When my daughter was born, I was determined to contribute to her future financial freedom. This includes the ability to buy a house with cash, perhaps in her early 30s. The tool I’m using? A Junior Stocks and Shares ISA, harnessing the twin powers of compounding and pound cost averaging.
Here’s the strategy
She’s now aged 18 months and we’ve already built a £14,000 nest egg. Her portfolio’s performance has been very strong so far, but over the long run, I’m aiming for an average annual return of 10%. It’s ambitious, but not unrealistic given the long-term performance of global stock markets.
So let’s run the maths. Taking a 30-year time horizon and £700 of monthly contributions, this Junior ISA could be worth almost £2m by the time she’s 31. It’s all about compounding.
With each year, not only does the money I invest grow, but the returns themselves also start to generate returns. In the early years, the growth feels slow — after one year, the balance is just over £24,000, and after five years, it’s around £77,000.
But as the years roll on, the effect snowballs. By year 15, the pot’s grown to over £350,000. By year 30, it’s projected to reach a staggering £1.86m. That’ll be enough to buy a house outright in most parts of the UK in 30 years, although I have to remember that none of this is guaranteed and the investment may lose money as well as making it.
Pound cost averaging is just as important. By investing the same amount each month, I smooth out the highs and lows of the market. Sometimes I’ll buy when prices are high — although I try not to — and sometimes when they’re low. But over time, this approach reduces the risk of investing a lump sum at the wrong moment.
What’s more, all this is done inside a Stocks and Shares ISA, so every penny of growth is protected from income tax and capital gains tax.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Don’t lose money
Many novice investors lose money. And it’s actually very important to avoid loss-making investments because if you lose 50%, you’ve got to go 100% to get back to where you were.
So where’s my daughter’s ISA being invested? One recent addition to her portfolio was Rocket Lab (NASDAQ:RKLB). She’s already up 36% on it, but that wasn’t the plan. Having already built something of a diversified (albeit tech-focused) portfolio, I picked Rocket Lab as a bet on the long-term development of the space economy.
However, the investment case isn’t without significant risks. Rocket Lab’s valuation has soared to reflect enormous future expectations. Its market-cap now stands at $16bn, and the shares trade at a forward price-to-sales ratio of 28. That’s many times the S&P 500 average. But the company remains unprofitable, burning through $177m in cash annually.
Despite this, the stock’s trading around 800 times expected earnings for 2027 and 125 times for 2028. It’s easy to see how this figure could fall dramatically in the following years as it moves through breakeven.
For all its promise, Rocket Lab’s a classic example of why growth investing demands patience and a strong stomach for volatility. While I’m happy to hold it as a part of my daughter’s portfolio (and my own), even the most exciting themes come with real risks. Nonetheless, I think it’s a great pureplay space stock, and certainly worth considering by all investors.
