What is a good investment vehicle for introducing kids to investing?

Question

We have been paying our four kids a small allowance. We help them split their money by percentage into different categories (savings, investment, responsibility, school, play, etc.) One of the categories is "investment" which so far has been put into a savings account. Now that they have a little bit of money collected there (a couple hundred total), I thought it might be a good idea to help them be more actively investing it.

I did some real estate investing a while back, right before the bubble popped, so it didn't turn out too well. I purchased stock and options at companies I worked for, but those never paid out either. I've also done some investing on Prosper, which did OK. My point is I am not a sophisticated investor, but would like to start my kids on a good path.

So what is a good investment to introduce kids too? It is OK if it isn't 100% safe (nothing is) since I will encourage them to diversify into multiple investments, so if one fails they can see it as a learning experience, but I don't want them to loose it all. I'd also like something that they can be involved in, where we can check on it from time to time to see how it is doing, then maybe make decisions on how to improve the investment.

This will also be a learning experience for me as well. Suggestions?

Answer 1

I'd also look into index funds (eg Vanguard) as they have low management fees. you can buy these as ETFs as well - so you can buy in at a very low starting amount.

An index fund can also be a talking point for your kids about what an industry index is and how it relates to the companies that fall into it. Also about how mutual funds try to "beat the market" - and often fail.

Answer 2

Buy them a physical stock certificate... you can request them from a broker, or buy through a company like http://www.oneshare.com.

Other options:

• US Savings Bonds
• Collectible coins
• Passbook savings accounts.

Answer 3

There are mutual funds oriented toward kids or that are suitable in some way (e.g. they have low minimums). Here are two articles with mention of some of them:

• http://articles.moneycentral.msn.com/Investing/Morningstar/6FundsToInvestInWithYourKids.aspx (mentions USAA First Start Growth, TIAA-CREF Equity Index Investor, Vanguard STAR, Pax World Balanced, T Rowe Price Spectrum Growth, Ariel Appreciation)
• http://news.morningstar.com/articlenet/pfarticle.aspx?id=166867 (this may require a subscription, but the funds it mentions are Vanguard STAR, Oakmark Fund, Oakmark Select, because they have low minimums)

Of those only USAA First Start Growth is explicitly for kids: http://quote.morningstar.com/fund/f.aspx?t=UFSGX or https://www.usaa.com/inet/pages/mutual_funds_reports

Another fund aimed at kids is Monetta Young Investor http://quote.morningstar.com/fund/f.aspx?t=MYIFX or http://www.younginvestorfund.com/

The diversified funds (with fixed income) like USAA First Start Growth, Vanguard STAR, Pax World Balanced, etc. have the nice property that they won't be as volatile and may spend less time "underwater," so that might better convey the value of investing (vs. an all-stock fund where it could be kind of depressing for years on end, if you get bad luck). Though, I feel the same principle applies for adults.

Kids may appreciate intangible aspects of the funds, e.g. Pax World Balanced invests in sustainable companies, Ariel Appreciation also has some social parameters and I think the guy running it does charity work with kids, that type of thing.

There should be quarterly and annual reports on mutual funds (or stocks) that would give kids something to read and think about related to the investment.

Disclaimer: none of these funds are recommendations, I have not researched them in any detail, just giving you some leads.

Answer 4

For "real" investing I would usually recommend mutual funds. But if you are trying to teach a kid about investing, I would recommend they choose individual stocks.

That will give them a great opportunity to follow the companies they bought in the news. It also gives you an opportunity to sit down with them periodically and discuss their companies performance, economic news, etc. and how those things play into stock prices.