Many parents fill their child’s Christmas stockings with chocolate gold coins, but should they consider gifting the real thing this Christmas? asks online investment platform interactive investor.

Children might want a PS4, FIFA 20 or the latest Harry Potter merchandise for Christmas – fair enough. But will any of these items be worth anything in say 20 years’ time, compared to say investing a £1,000 lump sum in your average investment trust? The answer is probably, ‘No’.

According to research from interactive investor, if you invested a £1,000 lump sum in your average investment trust, it would have outperformed the average fund by 18% over the past 18 years.

“A third of the assets gifted by the three wise men was in gold, which would be considered pretty hefty these days. Whilst gold is a good diversifier, holding 5% or so feels more appropriate for a long-term investment.”

If parents also invest in commodities, for example gold, then they could also see returns for their children over the long-term. Interactive investor uses the Christmas story of the three wise men to illustrate this point.

While frankincense and myrrh have dropped off Santa’s gift list in modern times, gold has soared in popularity since the beginning of the year, with the price of the precious metal rising by 11% in the calendar year to 3 December 2019 (Source: BullionVault).

However, interactive investor points out that whilst gold can be a great diversifier, making it a third of a portfolio, like the three wise men, is excessive – and funds and investment trusts might warrant a larger share of the stocking.

Moira O’Neill, head of personal finance at interactive investor, says: “A third of the assets gifted by the three wise men was in gold, which would be considered pretty hefty these days. Whilst gold is a good diversifier, holding 5% or so feels more appropriate for a long-term investment.

O’Neill adds: “It’s often viewed as a haven and has the potential to perform as one when held for the long-term. But gold can have big short-term swings in value and is sensitive to anything from the US dollar, sterling fluctuations, through to the Indian wedding season. One of the easiest and cheapest ways to invest in gold is through an exchange traded commodity (ETC) that tracks the price of gold.”

Look to investment trusts and funds when investing for children?

Investment trusts are still often overlooked in favour of funds, but they deserve equal consideration and offer a diversified way of investing for the long-term.

Whilst past performance is no guide to the future, a £1,000 investment over the past 18 years in the average investment trust has outperformed the average fund by 81%, according to data compiled for interactive investor by the AIC using Morningstar.

A one-off £1,000 investment in the average investment trust and fund over 18 years to the end of November 2019 would be worth £5,510 and £3,041 respectively.

A monthly investment of £50 over 18 years (a total of £10,800 investment), would have grown to £33,169 (investment trusts) and £21,716 (funds) by the time the child reached adulthood.

O’Neill continues: “Investment trusts have several features that can help them harness the long-term potential of the stock market, such as the ability to gear (or borrow) to enhance returns. If markets are rising and performance is good, they will tend to outperform funds, but in a falling market, you’ll need your seatbelt on as they will tend to underperform. But over the long term, markets tend to rise, which means they are well worth consideration.”

Most popular funds and investment trusts in interactive investor Junior ISAs in November 2019