we saw last year.
Once the child has begun at the school you have chosen, something else you may want to consider is income funds.
Given the fees are payable on an ongoing basis each term, a good income fund or two may be helpful.
Income funds are designed to offer investors consistent flow of cash to spend while preserving, and ideally still growing, their principle. They do this by targeting companies with strong balance sheets and good, reliable dividends.
Picking the right investments
In terms of which funds to pick, the interactive investor Super 60 is a good place to start. Within it, there are US equities, emerging markets and income fund picks that could fit the bill.
As always, you must do plenty of research and may wish to consult a financial adviser before investing.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.