Investing Advice From A Five Year Old

From the mouths of babes come pearls of wisdom. Here are some excellent investing tips from a schoolboy.

Last month, I was explaining the basics of investing to my five-year-old son (I work on the basis that he's never too young to learn!).

My son was sat in my lap, and we had the share pages of Saturday's Independent open in front of us. I explained to him that I'd like to put away more money for him to have when he's a grown-up. However, I didn't want to put it in 'his bank' (actually, his savings are in the very good Nationwide BS Smart account for children), because he already has more than enough cash stashed away.

Hence, I explained to him that I'd like to buy into some companies for him, and if those businesses do well, then so will his money. We then looked at different market sectors, while I explained what the companies in each sector do, such as, "BP: it makes the fuel which makes Mummy's car go", "HBOS: that's the bank which Daddy used to work for" and so on.

After a while, I asked him which shares he wanted to buy. He thought for a long time, concentrating really hard with a furrowed brow, before replying:

"Please buy a little bit of everything, Daddy."

Eureka! Amazingly, my son had hit on a strategy which I already use: namely, to buy into a wide range of companies in the cheapest, simplest way possible. I do this in two ways: by investing in index-tracking funds ('trackers'), which simply follow a particular index up and down, and by buying Exchange Traded Funds. With little or no human intervention, trackers are cheap to manage, which means that your money doesn't go towards buying a fund manager his next Ferrari!

However, my son's advice didn't stop there, because there were yet more words of wisdom to come. He then said, "Don't spend it all at once", which is also good advice, as I don't want to invest a large sum just before share prices go on one of their occasional dives, as they often do.

He also said, "Make sure that you keep some for later", at which point I decided to set up a monthly savings scheme for him, as well as investing a lump sum to get him off to a good start. He ended with, "Think carefully for me, Daddy, and don't buy anything too expensive".

Again, he's hit the nail on the head, as you should always do your research before investing. Also, you should steer clear of buying when asset prices are high, as future returns are bound to disappoint. Frankly, I was seriously impressed with my son's insight into the basic rules of investing: in fact, he is a better investor at five than I was at twenty-five!

Now I need to decide how to invest on my son's behalf. His little sister owns shares inside a Child Trust Fund, but, as my boy was born before 31 August 2002, he missed out on this tax shelter for children. Also, he cannot hold shares in his own name, so I need to own his investments on his behalf, using what's known as a 'designated account'.

To cut a long story short, I've decided to earmark some iFTSE 100 (LSE: ISF) shares for my son, which are currently held inside a tax-free ISA wrapper in my name. The FTSE 100 index which they track ('the Footsie') is cheap in historical terms, so I think that these will be a worthwhile investment over the next fifteen years.

Furthermore, I'm going to use a designated account to invest, say, £100 a month into the UK's cheapest index-tracking fund, which is the Fidelity MoneyBuilder UK Index Fund. This tracks the FTSE All-Share index, which measures the value of around seven hundred leading companies, and all for a mere 0.3% a year. Indeed, its Total Expense Ratio, or TER, is the lowest of all tracker funds, making it The Perfect Investment for my little boy!

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