Ian Cowie: how two picks for my grandchildren are faring

Tariff tantrums trumped hopes of peace in Ukraine to stump global stock markets this week. The formerly fashionable Nasdaq index of technology shares has slipped 8.6% lower since the start of this year. That’s bad news for asset-rich wrinklies, like me, but should be celebrated by younger readers, because this is a cut-price opportunity for them to get started investing.

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Everyone knows that the sooner we begin buying shares and stock market funds the better, because that means - all other things being equal - these assets will have longer to grow for our benefit. Never mind the generalities, here are a couple of specific examples - one very short term, the other much longer - of how it works in practice.

Both my grandchildren may have mixed feelings about this old baby boomer, if I am still pottering about when they are teenagers, but might be glad I bought them some shares when they were still wearing nappies. However, even at this very early stage, timing has had a substantial effect on their differing experiences of investment.

Darling Cressida, who has yet to celebrate her first birthday, might not look at me quite so fondly if she realised that Alliance Witan Ord (LSE:ALW) shares I bought for her, alongside other family members, in June last year have fallen from the £12.14 I paid to £11.76 this week. Note to grandad: must try harder.

Even so, I draw some comfort from the fact that this £5.3 billion global investment trust diminishes risk by diversification; its money is spread over dozens of different companies, countries and currencies. Founded in 1888, ALW survived both world wars and the Great Depression before raising its dividend distributions every year since 1967 without fail.

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More recently, ALW delivered total returns over the past decade, five years and one-year periods of 196%, 91% and a barely visible 0.3% respectively. The shares currently yield 2.3% income, which has risen by an eye-stretching annual average of 13.8% over the past five years, but remain priced 4.9% below their net asset value (NAV).

So I hope Cressida will eventually look kindly on this old boy’s stumbling start and one day be glad she gained early exposure to international investment, via ALW’s diversified portfolio. Top holdings include the online retailer Amazon.com Inc (NASDAQ:AMZN), the software giant Microsoft Corp (NASDAQ:MSFT) and the Guinness brewer Diageo (LSE:DGE).

Meanwhile, my darling grandson, Charlie, is already benefiting from his head start in the stock market. Along with my late father, Joe, and my mother, Mary, and his late grandmother, Sue, we bought F&C Investment Trust Ord (LSE:FCIT) shares for him at £8.86 in July 2023, which cost £10.98 this week.

So, despite ongoing stock market shocks, starting just 11 months earlier than Cressida has helped little Charlie, who is two, achieve double-digit paper profits already. FCIT is another global giant, with total assets of £6 billion, that can boast the longest investment trust history of all, having been founded in 1868.

Over the usual three periods, FCIT delivered total returns of 197%, 93% and 16% but with less income, currently yielding 1.3% rising by 6% per annum. It trades at a -4.3% discount to NAV and is also a “dividend hero”, having raised shareholders’ income every year since 1971 without fail.

Top underlying holdings in FCIT include the artificial intelligence (AI) microchip-maker NVIDIA Corp (NASDAQ:NVDA), the technology giant Apple Inc (NASDAQ:AAPL) and significant private equity exposure, or shares that are not listed on any stock market. Both these global funds offer good value, too, with ALW imposing annual costs of 0.6% and FCIT charging just 0.49%.

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You might think it is a bit too soon to start drawing lessons from the Cowie rugrats’ experience of investing earlier rather than later. So here is a long-term stock market parable about twin sisters, Prudence and Extravaganza, who take very different approaches to saving and spending.

Prudence invests £100 a month from age 18 to 38 and then stops saving altogether. She achieves an average of 5% annual growth for the 20 years she invests and her fund continues to grow at 5% per annum for the next 27 years until she reaches 65.

Extravaganza fritters away her money, saving nothing until she is 38. Then she starts saving £100 a month until she, too, is 65. Extravaganza also achieves 5% per annum during the 27 years she’s investing.

Now, here’s the point of the tale: at age 65 Prudence has a fund worth £145,795 but Extravaganza has just £68,219. So, Prudence has more than twice as much as Extravaganza, even though Prudence set aside a total of only £24,000, while Extravaganza invested £32,400.

The explanation is that Prudence invested for 20 years before Extravaganza got going and those early pounds had another 27 years to fructify in the sensible sister’s fund. Time is the young investor’s big advantage; if only more of them made the most of it.

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Not many kids can do it themselves, of course, which is all the more reason for older family members to consider helping them. With less than a month left of this tax year and the imminent opportunity to double-dip two years’ Junior Isa allowances, all the bad news about plunging share prices might make this a particularly good time to do so.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Apple (AAPL), Diageo (DGE), and Microsoft (MSFT) as part of a globally diversified portfolio of investment trusts and other shares.