Ethically Investing for Children (Or Yourself)

Last week, we got this message from one of our followers on Instagram:

I have two young children and when my grandmother passed away a few months ago, she kindly bequeathed money to them…and asked that they don’t touch the funds until they’re 18yo respectively.

What are your thoughts on ethically investing for children? E.g.: Would you look at an ethical Kiwi Saver fund or perhaps buy shares in a sustainable initiative that will benefit their generation as well as be a sound investment?

With Cecilia being a director of Pie Funds, we were only too happy to oblige.

First and foremost, investing on behalf of your children is an excellent way to set them up for the future, and will advance them far greater than simply leaving money in a savings account.

Why is investing for children so important?

Investing is a long-term game, and the more time you have, the better. Investing long term means you can invest in potentially higher risk funds (more on this later), and means you are more resilient to the peaks and troughs of the market.

Secondly, investing for children will mean they have far more money in the end. For example, if you invested $2000 today and left it for 18 years (assuming an average rate of return of 10% annually), you would have $11,119.83. That’s a return of $9,119.83! Although not many investments return 10% per/year currently. 

Naturally, this number would increase significantly with regular contributions to this investment and/or a longer investment window. You can experiment yourself with Money Hub’s compound interest calculator.

Is investing better than saving?

If the money is intended for the long term, investing is the best option. Leaving money in a savings account can actually cause you or your children to lose money long term, all thanks to inflation. Inflation refers to the gradual price increase of living costs such as food, electricity, rent, etc. Essentially, inflation rates are around 1.5-2% per year, whereas current interest rates on savings accounts are sitting at around 1%. On top of this, many savings accounts will charge a fee, meaning your savings will actually be decreasing over time.

What is ethical investing?

Investing is putting money into an asset of choice and expecting to profit. There are a few different types of asset classes including shares, fixed income (bonds), cash and property. Investing ethically means that your money is exclusively invested in assets with ethical values and does not invest in assets such as firearms, pornography, gambling, tobacco etc. When investing, you can choose yourself which companies to support, or you can find a good managed fund to ethically invest on your behalf.

How to get started with investing for children (or yourself):

Getting your children involved in the investing journey is a great way to start conversations around money and planning for their future. Helping them to understand the value of saving and investing early on is a great way to set them up for a lifetime of strong financial literacy. A good first place to start is setting up a Kiwisaver account for your child, and choosing a fund which has ethical principles and low or no fees for kids. For example, Pie Funds, the aforementioned investment company which Cecilia is Director of, offers the Juno Kiwisaver Fund which doesn’t invest in firearms, tobacco, or illegal drugs and has no fees for under 13s. This is just one example of the many excellent funds available which can be found through a quick internet search.

Beyond Kiwisaver, there are many ways to enter the investing world. With the rise of micro-investing platforms such as Hatch, Sharesies or Invest Now, investing has become easier than ever. The advantage of these platforms is that you enter with a lower initial investment, and pick between a range of managed funds, ETFs, and individual shares. You could get your children involved by letting them pick an investment that they’re interested in (e.g. Apple) to put their pocket money towards. You could have conversations about what makes a good investment and do research together on the types of companies you want to support.

Another way to invest with more security is through a fund manager, such as Pie, Milford or Jardin, who invests your money on your behalf in line with your goals, values and risk profile. This can come at a premium, however we highly recommend this if you are dealing with larger sums of money. Investing at a high level requires in-depth expertise and constant monitoring, which is best left to a professional. Once you are dealing with an amount of money which feels highly significant to you, go and seek professional advice to ensure your money is working for you as effectively as possible. 

For many years, our business was our sole form of investment until we sold our first company. We knew that we wanted to invest a portion of the profit for the future, so we went directly to Pie Funds to manage our investment on our behalf. The way we see it: we went to a realtor when selling our first home, as we thought a realtor would be able to do a better job of selling it and get us a better price than if we were to try sell it ourselves. We take the same view with the management of our investments. Our fund manager knows our goals and that we don’t want to invest in assets such as weapons, child labour and alcohol, and tailors our investment strategy to suit. 

So, in answer to our follower question – Would you look at an ethical Kiwi Saver fund or perhaps buy shares in a sustainable initiative that will benefit their generation as well as be a sound investment?

The best option would be for you to do your research and find something that aligns with your values. We like to choose funds that have a proven track record and meet your criteria, as investing in individual shares requires a high level of expertise and monitoring. We’ve compiled a few tips below to get you started on your investing journey:

What to do before you start investing for children or yourself:

1. Ensure you’re on top of your savings, budget and cashflow first

a. Investing is a long term game, and you should not be investing money in the share market that you need access to in the next 3-5+ years at least. Before you start investing, make sure you have an emergency fund that you can fall back on when you need to, and that you have a budget in place you know you can stick to. This will mean that you won’t be as impacted by the share market fluctuations and that you will be in a position to contribute to your investments on a regular basis.

2. Understand your risk profile

a. Your risk profile relates to the types of investment you choose, and is largely informed by how long you have to invest. Shorter periods of investment typically means you have a low tolerance for risk, whereas long term investors can have a higher tolerance for risk. To find out your risk profile, check out the Sorted Investor Kickstarter.

3. Do your research

a. If you are looking to invest with a company, managed fund or fund manager, research its structure, leadership team, how it’s run, and its forecast. It’s also advisable to look at its track record, however it is important to know that past performance is not a reliable indicator of future growth. Check out this article for more tips on how to research a potential investment.

4. Contribute regularly

a. While compounding interest works its magic on your initial investment, the best way to capitalise on this is to invest regularly. This also is a good strategy to mitigate share price fluctuations through trying to ‘time the market’.

5. Buckle in for the long term

a. Investing is a marathon, not a sprint. Markets are incredibly volatile, and investing for a short period makes you far more susceptible to significant losses. With investing, you only lose money if you pull your investment out when the market is down. By holding over a period of many years, your investment will have the opportunity to ride out the rises and falls of the market and give you positive returns.

The information in this blog is general in nature and is not intended to be personalised financial advice. You should consult a professional financial adviser before making any financial decisions or taking any action based on the information on this website.