DISCLAIMER: I do write some stuff about financial topics such as cryptocurrency and investing. I am not a financial professional and please don’t rely on what I say to make financial decisions. Please check with your financial adviser before making these decisions.
A JISA is a great way to test Einstein’s Eighth Wonder of The World: Compound Interest.
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Attributed to Einstein
Zach is one now, and so setting his JISA up now would mean his JISA would have 17 years until he took ownership of its assets. The maximum you could invest in a year is £9,000 (which we can’t afford to do!), but that’s a lot of tax shelter. 17 years is a long time in compound interest terms and could be even more if he doesn’t bomb it all on booze and good times when he’s 18.
A fun tool to play with is a compound interest calculator. Bear with me.
If we assume an 8% return a year using equity index trackers (the historic returns over the last century of the stock market is around 8%), and assume a conservative £5,000 cash deposited as well into the JISA, that’s a huge £193,263.60:
If we assume a 15% return a year, with the same £5,000 annual deposit, it’s a whopping £439,074.39:
The three main drivers of the final amount over this time period are:
- the Rate of Return
- the number of years
- the size of the annual deposit
(and not paying fees. You won’t pay tax on any returns in a JISA)
The Rate of Return
I reckon you could get 8% fairly straightforwardly with cheap equity index trackers.
The number of Years
This graph from Seeking Alpha shows that returns are not linear with the number of years. The more years you add, the greater the relative returns for that extra time. You’ll also notice that the non-linear impact of small changes in the rate of return.
The True Power of Compounding
If you just invested £5,000 today and left it for 17 years at a 8% rate of return, it would be over £19,000! That’s more than £14,000 in returns!
What investments to put into the JISA?
Unlike with my ISA asset allocation, which is a mix of equities and fixed-income, a child at the age of one is young enough to not have to think about the greater volatility of equities vs bonds. So it could be 100% equities in his JISA until he hits 18.
I’m looking for:
- Strong returns over at least a 5 year period (around 15% to 20%)
- Funds, so that I don’t have to do any stock picking.
- Exposure to as much of the world as possible. Funds with US and Asia stocks have been going great guns in the past 5 to 10 years (in part because their indexes have strong exposure to tech growth stocks). I also read a book that shows how with a bunch of trackers, and funds, you can literally own the world. Eg. if you invested in a Global fund, in theory, you should have exposure to geographically diverse companies.
The funds I’ve picked
FUNDSMITH EQUITY CLASS I – ACCUMULATION (GBP)
I also want some Asia exposure so I made up this watchlist of Asian focused funds:
There’s a fair bit of overlap in these funds, so of the Asia-focused funds, I’m leaning towards:
- FSSA JAPAN FOCUS HEDGED CLASS B – ACCUMULATION (HEDGED GBP)
- SCHRODER ASIAN ALPHA PLUS CLASS L – ACCUMULATION (GBP)
I haven’t decided how to split the allocation between these funds yet. Will add an update to this post when I do.
DISCLAIMER: I do write some stuff about financial topics such as cryptocurrency and investing. I am not a financial professional and please don’t rely on what I say to make financial decisions. Please check with your financial adviser before making these decisions.
