What do market dips mean for Kids Accounts?
If you’re investing for a kid’s future over the long term, you may experience a share market dip at some point along the way—after all, it’s normal for share markets to go up and down.
With that in mind, here are some things to think about when it comes to managing a Kids Account during a market dip.
Long-term investment horizons
Because of their age, kids may have longer investment horizons than adults. Although market dips are an inevitable part of investing, if you have a long-term investment horizon, you have more time to ride out the ups and downs of the share market.
For example, let’s say you open a Kids Account for a 2-year-old, with the intention of transferring it to them when they’re 18. Now, let’s say there’s a market dip two years later, right around the kid’s fourth birthday. It can be a bit nerve-wracking to see their investment portfolio lose value, but remember, with their longer investment horizon, they have 14 years to potentially recoup any losses and make a positive return.
It’s also important to remember that although share markets can go up and down in the short and medium-term, historically, they’ve eventually bounced back after every major dip.
Since World War II, there’ve been 27 market corrections (drops of more than 10% from a market’s most recent peak) in the S&P 500, but the average annual return since the index was first started in 1926 through to 2021 is about 10.5%. And over the past 5 years, the S&P 500 index level has almost doubled.
One investing strategy you might consider is dollar-cost averaging—investing the same amount in a particular investment, regularly, regardless of the share price. This saves you from trying to time the short-term ups and downs of the share market. You might pay a bit more for your shares when the market goes up, and a bit less when the market goes down—but over time, it’ll average out. ⚖️
If you continue to dollar-cost average while the market is down and the market later recovers, you’ll have had the opportunity to buy shares at a lower price, decreasing the average cost per share over the long term.
Don’t forget to diversify
Another thing to consider is diversification—spreading your money across lots of different types of investments (whether it be by risk, asset class, sector, or country) to spread your risk.
If your Kids Account portfolio is concentrated in just a few similar investments, you’re relying on those specific investments (and the specific sectors and geographies they’re in) to perform well. Instead, diversification can help to even out the impacts of a market dip across a bunch of different investments.
Market dips can be nerve-wracking, especially when it’s your kid’s investments losing value. But dollar-cost averaging, and investing for the long term, in a diversified portfolio can help to weather the ups and downs—just be prepared to ride the roller coaster!
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.