Investing for kids

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  • #137284
    SkiCrazy74
    Participant

    Here’s my question. My two children (6 and 8) have money in the bank from birthdays and what not. For a while I used it to buy CDs but now they have matured and the money that was earning a decent 4.5% (roughly) is now lucky to make 2% if I lock it away for five years. As I get older and learn more about investing, I want to provide my children with a better head start. What is a good investment plan for their money? I would like to go high risk figuring on they don’t really “need” that money for quite some time. Any thoughts?

    #137381
    Dan Schointuch
    Keymaster

    Check out passively managed index funds, like those offered by Vanguard, Fidelity, or Schwab (those three specifically have very low fees). An S&P 500 index fund could be a good choice. You could then get a bond fund to pair with it and put 90% of the money in the S&P 500 and 10% in the bond fund.

    Once or twice a year, rebalance the funds to get them back to a 90/10 distribution. So if your stocks have done really well and bonds have languished, you’d end up selling some of the stocks and buying some of the bonds to get things back to 90/10.

    If you’d like, by adjusting the distribution you can adjust your risk (put a greater percentage in bonds and less in stocks to lower your risk but also potential reward). So you could very well do a 70/30 split instead of 90/10 if you wanted less risk, or 50/50, etc.

    To trade these funds, you’ll probably want to open an account with Fidelity, Vanguard, or Schwab directly as they let you buy and sell many of their own funds for free.

    For example, this is Fidelity’s S&P 500 ETF: https://screener.fidelity.com/ftgw/etf/goto/snapshot/snapshot.jhtml?symbols=IVV

    Alternatively, you could use a total US stock market fund, like this one: https://screener.fidelity.com/ftgw/etf/goto/snapshot/snapshot.jhtml?symbols=ITOT

    And this could be your bond fund: https://screener.fidelity.com/ftgw/etf/goto/snapshot/snapshot.jhtml?symbols=AGG

    The big advantage of using a fund is that you’re not exposing yourself to the risk that any single company will go bankrupt and take all or a big chunk of your savings with it, while still seeing an increase in value as the overall market rises in the long-term.

    You’ll also want to make sure as much of this activity is happening in tax advantaged accounts as possible, like a retirement account or college savings account.

    (Note: You can also split the stock portion between the S&P 500 or total US market fund and a total international market fund to take advantage of any growth in the world economy as well. There are also often lower taxes on the total international market funds as a small portion of the investing activity going on within the fund is typically not taxable.)

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