Financial Education for Children and Beyond

Nicola, thank you very much for joining me.

I'm interested in talking to you a little bit about actually investing for children first off, because you've affectionately been known in the media as a ‘Supermum’ for managing people's money as well as a family of your own. How can you try and teach children to grow up financially savvy? Do you have any tips for us? 

Nicola Horlick: Well, I think you can teach them. You can talk to them about the stock market and explain to them how investment works. Some of my children have been interested in that and some haven't. 

I remember when I was a child, I used to spend a lot of time looking up the prices of all my father's shares in the newspaper, in The Times, and then The Times used to have this little portfolio game where you got a card and it's a bit like Bingo really, where you were to sort of monitoring the prices of stocks and if you got all the right numbers then you would win some money in theory. 

So, I think you can encourage children to look at the stock market and try and teach them a bit about how it works. Indeed, I think, there are various programmes that have been sponsored by banks and so on, going into schools and trying to teach children at that level about how finance works. I think that should be something that is put on the national curriculum, in fact. Because one of the reasons we're in this mess is it’s all very easy to blame everybody else but no one actually told people to go out and have 10 credit cards and borrow £10,000 on each one and get themselves into huge amounts of debt. They’re the ones who actually filled in the forms and signed them. 

So, I think we need to educate people and explain to them why it's not a good idea to have large amounts of debt and why it is important to save, and why it's important to save for retirement as well. 

Cook: So, the government's Retail Distribution Review, RDR, is encouraging people to become more financially savvy. It's increasingly putting the onus on the individual for their – ensuring their financial future. Are there – what sort of specific lessons do you think are really crucial for an individual to learn? 

Horlick: Well, I think, there are major lessons to be learned from what's happened over the last few years, and I think more and more people are realising that debt is not such a good thing. 

The other thing is when you've got low levels of inflation, debt is very onerous. In the old days, in the ’70s when we had very, very high levels in inflation, if you actually had a lot of debt, then over a period of years that became less in real terms. When you've got relatively low inflation, that's not the case. Plus, a lot of people took out mortgages that were interest-only so they weren't making repayments, which means that they are going to be left with a large amount of debt, and in some parts of the country house prices are stagnating, London is clearly the exception. But in other parts of the country, house prices are stagnating and if you’ve got an interest-only mortgage and you haven't been repaying it and you're getting towards retirement, what are you going to do about that pile of debt? You have to sell your home and move to something a lot smaller. 

So, I think, actually what's happened as a result of the credit crunch and all those sort of pain and horror that we've experienced over the last four or five years is that people are beginning to realise that they do need to take responsibility for their own financial affairs and that they need to be more careful, which I think is a good thing. 

Cook: So, going back to my first question about sort of investing for children and that sort of long-term horizon, what would you actually recommend for an individual investor who is perhaps attracted by this idea of sort of niche investments, but really needs to be just taking stock and controlling their own future with a long horizon. 

Horlick: Well, if you are investing for children, then you can use a Junior ISA, that's probably the best thing to do. And also the general belief in the stock market and in the investment world is that if you are investing for young people then you should invest in equities, whereas if you are old you go more for fixed income and very high income equities because you need the income. 

So, if you are investing for children, you want to be trying to find the next Glaxo that's going to do well over the next 30 years. So, you probably invest in a Junior ISA and buy a growth fund. I am very much of the view that people should invest in unit trusts because those are managed by professional investors. And the markets move so rapidly these days, it is very, very difficult for individuals to keep up. I know there are people out there who like to manage their own portfolios, but really it is very difficult thing to do. So, I think, using a unit trust is the best thing to do.

And for everybody, saving is important. Using your ISA allowance to the extent that you can, I mean, it's just under £11,000 the ISA allowance now per person. So, a man and a wife can do over £21,000 into an ISA each year. If you do a monthly savings plan, that's a very good way of doing it. The same applies if you are younger, you should have more in equities, and if you’re older you go more for the high yielding equities and bonds. 

Cook: Of course, with the ISA structure you get that tax benefit that's really… 

Horlick: A tax-free environment, yes, which also is very helpful. Of course, one has to remember that in tax-free environments you don't get the benefit if you make a loss, it does cut both ways. But clearly, if you are investing for the long term and you generally believe that over time economies will grow and companies will grow—we haven't seen much of it lately, but you never know—then you invest in equities, you tuck it away and you just leave it there for the long term. 

Cook: Well, thanks very much for joining me Nicola and I look forward to your presentation at the LIS. 

Horlick:  Thank you. 

Cook:  For Morningstar, I'm Holly Cook. Thanks for watching.