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Your Children: An Investment in their Future
By Nancy Zambell, Contributing Editor, Financially Fit
As 2006 winds to a close, we are all busy with holiday shopping, celebrations, and some of us - I hope quite a few! - may even set aside a little time to reviewing the state of our financial lives.
But there's one more item I'd like you to add to your list that will reap huge benefits for years, and for generations - far into the future: Teaching your children about investing - and creating investment accounts for them.
Many parents today have begun saving for their children's college educations, and we addressed the 529 college savings plans in our September 12 and September 19 issues of Financially Fit, to assist you with that important investment decision.
Building upon those plans will go a long way toward ensuring that your children at least enter that stage of their lives relatively stress-free, financially. But to really give them a solid financial footing to ease their way along the volatile economic cycles they are sure to face in their lifetimes, nothing will help them more than an initiation into the investing world.
The first step is to talk about money - with both your sons and daughters. Many surveys have shown that parents, particularly fathers, do discuss money, saving and investing, with their sons, but their daughters are often left out. A few years ago, the Dreyfus Gender Investment Comparison Survey found that parents encouraged boys to begin earning money at age 13, compared to age 16-18 for girls, and that twice as many boys as girls were advised to save their money.
The money conversation should include:
- The value of money - today and into the future
- The temptation of debt
- The beauty of compounding
- The basics of the stock market - its origins, its accomplishments and its promise
It's important to keep your explanations simple - and fun. To introduce children to the world of investing, I suggest talking about companies with whom they are familiar - businesses like McDonalds, Toys R' Us, Coca-Cola, William Wrigley Jr. Co., Disney, etc. Many public companies offer small bonuses to their shareholders that kids often enjoy. For instance, I have set up investment accounts at McDonalds for all my nieces and nephews, and in its annual report, McDonald's always includes a coupon for free food. And Wrigley's sends gum to its shareholders once a year.
Then, log onto the Internet (which most kids have no problem with!) and show them how to find stock quotes and stories. One of my favorite sites is http://finance.yahoo.com/
For additional information, go to the home pages of the companies you want to discuss. You can get there by typing in your ticker symbol, then clicking on Profile on the Yahoo! pages.
Once you have the basic explanations down, including how to find the information you need, you can decide if you want to invest in individual stocks or mutual funds.
If you decide on individual stocks, you can always set up a custodial account for a minor at your brokerage firm. Alternatively, a really easy method for regular - and low-cost investing, is to buy Dividend Reinvestment Plans (DRIPs). I wrote about those in our Financially Fit issue on July 18, 2006. Fortunately, there are many companies that will assist you in purchasing DRIPs. But my hands-down favorite is from Better Investing.
Better Investing is the National Association of Investors web site. This is the company that spawned the legions of investment clubs all over the world. And its Low Cost Monthly Investment Plan will allow you to invest by purchasing just one share in well over 100 companies, for a minimal set-up fee. After that, most plans will allow you to buy shares - in small amounts - through a regularly-scheduled investment plan, or whenever you want.
For a few years, several mutual fund companies operated kid-friendly funds, but those have disappeared. But don't give up! There are still lots of funds out there that would be suitable for your children's investing plan. Look for funds with low minimum initial investments, low future contribution limits, low expenses, low turnover, well-diversified, and with decent returns, as compared to the S&P 500. Morningstar is a site that will help you in your search.
The Morningstar site will allow you to type in your search parameters and will give you a list of funds that will suit your needs - all for free! I did a quick search and found 25 domestic mutual funds, rated 3 stars or more, with expense ratios less than 1%, that outperformed the S&P 500 over a three-year period.
Then, to further narrow your search, you can check each fund's allocation of holdings to see if they invest in kid-friendly companies. To encourage as many of your children's aunts, uncles and grandparents to also contribute to the plans, you may want to try to eliminate the funds that include the 'sin' companies - those involved in the tobacco, alcohol or gambling businesses.
Once you have made your investment choices, you are well on your way to ensuring that your children enjoy financial freedom - their entire lives. But just two reminders:
- Set-up a system to monitor your investments. Yahoo! has a wonderful portfolio maintenance system on its web-site.
- Cement the thesis of long-term investing in your children's minds.
- Encourage them to come to you with investment ideas.
And most of all, have fun!
Until next week…
This concludes this week's issue of Financially Fit. We encourage you to visit our website to review past issues of Financially Fit:
http://www.brokeradviser.com/newsletter.cfm
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