Helping my kid invest
September 24, 2015 9:57 AM   Subscribe

My 12 year old is looking to invest money someplace other than in a savings account. The objective is to get the money working harder than in a savings account (and learn about investing). There is about $1000 available to start. I will supplement the investment if a slightly larger startup amount is needed to open an account. This is a long-term investment.

Initial thought is to put some in an index fund like the Vanguard 500. Any feedback on this option? How about direct stock purchases from some larger companies?

What are some good books / online resources to help understand what other options are available?

Thank you
posted by GernBlandston to Work & Money (16 answers total) 19 users marked this as a favorite
You might read "A Random Walk Down Wall Street" together. If he wants to get started with investing, I would absolutely recommend sticking to index funds. I would warn you that right now is a volatile time in the stock market and he could lose money in the short or medium term. If he's not mature enough to handle that lesson right now, this might not be the time to venture into the market.

If he wants to see what playing the market is like without risking actual money, there's sites like PaperMoney that will let you simulate trading with real data but virtual money. IIRC, it lets you chose the date as well, so you can compare investing now, 5 years ago, and 10 years ago.

How about direct stock purchases from some larger companies?

These are often such a pain to deal with that I don't recommend them. Most quality brokers have DRIP programs set up that are much easier to deal with. And for the most part, picking specific stocks is going to have a worse outcome than a good index fund.
posted by Candleman at 10:10 AM on September 24, 2015 [4 favorites]

The most intriguing investment advice I've read recently was a pamphlet called "If you Can: How Millenials Can Get Rich Slowly"" by William J. Bernstein (pdf link)
posted by gyusan at 10:11 AM on September 24, 2015 [2 favorites]

If rates were better, I'd suggest a CD ladder. You get the ideas of slow, steady investing and dollar-cost averaging with the added bonus of not losing money.

Might be worth looking into, or keeping in mind for down the road.
posted by brentajones at 10:15 AM on September 24, 2015

I would definitely recommend a mutual fund over a single stock - it will be less volatile and your kid can learn about diversification. You should be able to see the mutual fund's top 10 stock holdings-- so you can still look up how each stock did that day, and see how it affected the fund as a whole.

Vanguard has a couple funds with $1000 minimums- not their S&P 500 index, but their Star fund and their selection of Target Retirement funds have $1000 minimums. Their Star Fund is a nice mix of stocks and bonds, so your kid can learn about different asset classes.

Alternately, you could buy an ETF of the S&P 500 fund (which doesn't require any minimum investment) but that would cost money to buy each time you make a purchase-- not a bad deal if it's a one-time $1000 investment, but if your kid wanted to add money on a regular basis it could get expensive.

I loved "A Random Walk Down Wall Street" but I think it might have been way too advanced for me at 12. "If You Can" (mentioned above) is short and is free, and Bernstein has written several extremely well-regarded books on investing.
posted by matcha action at 10:20 AM on September 24, 2015 [3 favorites]

My parents opened a Vanguard account for me when I was about that age (maybe younger, I don't remember). I still have it! I paid for part of school with it, and then it became my savings vehicle for the house down payment, and now I just put some money in it automatically every month for the next big thing. Definitely worth it. The only downside for a kid is that it's not quite as hands on and "fun" as picking stocks and being able to see how your decisions affect your gains and losses, but maybe you could do a sort of fantasy stock market game with him in parallel with the Vanguard fund and he can see whether picking stocks turns out to be better or worse than the mutual fund.
posted by backseatpilot at 10:24 AM on September 24, 2015 [3 favorites]

When I was 12 I was in a class where we played the stock market game. Our team chose investment and tracked them throughout the semester. We read newspapers and talked to relatives to research, and traded stocks on a weekly basis.

It was a great introduction to how the stock market worked and we even went on a field trip to the NYSE. That year I asked for Apple stock for my birthday, and my parents bought me 2 shares. That was 1992 and I recently sold the shares (which had spit several times), for A LOT more than the original purchase price.

I agree that a Vanguard account is a great idea for long term, but if the goal is to learn about investing I think it would be really fun to also play the stock market game (no real money involved). That way the kid has the secure investment while learning how that investment actually works.
posted by elvissa at 10:28 AM on September 24, 2015 [1 favorite]

Alternately, you could buy an ETF of the S&P 500 fund (which doesn't require any minimum investment) but that would cost money to buy each time you make a purchase

FYI, most of the big brokers have no transaction cost index fund ETFs now, so that helps with that, though you can't buy fractional shares.
posted by Candleman at 10:30 AM on September 24, 2015

Sharebuilder used to let you buy fractions of individual stocks. Maybe there's something like that still out there? (or maybe whatever-it-is-now still allows that?). They kept the transaction costs low by batching everyone's orders together and executing only once a day. That would make it okay to invest in individual stocks at the low amount you have.

Mutual funds are terrible and no one should buy them. They are no better than index funds on average, but cost 10x as much.
posted by flimflam at 10:32 AM on September 24, 2015

I'm going to go against the usual metafilter investment advice (DTMFA buy low cost index funds) and say that if you really want to teach him about investing, let him pick some stocks, with real money. I mean, in addition to buying some funds.

Stocks, for many of the reasons detailed above. And real money, because you just don't have the same investment (hurr) if it's just a game.

At the amount you're talking about (assuming you can afford it), it's just play money anyway. And a great, direct lesson about how fees will really eat into your return if you're only buying like $200 worth of something.
posted by danny the boy at 10:34 AM on September 24, 2015 [1 favorite]

That's enough to buy about 7 B-class shares of Berkshire Hathaway, which is a pretty stable investment and also means you get Warren Buffet's awesome shareholder letters in the mail.
posted by 256 at 10:34 AM on September 24, 2015 [1 favorite]

Also, the effort of researching an individual company, its industry, understanding fundamentals, isn't really relevant if you're buying into an index. Those are worth learning.
posted by danny the boy at 10:35 AM on September 24, 2015

Why not open a Robin Hood account for him where he can buy single shares of companies that intrigue him without having to worry about commission fee.
posted by Buddy_Boy at 11:48 AM on September 24, 2015 [2 favorites]

You could get him a subscription to Investor's Business Daily or buy a copy at a bookstore. It has much info about stock investing, also lists of stocks they think are good prospects (IBD100).
posted by H21 at 12:33 PM on September 24, 2015

Vanguard STAR
posted by LoveHam at 1:30 PM on September 24, 2015

You know exactly what you're doing, and this isn't your life savings, so I'm also going to deviate from my usual orthodox advice (Vanguard VTI, and VIG, and VEA or VXUS if you're feeling adventurous). With the $1000, you and your son should actually buy shares in individual companies as an educational exercise. And you can compare how they perform against VTI.

For those shares, I suggest shares in Apple, Berkshire Hathaway (as recommended above), and Disney, for nice letters and perks in the mail. When you do a comparison of your returns against VTI, remember to include the transaction costs of buying odd share lots.

(Sharebuilder - now Capital One Investing - or ETrade will be happy to take your $1000.)
posted by RedOrGreen at 3:34 PM on September 24, 2015 [1 favorite]

B-class shares of Berkshire Hathaway, which is a pretty stable investment

Berkshire Hathaway's stability is rather directly connected to Warren Buffett's longevity. 20 years from now, it may turn out to be a wise investment, but the company will not have been "stable" the way it has been the last 20. (Yes, there's a very good succession plan in place, but there's only one Warren Buffett)

I'd take most of it and put it in a broad index ETF (VTI, SPY, QQQ all come to mind). One benefit of this is that when kiddo hears "The S&P 500 is up 2% today" on the radio in the car, that directly translates to their SPY holdings.

Take the rest of it and have them choose stocks -- their favorite companies or well-researched investments, or just throw darts at the wall street journal. Give them the opportunity to sell/reallocate every 366 days.

[I am a former broker/dealer, and hold a series 7 (among other things), but I no longer work in the industry. This is not investment advice or a solicitation to buy/sell securities. Do your own homework and research.]
posted by toxic at 9:11 AM on September 25, 2015

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