The verdict is in. After months of debate, campaigning and uncertainty, Britain has voted to leave the European Union. While many of us wonder what this now means for our own investments – you may also be wondering what this means for your child’s savings with The Children’s Mutual.
It’s fair to say that the financial market didn’t get off to a great start this year and despite the increase in the price of oil there have been other contributing factors that have caused the markets to fluctuate. With falls in the value of the Chinese Stock market, the Bank of Japan moving to a negative interest rate and of course the uncertainty surrounding the UK EU referendum, it’s no wonder that we have been experiencing a volatile market.
What is a volatile market?
A volatile market can be defined as the tendency to rise or fall sharply within a short period of time – in other words it’s the ups and downs of the individual equities within the market. Volatility of the market is one of the main reasons why investors sell at the wrong time and often fail to benefit from any potential recovery over the longer term. Whilst it can be a natural instinct to want to sell in times of uncertainty to avoid the risk of further loss, don’t forget that as the market falls this reduces the cost of additional purchases you may make.
As highlighted by Schroders, one of the world’s leading investment managers, market volatility can present opportunities for longer term investors, with the short term investors (below 3 months) being impacted the most. Since shorter term investors are more sensitive to potential losses created by volatility, those with a longer view and willing to withstand a short stormy period can take advantage during such times. By investing regularly, such as a monthly direct debit, volatility can therefore provide an opportunity. Schroders have also indicated that beyond periods of 24 months the impacts of volatility tend to fade.
What does leaving the EU mean for my child’s savings?
As an investor, it’s natural to be concerned on the impact the Brexit decision may have on financial markets. But bear in mind volatility is not the same thing as risk, and if you succumb to volatility by selling under pressure you may incur a permanent loss for your child’s savings rather than just experiencing a possible temporary decline in value. After all, your children’s savings are a long term investment.
However, an approach to your child’s investment is ‘do not panic’ if the stock market falls. If you ride out the waves of a low market and invest more when the market is low, then you could benefit when the market rises, especially if you have invested more during any low period. Think through your decision rationally and make sure you consider your risk appetite, investment period and why you invested in the first place.
If you have a long term investment such as a Child Trust Fund or Junior ISA it is more than likely to increase over time if invested in Stocks and Shares compared to saving in cash. Whilst past performance is not a guarantee of future performance, the Barclays Equity Gilt Study 2016 shows that an investment over 18 years into equities such as stocks and shares, is likely to outperform cash 99% of the time (based on annualised real returns analysed since 1899). Over an investment period of 10 years the figure is 91% and over 5 years, it is 74% more likely to outperform cash.
Another thing to bear in mind is that uncertainty in the market can give rise to volatility. So, now we know the Brexit decision that is one less uncertainty. However, the decision to leave the EU creates other uncertainties, and these too could give rise to continued volatility in the short term, but consider the longer term view and weigh up your options. A hasty decision to exit into cash now will ensure that any losses your child has experienced will be realised.
The Bank of England governor, Mark Carney, has said that it is inevitable that there will be a period of uncertainty and adjustment following the result and that some market and economic volatility can be expected. However, both the Bank and HM Treasury are well prepared, have previously engaged in extensive contingency planning and will not hesitate to take additional measures as required as markets adjust and the UK economy moves forward.
Investing for the long term
The Children’s Mutual is part of Foresters Financial, who look after the savings of over one million children. These savings products are designed for those with parental responsibility to save on behalf of their children and can only be accessed by the child when they reach 18. It is likely that you will experience both rises and falls in your child’s investment over the term of the plan; however the value of the account cannot be determined until the account reaches maturity, when your child is 18.
Dealing with Volatility – the importance of diversification
Child Trust Funds (CTFs) and Junior ISAs held with The Children’s Mutual are invested in funds that aim to match the performance of a wide range of UK company shares, rather than just a few. The idea of diversification is that whilst one investment may be going through a bad time, then others may not – and this diversification helps to smooth out the risk of volatility.
Also, under current Government guidelines, to help protect the value of the account, the CTF will have the option to gradually move into lower risk assets – government bonds and cash – for the final years of the investment period. This occurs so that as the child’s 18th birthday approaches the risk of the account losing value if share prices fall is reduced.
So, what next?
As an investor before you make any decisions, consider the best options that will meet your original goals of investing. Be aware of risk during times of volatility, but don’t panic. Remember that an unsteady market may be a result of specific economic events, such as the EU referendum, and may not be for the long-term. But, bear in mind that past performance is not an indicator of future success. The value of your investment can fall as well as rise, and as with all stock market investments you may get back less than paid in.
Remember what you are saving for
One thing is for certain, a lump sum when your child reaches 18 will help them realise their choices and opportunities – whether that is helping them buy their first car, pay towards the cost of further education or possibly travel the world.