How to prepare for the future while dealing with holiday expenses

December is upon us and with Christmas less than three weeks away, it is an expensive time of the year.

Despite a cost of living crisis, the UK plans to spend almost £30 billion on Christmas gifts in 2024, up from £27.6 billion in 2023*. Over the Christmas period, Brits are projected to spend an impressive £46.4 billion in total, including gifts, food, travel and socialising – a total of £923 per person*.

When it comes to how much parents spend on their children at Christmas time, spending nationwide on kids’ gifts has increased by £2.68 billion (73%) in a generation – the equivalent of £204 million considering inflation**. The average Brit spent £119.45 per child on presents last Christmas, and one in four (23%) will spend more than £200**!

This is just part of the wider cost of having children, which is an expensive business. Current figures show that the first 18 years of a child’s life costs couples £166,000 (£220,000 for a single parent)***. This encompasses a number of factors, including learning to drive and getting a first car, or taking out a maintenance loan at University, for example. We won’t even mention the idea of helping a child get onto the property ladder, with first time buyers in the UK now having to put down an average £50,000 deposit****.

With this in mind, it is best to think ahead with the likes of a Junior ISA, a tax-efficient way to prepare for when a child reaches 18. But there are also considerations for your own ISA, or other investments, that can help put a dent in the £166,000 needed until they reach 18.

Below are three useful considerations for investors.

Income and the power of reinvested dividends

It does not have to be a high growth strategy that helps you reach your investment goals – dividends (and reinvesting them) is essential. Few people know about how compounding dividends can potentially have exponential effects on their returns.

To put this into context, if you invested £10,000 in the FTSE 100 on the last day of 2003 in a fund that tracks this index and had taken the dividends as income, your investment would have been worth approximately £17,270 by the end of 2023. However, if you had reinvested the dividends, that initial £10,000 would have been worth £26,379 (that is almost a £10,000 difference!)^.

For this, investors may want to consider a rock-solid UK equity income fund like Artemis Income, which focuses on company cash flows and how this will drive future returns. The fund has a dividend yield of 3.82% and has returned 97.2% in the past decade^^. It has typically focused on the FTSE 100.

Read more: All your UK equity income questions answers

Alternatives include the Murray Income Trust, where manager Charles Luke focuses purely on quality companies. He looks to build a portfolio that is “dependable, diversified and differentiated”, with the aim of producing performance that is not dependent on any one economic scenario. Another would be the Guinness Global Equity Income fund, which yields 2.6% and has returned 196.4% to investors over the past decade^^.

Don’t forget the unloved opportunity

Right now markets are being driven by a heavy focus on large technology stocks, fuelled by the boom in artificial intelligence (AI). Many of these stocks sit in the US equity market – which looks very expensive versus its own history. But if you are investing for the long term, there are also a couple of areas which look very attractive from a valuation perspective. Today they may be unloved, but investors could stand to make significant gains over the next 15-20 years.

The first is the UK. Between 2016 (Brexit) and 2023 we’ve seen almost £50 billion of outflows from UK equity funds, and the figures are no better for 2024^^^. But things are changing, with overseas companies looking to buy our businesses, companies buying their own shares (indicating they believe they are too cheap), and the potential for the government to force pension funds to increase their exposure to UK equities.

Here, we would consider a couple of smaller companies funds, which have traditionally been a hot-bed for long-term growth, with the likes of Liontrust Special Situations and IFSL Marlborough UK Micro Cap Growth both having excellent long-term track records for delivering growth – returning 115.7% and 94.6% respectively over the past decade^^.

The other area is China – which due to geopolitical, internal and market moves is viewed by many to be uninvestable over the short term. But it remains the world’s second largest economy, with huge structural tailwinds, like a growing middle-class behind it. The value of Chinese equities has fallen over 40% since February 2021^^^^, meaning they are now cheap. Good considerations here include Fidelity China Special Situations Trust or the FSSA Greater China Growth fund.

Read more: Four cheap investments for Black Friday

Tapping into megatrends

You can also tap into market-specific megatrends, a long-term global change that affects many aspects of society, including the economy, politics, culture, and the environment.

Two major ones come to mind, the first is artificial intelligence. Growth has already been exponential, but research figures show it is only the tip of the iceberg. Investors can access the growth of AI through US growth funds like T. Rowe Price US Large Cap Growth Equity, which has a number of the big players in the AI space like Microsoft, NVIDIA or Alphabet*^, or through the Sanlam Global Artificial Intelligence fund, which invests in stocks of any size which can benefit from the AI boom.

Another megatrend is healthcare. UK life expectancy has doubled since the industrial revolution, prior to which 35% of men didn’t even make it to their 20th birthday. A key part of this astonishing shift has been healthcare: vaccines, antibiotics, cancer treatments, statins. These breakthroughs are still taking place at speed, from the likes of weight loss drugs to machines carrying out operations. An option here would be the Polar Capital Global Healthcare Trust, which invests in pharmaceuticals, biotechnology, medical technology and healthcare services across the globe.

Read more: Megatrends unveiled and the power of thematic investing

*Source: Finder, 14 November 2024
**Source: Voucher Codes, Shopping for Christmas 2024
***Source: abrdn, Investing for Children this Christmas, 25 November 2024
****Source: M&G, Investing for the next generation, 21 November 2024
^Source: BlackRock, The power of compounding: little and often for a long-time, 2024
^^Source: FE Analytics, total returns in pounds sterling, 2 December 2014 to 2 December 2024
^^^Source: Investment Association, Net retail sales of funds by asset class, November 2024
^^^^Source: FE Analytics, total returns in pounds sterling for MSCI China, 17 February 2021 to 2 December 2024
*^Source: fund factsheet, 30 September 2024