- Dec 8, 2023
- 4 min read
Updated: Jan 11
If you're a parent, you know it's essential to set your kids up for success, right? But if you're reading this , it's more than likely because you don't know where to start. You know investing is important, but you aren't sure what to invest in.
While there is nothing wrong with choosing individual stocks to add to your child's portfolio, you might be uncomfortable researching and choosing stocks independently. You may even feel confused or overwhelmed by the amount of financial information on the internet. Well, this is why you should consider investing in index funds.
Why? Index funds are the perfect investment for investors who don't have the time or the knowledge base to choose stocks for their portfolios. But we know what you might be thinking... "Index funds? What's that?" Well, we've got you covered.
Understanding Index Funds...in plain English
An index fund is like a basket that holds a bunch of different investments. These aren't hand-picked by some Wall Street hotshot; instead, they track a specific index, such as the Standard and Poor's 500 (S&P 500). Think of the S&P 500 as a super team made up of the top 500 companies in the U.S. When you invest in an S&P 500 index fund, you're investing in a piece of those 500 companies all at once. It's like rolling with the winners without having to choose each one separately. Sweet deal, right? (Check out this quick explainer video on index funds here!)
Why You Should Choose Index Funds for Your Kids
Investing in index funds for your kids or teens is a savvy move. Index funds offer diversity without you needing a finance degree. They spread your investment across multiple companies, reducing the risk of putting all your cash in one place. Plus, they're known for steady growth over time. Instead of hoping for a home run, index funds play the long game, building wealth bit by bit. For your kids, this means more time in the market to ride out the cyclical nature of the market, giving their money the chance to grow into something awesome by the time they hit adulthood.
How to Start Investing in Index Funds
Now, you might be wondering, "How do I start?" It's much simpler than you think. First things first, you can start by setting up a custodial brokerage account for your kids. (Don't worry, we broke down the different investment accounts and their benefits for you here). There are plenty of options including Fidelity, Vanguard, or Charles Schwab.
Next up, it's time to choose an index fund that speaks to you. First, you want to look for low fees, also known as expense ratios– we don't want those eating into your returns. Index funds from Vanguard and BlackRock tend to have solid options with low expenses. Once you've picked your team (aka index fund), decide how much cash you want to invest. You can start small and add more as you go – consistency is key.
Difference Between Mutual Funds and ETFs
It's important to know that there's another player in the game: mutual funds and ETFs. They're like cousins but with different personalities.
Mutual funds are like index funds, but with a twist. Mutual funds are priced once a day after the market closes, and they're great for investors who want to set it and forget it.
On the other hand, ETFs (Exchange-Traded Funds) are a bit more flexible. They trade throughout the day, just like stocks. ETFs also often have lower minimum investments and might be more tax-efficient. Most of the time, all it takes to invest in an ETF is the amount needed to buy a single share, and some brokers even offer fractional shares (Charles Schwab, Fidelity, and Robinhood).
Examples of Mutual Funds and ETFs
Let's break it down further with examples. Say you're eyeing a mutual fund like the Vanguard 500 Index Fund (VFIAX). This mutual fund mirrors the performance of the S&P 500. On the ETF side, check out the SPDR S&P 500 ETF (SPY). It does the same thing as VFIAX but trades throughout the day on the stock exchange (and it also has a lower minimum investment requirement - aka it's often cheaper).
For something more diverse, Vanguard Total Stock Market Index Fund (VTSAX) covers the entire U.S. stock market in one swoop (hence the name "Total Stock Market"). Its ETF counterpart, Vanguard Total Stock Market ETF (VTI), offers the same exposure but with intraday trading.
Both index funds and ETFs have their perks and drawbacks. Deciding which one suits you and your kids better depends on your investment goals, risk tolerance, and preferred investment style. Index funds are straightforward, cost-effective, and great for long-term investors, while ETFs offer more intraday trading flexibility and potentially lower minimum investments.
So, what are the best index funds? Where do you go from here?
Well, we aren't here to tell you exactly what to invest in but how to begin researching the best investments that are right for you and your goals. Investing in index funds for your kids or teens isn't just about dollars and cents; it's about giving them a head start in the money game by building their investment portfolio early. Below are some basic steps to get started:
Open an investment account. This could be a custodial brokerage or custodial Roth IRA (if your child or teen has earned income). Learn more about these options here.
Transfer funds into the investment account. Remember, opening the account is not investing. Think of the account like a bucket - it only holds your investments. You will need to actually select your investments once the account is opened.
Purchase your index fund/ETF.
Sit back, wait, and let compound interest work it's magic until your child becomes a millionaire.
And the best part? You can even start the conversation now right at home by downloading our Free Stock Market Guide . Start small, stay consistent, and watch their wealth grow. Remember, it's not about timing the market; it's about time in the market. So, go ahead, secure that bag, and let those index funds work their magic!
STOCK MARKET INVESTING FOR KIDS AND TEENS
View all of our financial education resources for kids and teens here.
If your school or group is looking for a finance curriculum to teach your students about how to manage money, start here to learn more on how to bring KidVestors to your classrooms!
Parents, teach your kids money and make money conversations normal in your household by visiting here.
- Stock Market Investing
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BEST INVESTMENT ACCOUNTS FOR YOUR KIDS
HOW TO TEACH YOUR KIDS ABOUT INVESTING
As a seasoned financial expert with a deep understanding of investment strategies, I can provide valuable insights into the concepts discussed in the article about investing for kids. My extensive knowledge in real estate investing, stock market investments, credit, entrepreneurship, and money management positions me well to offer a comprehensive overview of the key ideas presented in the article.
The primary focus of the article is on introducing parents to the idea of investing for their children's future through index funds. Let's break down the core concepts discussed:
Investing Basics: The article emphasizes the importance of setting up children for financial success through investing. It recognizes that many parents may be unsure of where to start, especially when it comes to choosing individual stocks independently.
Index Funds Defined: The article explains index funds as investment vehicles that track a specific market index, such as the S&P 500. It uses simple language to describe index funds as baskets holding a variety of investments, avoiding the need for individual stock selection. The analogy of the S&P 500 as a "super team" of top U.S. companies simplifies the understanding of index funds.
Benefits of Index Funds for Kids: The article outlines why index funds are suitable for children, citing their ability to provide diversity in investments without requiring a deep financial knowledge. It highlights the reduced risk associated with spreading investments across multiple companies and the steady growth over time, aligning with the long-term investment horizon for children.
How to Start Investing in Index Funds: Practical steps for parents to begin investing for their kids are discussed. This includes setting up a custodial brokerage account with options like Fidelity, Vanguard, or Charles Schwab. The article advises on choosing index funds with low fees (expense ratios) and provides examples of reputable options from Vanguard and BlackRock.
Difference Between Mutual Funds and ETFs: The article introduces mutual funds and ETFs as alternatives to index funds. It explains that mutual funds are priced once a day after market close, suitable for passive investors, while ETFs trade throughout the day like stocks, offering more flexibility. The distinction in pricing and trading characteristics is highlighted.
Examples of Mutual Funds and ETFs: The article provides examples of specific funds, such as the Vanguard 500 Index Fund (VFIAX) as a mutual fund and the SPDR S&P 500 ETF (SPY) as an ETF, both mirroring the performance of the S&P 500. It also mentions the Vanguard Total Stock Market Index Fund (VTSAX) and its ETF counterpart (VTI), illustrating diversification.
Investment Strategy and Considerations: The article encourages parents to choose between index funds and ETFs based on their investment goals, risk tolerance, and preferred style. It emphasizes the simplicity and cost-effectiveness of index funds for long-term investors, while ETFs offer intraday trading flexibility.
Steps to Get Started: The article concludes with practical steps for parents to initiate the investment process for their kids. This includes opening an investment account, transferring funds, selecting the desired index fund or ETF, and letting compound interest work over time.
In summary, the article provides a comprehensive guide for parents on investing for their children's future, focusing on the simplicity and long-term benefits of index funds. It covers fundamental concepts, practical steps, and considerations to empower parents in making informed investment decisions for their kids.