What are joint investment accounts and how do they work?

Considering the growing awareness around the importance of investing, and the need to save up for many years to cover a typical house deposit in Australia, it’s not surprising that joint investments accounts have become popular. At Stockspot we’ve seen continued strong growth of Joint investment accounts – mainly coming from couples in their 20s to 40s who are saving up for a family goal like buying a property or paying for their kids’ education.

Joint investment accounts work the same way as individual accounts; they allow two people to invest money together. Some platforms even allow for more than two people to jointly invest. There are, however, some distinct advantages and disadvantages of having a joint investment account.

Why would you open a joint account instead of individual accounts?

The main advantage of investing with another person is that you can top up your account by a greater amount than you might be able to do by yourself. Regular top-ups to your initial investment maximise the compounding effect, which can be likened to the snowball effect. Compounding happens when you take a number and keep increasing it over and over by a percentage, which, in terms of investing, leads to growth. Essentially, the more you add to your investment account, the faster your investments will grow over time as compounding takes effect.

To illustrate:

Let’s assume we’re working with an initial investment amount of $10k and an annual return rate of 8% p.a. If you were investing by yourself and were topping up that investment account with $250 per month, in ten years you’d get a return of $68,238. But if you and your investing partner were both topping up that investment account with $250 per month ($500 per month), in ten years you’d be looking at a return of $114,279.

Is a joint investment account right for you?

A common misconception is that joint investing is just for couples, but a joint account could be started by business partners, two members of the family, or even friends. There are many reasons for investing with someone else. It could be to maximise savings for a house or to reach your wealth goals sooner.

A joint account could be suitable if both individuals have clear objectives, clear communication, and an understanding of the basic principles of long-term investing.

Whatever the relationship is between the joint investors, you need to have conversations about what you both want from the joint account, what your time frame for investing is, and what happens if your relationship or friendship goes south. Ideally, all of this should be written down in a formal agreement that can be referenced at a later date.

When it comes to understanding the basics of investing, both investors should be educated on what makes for a good long-term investment, and they should also think about the risk tolerance of each individual. If you’re both targeting high growth, you’ll both have to be comfortable with sharp falls along the way. If either of you can’t stomach that, you might have to opt for a more conservative strategy with lower growth.

Once you’ve nutted out all these details, the beauty of successful long-term investing (joint or otherwise) is that you can be passive and let your investments do the work for you. However, you should have regular conversations about where your investments are at.

What are the benefits of having a joint account?

Aside from the obvious benefit of compounding growth, there are some other benefits of investing together.

Support and shared goals

Successful long-term investing requires waiting. You’ve put a little or a lot away, and you’re adding to that investment account on a regular basis so you can take advantage of compounding returns. The hard part is not accessing that money for something you want in the short term. The even harder part is watching your investments fall in value when markets go down.

When you invest with someone else, you’ll have someone around to stop you from selling your investments, and to keep you calm when markets crash (almost guaranteed to happen over the course of your investing journey). Think of it as an accountability partner for your financial health.

Additionally, whether you’re in a romantic relationship or business partner, having a shared goal you’re working towards can make you more excited about your future and therefore more likely to put money away.

Lower barrier to entry

Many investments – such as property, are expensive and it’s hard for people to get on the ladder. A share portfolio is less of a financial commitment and allows for growing wealth with smaller amounts of money.

Less management (potentially)

Depending on the type of platform or service you use, you might have to do quite a bit of work to manage your account. With a joint account, one person can be totally hands off if they wish, or you can split the management of the account.

A joint investment account means two people have control of the investment account. Both parties can view their account and transactions and can make deposits and withdrawals as they wish. Equal access to the account means that both parties should trust each other implicitly.

Fewer fees

One of the golden rules of investing is to keep a very close eye on the fees you’re being charged, as these eat into your returns. With a joint account, you’re only paying one set of fees, so that means less brokerage and other fixed costs. Over the years, this will add up and is one of the main advantages of having a joint investment account.

What are the limitations of a joint account?

You can’t buy time

My example about compounding returns is a compelling one, but the secret sauce is time. If you give your investments time to grow, you’ll be rewarded. So, if you want to successfully invest with your investing partner, you may want to start as soon as possible and be clear that you’re in it for the long haul.

Different risk profiles

When people invest in a share portfolio as a couple, it’s usually with a long-term strategy in mind. But every investment strategy has a different level of risk. Some are higher risk to target higher returns. Some investment strategies are low risk, but that usually means lower than expected returns. We’ve written this article to help clients understand what a risk profile is and why it’s important.

Problems arise when a couple has different risk profiles – but they don’t communicate about it. One person may not be comfortable with the inevitable ups and downs of a high-risk investment portfolio and this can cause a lot of tension. There are a number of online quizzes you and your partner can take to help determine your risk profile.

No set way to split assets

There’s no set way to split assets if your relationship goes south. This is something you have to figure out yourself, so ideally you’ll have an agreement or structure in place if your investments ever have to be split up. The best way to do this is to draw up a formal agreement before you make your first deposit.

For example, joint investors who want to go their separate ways we’ll have to think about how to split the investments into appropriate percentages, or if they’d rather to sell down the assets and release the money.

However you decide to invest, remember to educate yourself and set yourself up with a properly diversified portfolio. If you and your investing partner are clear about your goals, your timeline, and the risk you’re both willing to take, your joint investment account should work for both of you.