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Welcome to the its-YOUR-money Forum Q and A page

This is where we publish your questions and our answers.

Where would be the best place to invest 10,000 euro for a 13 yr old child, also 5,000 euro for a 9 yr old? (Submitted by Pat, January 2007)

I can only give you general advice because I don't know your circumstances, and you may like to consider getting independent advice from somebody who can discuss the various options in more detail. However, I hope you will find these points helpful.

Firstly, investments for children usually have a reasonably long time horizon. For your 13 year old, I would assume you would be thinking about him or her being able to cash it in at, say 18 (ie 5 years ahead) or maybe older, say 21 or 25. For the 9 year old, you would have at least 9 years, and maybe longer. Over a longish period (say 10 years or more) growth becomes increasing important, so you are looking for an inves tment with an increasing return. You can be more relaxed about the ups and downs in capital values that would worry you if you had a shorter horizon. If you are looking at less than about 10 years then you will be more concerned with not losing money due to short-term dips in a market. The other issue is whether you (and/or the children) have other investments. If we are talking about 'fun money' (because you have other savings and can take more of a risk with these investments), then you could think about investing the full amounts in equities (shares). If you don't feel comfortable with having all your eggs in the stock market, then split the investments.

Summing all that up, you might consider investing 5,000 euro for each child in a pooled stock market investment. I think I'd probably go for exchanged traded funds that track the UK FTSE 100 index. As you are in the Euro area, you could say put half into a Euro denominated fund, and half UK. The remaining 5,000 for the elder child I would keep in a high interest bank or building society account. The amounts you mention are too small to consider investing in individual stocks.

What is a share worth? (submitted by Annie, 13 April 05)

A share is worth the present value of all the cash the company returns to its shareholders in the future. Dividends are the main way for a company to reward its shareholders, so to work out the value of a share, we start with the latest dividend, look at the history of dividend payments (have they increased year by year, and by how much?), try to guess whether that trend will continue and for how long. That will give us our best guess as to what cash we will get back each year if we buy the share. The other guess we have to make is what will happen to interest rates in future years. We can tell what the markets are guessing by looking at the yields on government bonds and that is probably as good a guess as any. By discounting future dividends at those interest rates we get the value to us now of all those future payout's, and that's what the share is worth. If that sounds like hard work, try a simpler formula: take the present dividend yield and add the likely average annual growth rate of the dividends. That total is the expected rate of return. If that is comfortably higher than interest rates (bond yields) then the share is probably reasonably good value. But keep in mind that above-average growth rates won't last, and don't put too many eggs in one basket.

See our pages on present value, government bonds.

How can I make unit trusts work for me? (submitted by Prosper, 24 March 05)

The key to making any investment work for you is to be clear and realistic about what you expect to achieve before you invest. Unit trusts are one of several ways by which you can invest in equities (company shares). Before looking at whether unit trusts are the best way for you to invest in equities, you firstly have to decide whether you should be in equities at all. Once you have made the asset allocation decisions (ie, how your investments should be spread amongst the main asset classes) then you can look more closely at the mechanics.

Once you have decided how much you want to invest in equities then you are faced with either doing the share selection yourself, (bearing in mind that you shouldn't put too many eggs into too few baskets) or letting somebody else do it for you. Unit trusts are one method of delegating the job of choosing which shares to buy and sell. They employ experienced fund managers who understand the markets concerned, and these managers will probably be better at it than you (or me). However, wisdom and experience come at a price. There will be an up front fee of around 5% of the amount you decide to invest (although this might be reduced by some stockbrokers or financial intermediaries), and there will be an annual management fee subtracted from the returns earned by the fund. This fee will depend on the type of fund but is typically between 1% and 3% per year.

Unit trusts exist for a huge range of investment styles, and cover overseas as well as UK markets. Some funds are very focused on, say, technology shares, or small companies, whilst others exist just to track a share index such as the FTSE 100 or All share. The more specialised funds and those investing in overseas markets tend to have higher costs than trackers. The costs associated with unit trusts include the bid/offer spread. This is the difference between the price you pay to buy the units and the price you will get when you sell them. For example, you might pay 100p per unit if you bought today and get back 96p per unit if you sold them today. Although holding shares directly also involves a buy/sell spread, these tend to be less for most large company shares than for unit trusts.

You therefore have quite a few decisions to take before looking at individual funds. Should you be in equities and if so, how much should you allocate? Should you stick to one market (the UK say) or do you want to have some part of your equity allocation represented by overseas markets and if so, which ones and how much? Within your home market, should you be broadly represented (an index tracker for example) or do you want to try to beat the market (and take higher risks) by going for a growth fund, or do you believe that income is the slow and steady way to make money?

Once you have made these decisions then you can start to shop around for individual funds. Find out as much as you can about the managers concerned. Look at their history (although past history is no guarantee of future performance).

Visit the Investment Management Association web site for more information on unit trusts.

In an actual investment capital gains come and go. What is your comment on
switching from equity fund to income or vice versa ? Or is it necessary? (submitted by Prosper, 27 March 05).

Switching involves dealing costs and research has shown that people who trade frequently tend to make less than those who buy and hold. On the face of it, you can get better returns by moving out of equities (and into cash or fixed interest) when equity markets are high, and buying back in again when markets fall. However, the timing is difficult to judge and again there are dealing costs. In my view, it is sensible to decide your asset allocation and stick with it unless there are good long-term reasons for changing.

The argument about income shares versus growth shares has been around for a long time (and in the next few weeks we will be publishing some research on the subject). Our evidence is that shares with highest cash-flow in relation to share price (which is not quite the same as income in the sense of dividend yield) produce the highest returns.

Why has the price of my War Loan bonds gone down? (submitted by PAW, 31 March 05)

The income from normal gilts (government bonds), like your War Loan 3.5%, is fixed. If you own £100 nominal (gilts are sold in parcels of £100) you will receive £3.50 per year before tax. That will never change. The market price of those bonds will reflect the market's view of what interest rates are likely to be on average over the next few years. If the market price has dropped it's because the market (that really means most of the people who trade in gilts regularly) thinks that interest rates will rise. What the market is looking at is the yield on your gilts (that is £3.50 as a percentage of the market price) compared to the likely yield on cash (which is set by the Bank of England base rate). If the market thinks the base rate is likely to rise, then the market will allow the price of your bonds to fall until the yield is about the same. Don't forget the market isn't a single entity. We are simply talking about what the average opinion is.



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