Keiron Root considers the first principles of investing.

One of the recurring themes of domestic politics for as long as I can remember has been the importance of financial education. And yet despite numerous formal initiatives over the years, from both the public and private sectors, this noble objective rarely seems to make much progress.

However, it is just possible that the current Child Trust Fund (CTF) scheme may prove to have a greater impact. This is partly because one of the stated intentions of this state-sponsored  savings plan is to encourage children to understand the process of saving from an early age, but also because the arrival of the CTF vouchers is often a catalyst for parents to consider not only the financial provision they are making for their children, but their wider investment strategies as well.

Keeping it simple
One of the hidden impacts of the current turbulence in the global economy is the effect that it has on investor psychology. Regular surveys of investor confidence suggest that there is precious little of it around at the moment, with some suggesting that significant numbers of people don’t expect to be able to invest anything for the best part of the next decade.

If such an approach is unwise for adult savers, it is even less appealing where the objective is to build up a nest egg for a child while they are growing up. The great thing about saving on behalf of a child is that there is a target date for the investment to mature but, providing you start early, there is also plenty of time to follow a coherent, long-term investment strategy in order to achieve the optimum return.

Most parents and grandparents making such savings will not want to take too much risk, but if you start early enough, you shouldn’t have to. Children approaching their 18th birthdays this year, whose families have been investing regularly on their behalf throughout their lives, may have seen the value of that fund reduce during the recent turmoil, but will still be reaping the benefits of the greater number of profitable years for investment that we have seen since 1991.

Similarly, a child arriving in the eye of the current economic storm should be able to look forward to many more future years of positive returns before they need to use their nest egg for driving lessons, college fees, house purchase or whatever their objective is in two decades’ time.

The virtues of consistency
That is why we publish these Essential Guides to Saving for Children twice a year, as a reminder of the simple fact that the earlier you start saving, the more effective that saving is likely to be, and to highlight the various ways in which this can be done most efficiently, where the ultimate recipient is currently engaged in the serious business of growing up.

And starting early is only part of the process. As with any form of long-term investing, the key is to continue to invest, either through a monthly savings plans or regular top-ups to the initial portfolio, and to monitor that investment. For children’s savings also need managing, possibly adopting a ‘lifestyling’ approach, whereby slightly more risk is taken in the early years to generate growth, which is then protected as the maturity date approaches by moving into more defensive investments.

Ultimately, the choice is yours, but, as this guide amply demonstrates, there is much more to saving for children than a stakeholder default option CTF fund or a savings account with a piggy bank and a birthday card. And the way to maximise their returns is to take a proactive approach to managing their savings from the moment they are born.