Young people face the most difficult labour market in a generation, with more than 20 per cent unemployment among 16 to 24 year olds.
Statistics suggest many leading companies are screening out graduates who don’t earn first-class degrees, with an average of more than 70 applicants for a single role, according to the Association of Graduate Recruiters.
While only your son or daughter can secure the academic credentials they need to succeed in three or four years' time, you can start saving to ensure they have the funds necessary to relocate, put down a deposit on their first rented flat, feed themselves, or buy a cheap car to make sure their options are as wide as possible when it comes to getting that crucial first job. Average rents in the UK for a one-bedroom flat hover around £800 per month, while in the capital – which has the most buoyant labour market and is the most likely destination for a graduate looking for work – average rents have soared to £1,260 per month.
A typical deposit amounts to six weeks' rent, so even assuming prices remain static, your offspring will need to have instant access to £1,890 if they get a job in London – before they buy a travel card to get to work, or eat – let alone celebrate with a drink – that month.
Add food, a month’s travel, bills and the cost of a few scraps of furniture, and you are looking at a minimum lump sum of £2,500 to ensure your son or daughter is able to secure a foothold on the career ladder when the opportunity presents itself.
The good news is that you have three years to save up. The bad news is that your limited timeframe means you can’t afford to risk a great deal.
Playing it totally safe, a savings account funded with £80 a month would get you there in three years, but with negative interest rates on the horizon, and negligible interest rates already a stark reality on most savings accounts, there are some investments that may offer a more attractive route – with the potential for greater upside.
The outlook for UK investors is extremely uncertain at the moment, so a pure equities play would be unwise. The market in Europe, though benign in recent weeks, hangs on a knife-edge – and that knife may well fall on Spain once the elite come home from their holidays.
Equities are cheap, however, so some exposure to them would be advisable. Funds that invest with a total return approach, using derivatives, bonds and other instruments as well as equities to achieve positive returns, offer an attractive compromise.
An investment of £1,000 in the average fund in the IMA Absolute Return sector three years ago, supplemented with a regular investment of just £40 a month, would now be worth £2,545 if redeemed on 14 August 2012.
If you had put the full £2,500 into the average fund in the sector as a lump sum, that would now be worth £2,693. Absolute Return funds are far from consistent in terms of quality though, so it pays to identify those that are worth holding.
CF Odey UK Absolute Return is the best-performing fund in the sector over three years, returning 58 per cent and beating its nearest rival, Standard Life Global Absolute Return Strategies, by a clear 30 per cent. However, with a minimum investment of £5,000, it may be too large a sum to commit for many.
Newton Real Return offers a more retail-friendly choice. Officially the fund has a minimum investment of £20,000 but many fund platforms – including Hargreaves Lansdown – allow you to invest in the fund in far smaller amounts.
The product is a favourite with IFAs, appearing in the AFI Balanced and Cautious indices on FE Trustnet.
An investment of £1,000 three years ago plus £40 per month in installments would now be worth £2,804, a full £300 ahead of the returns you would have from a savings account. If you had invested £2,500 as a lump sum three years ago, you would now be looking at a tasty £3,136.
An ETF, or tracker fund, may seem like an easy option when you are looking at putting money to one side for three years, but the urge to take a punt on markets going up should be resisted – especially at the moment when your exposure must be actively managed, not left to run.
Harpreet Sajjan, head of portfolio management at Platinum Financial Services, said: "Gold and silver ETFs would at one time have been considered a safe haven, but things have changed and things are so volatile that these days this simply isn’t the case any more."
"It’s difficult to point to a single ETF that would do the job. Some people think gold is going to shoot up as markets react to a deepening European crisis, but other people think it’s already overpriced."
"ETFs are too spicy to leave alone. You need to sit there and watch them, taking cash out whenever you make a profit and reinvesting somewhere else."
"The benefit of an absolute return fund is that you’re talking about a relatively secure annual return which is meant to ride out market conditions."
A total return-focused investment trust, like Ruffer Investment Company, may be an even better option. Given the timescale you have to work with you must minimise your front-end costs, which means if you can avoid an initial charge you would be wise to do so.
Performance (in £) of trust over 3-yrs
Source: FE Analytics
An investment of £2,500 in this investment trust three years ago would today be worth £3,283, while the regular savings route – with £1,000 upfront and £40 a month over the same period – would have returned £2,830, beating the open-ended fund on both counts.
Ruffer Investment Company invests in a mix of equities, bonds and alternative assets such as gold and currencies. The portfolio currently has 57 per cent in equities, 30 per cent in index-linked gilts – since the managers anticipate a high inflationary environment over the next 10 years – and the rest in gold, cash and illiquid strategies.
It has an annual management charge of 1 per cent, and doesn’t charge a performance fee.