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One of the most powerful tools in investing is time. By starting early, even modest sums can grow into extraordinary wealth. And this is thanks to the power of compounding. For parents who want to give their children a financial head start, opening a Stocks & Shares ISA — called a Junior ISA for under 18s — at birth could be transformative.
This can be done through any major UK brokerage. Personally, I use Hargreaves Lansdown for my daughter’s ISA. That’s because there are no fees on Junior ISA trades, but also because that’s where I manage my own portfolio. It’s good to keep everything in one place.
How it works
Here’s a simple example. If a parent or wider family member were to contribute £700 a month (£8,400 a year) from birth, invested in a diversified portfolio achieving an average 8% annual return, after 30 years, the account could grow to more than £1m. That’s despite total deposits amounting to just £252,000 over the period. The rest — over £790,000 — comes from compounded returns.
The maths becomes even more compelling at a higher average rate of returns. If annualised gains reached 10%, the million-pound milestone could be achieved in just 27 years. However, the lesson’s clear. The earlier investments are made, the harder compounding works in an investor’s favour.
Compounding works like a snowball rolling downhill. The larger it becomes, the faster it grows. In the early years, progress feels slow. After five years of saving, the portfolio might be worth just over £50,000. But by year 20, it could be £412,000. From there, the pace accelerates, topping £1m by year 30.
However, even with fewer contributions, say £250 a month, and an 8% yield, this £1m figure in 42 years. This may involve them contributing themselves when they start working.
Of course, no investment return is guaranteed. Stock markets can be volatile, and short-term downturns are inevitable. But history shows that long-term, diversified equity investing has delivered average annual returns close to these levels.
Where to invest?
Personally, my preference is to invest in one or two new stocks a month. However, a novice investor may prefer a more diversified and passive approach. This could involve investing primarily in funds or trusts.
One diversified option I like is Scottish Mortgage Investment Trust (LSE:SMT). The trust offers broad exposure to global growth companies, with top holdings including SpaceX (rockets & satellites) 8%, MercadoLibre (LatAm e-commerce/fintech) 5.9%, Amazon 5% and, Meta Platforms 4.5%.
Unlike many other trusts, Scottish Mortgage is unusual in its notable allocation to private companies, which currently makes up around a quarter of its portfolio. This means investors gain exposure to high-growth firms such as SpaceX and ByteDance before they ever list on public markets.
However, the investment trust carries risks given its exposure to volatile technology stocks and its use of gearing (borrowing), which can amplify losses as well as wins. Its unlisted holdings can increase volatility and valuation uncertainty.
Nonetheless, for long-term, high-conviction exposure to global innovation, Scottish Mortgage remains a highly exciting and diversified option I believe investors should consider.
