Investing for teenager

[Sk08]

Started a custodial account at Fidelity for our 13 year old. She likes the idea of being able to be FI someday, but unfortunately has very little interest in learning about investing, she just said "buy what will make me the most".

Trying to keep it simple and not end up with multiple funds that overlap, we just went with a low fee S&P500 fund.

In our account the small cap and international has underperformed the 500 for many years, so not sure if they are worth adding to hers?

Anything wrong with just a S&P500 fund to keep it simple?

 

[MarieIG]

Nothing is wrong with a low cost S&P fund. DS does that for DGDs with gift money.

My only concern is - will she get upset with the ups and downs if she "loses" money? Will there be enough to split funds, a little in a CD/treasury, some in the S&P?

 

[VanWinkle]

I also have a UTMA account for a great niece at Fidelity. I started it when she was under 1 year old and used Fidelity's Total US stock market fund. She will have access to the funds at age 21 but my not use them for much longer. That is a long term investment and 100% equities is not excessive. If you think she will have access and spend sooner than 10 years, I would also mix in 20-30% of fixed income.

 

[mpeirce]

A simple index fund is the right answer, but...

I know when I was a kid, my DF invested a little stock for each of us kids. We each got a different stock. For a few of us, it really got us interested in investing. We had a little skin the game so to speak. So this approach can be a real incentive to learn. More so, I would think, than investing in a index fund.

On the other hand, while a few of DF's picks did very well, a few were real dogs. My sister's stock fell like a rock. Not a good experience for her.

What I did with my son was to split the difference. I invested a bit for him in a custodial account and most of it went into an S&P500 fund (which has done well over the years), but also pick two stocks for him to watch. Luckily they did well, but it wasn't enough to be a disaster if they didn't. It did help him to develop an interest in investing.

 

[Sk08]

Nothing is wrong with a low cost S&P fund. DS does that for DGDs with gift money.

My only concern is - will she get upset with the ups and downs if she "loses" money? Will there be enough to split funds, a little in a CD/treasury, some in the S&P?

Going to start with $2000, so have enough to split it up a little, but leaning on starting with 100% stocks for now. And we explained the swings up and down and she said she wont mind. Be interesting to see how she feels about it after it happens.

I also have a UTMA account for a great niece at Fidelity. I started it when she was under 1 year old and used Fidelity's Total US stock market fund. She will have access to the funds at age 21 but my not use them for much longer. That is a long term investment and 100% equities is not excessive. If you think she will have access and spend sooner than 10 years, I would also mix in 20-30% of fixed income.

That's a nice thing that you started for great niece.

As of now my daughter said she wants to start this and continue to add to it to be FI at an early age, so 100% equities unless she changes her mind.

A simple index fund is the right answer, but...

I know when I was a kid, my DF invested a little stock for each of us kids. We each got a different stock. For a few of us, it really got us interested in investing. We had a little skin the game so to speak. So this approach can be a real incentive to learn. More so, I would think, than investing in a index fund.

On the other hand, while a few of DF's picks did very well, a few were real dogs. My sister's stock fell like a rock. Not a good experience for her.

What I did with my son was to split the difference. I invested a bit for him in a custodial account and most of it went into an S&P500 fund (which has done well over the years), but also pick two stocks for him to watch. Luckily they did well, but it wasn't enough to be a disaster if they didn't. It did help him to develop an interest in investing.

I can see how a small % in individual stocks could be fun to watch, and we talked about that with her, but she has no interest in that, just wants to buy it and forget about it... and that's the reason we are thinking of starting it with a simple 500 fund.

 

[OldShooter]

... I can see how a small % in individual stocks could be fun to watch, and we talked about that with her, but she has no interest in that, just wants to buy it and forget about it... and that's the reason we are thinking of starting it with a simple 500 fund.

You are wise. A small undiversified portfolio is gambling. If the portfolio is a loser, she becomes disillusioned. If it is a winner, she is encouraged to develop bad habits.

Personally I would go with a total market fund like VTSAX. This fund picks up the small stocks not in the S&P and there is an argument that this will be long-term beneficial. (If she wants to read, look up "Fama/French Two Factor Model".) It also eliminates the front-running tussles when stocks come or go from the S&P. These exercises cost the fund holders a tiny bite every time.

If she has not seen this: "If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download) it is a worthwhile read, although I don't like (and you will probably not like) his recommended asset allocation.

 

[Sk08]

You are wise. A small undiversified portfolio is gambling. If the portfolio is a loser, she becomes disillusioned. If it is a winner, she is encouraged to develop bad habits.

Personally I would go with a total market fund like VTSAX. This fund picks up the small stocks not in the S&P and there is an argument that this will be long-term beneficial. (If she wants to read, look up "Fama/French Two Factor Model".) It also eliminates the front-running tussles when stocks come or go from the S&P. These exercises cost the fund holders a tiny bite every time.

If she has not seen this: "If You Can" by William Bernstein https://www.etf.com/docs/IfYouCan.pdf (free 16 page download) it is a worthwhile read, although I don't like (and you will probably not like) his recommended asset allocation.

I didn't think the returns form a total market fund differed much from a 500, but would be just as simple to start with that.

Thanks for recommending "If you can". I will try and persuade her into reading it.

 

[donheff]

My grandson got involved in a fantasy stock management program at school a few years ago and did the best in his class. It got him very interested in the market. So that Christmas I set up a custodial account for him at Schwab and gave him $200 to start. I told him he could use half for Schwab slices (individual S&P stock fractions at $5 increments). The other half went into a broad market index. I told him he could do whatever he wanted with money he earned but gifts should go at least half into the index so he could compare with his trading. This grandson is an outlier - funny, smart, a super athlete, but hard working and frugal. He runs a lemonade stand on Saturdays at a nearby community market and does surprisingly well. All of the proceeds go into his account as do cash gifts on birthdays, etc.

Fast forward to today, at 13, going on 14. He has about $5K in the account about 60/40 indexes and stocks. By now many of his stocks are regular shares, and he has recently gotten into buying penny stocks with a little bit of mad money. He has concluded that the bulk of his investments should go into index funds because he has done better with the simple set it and forget it approach than with his trading. He is also his sisters' FA - they also got $200 accounts. He has kept them in index funds and their accounts are in the low hundreds since they only dumped a couple of gifts in. They are just as smart is they boy but have zero interest in the market or savings.

It is interesting to see his changing interest level. He has to come to my house to review or trade (needs me to be signed in). For a long time, he would come by several times a week to see how things are going, and to buy and sell. Now, as he has become more of a passive investor, he only checks out the portfolio when he is here with the rest of the family.

 

[Stormy Kromer]

I think your investment will be very hard to beat over the long term and would challenge anyone (like a FA) who would recommend a more elaborate portfolio. You did well.

 

[target2019]

I am thinking about these things for a child account, with 20 year horizon for spending.

It's a teachable moment. You could choose Total Market AND S&P500 and see what happens.

One child may learn from that, but another would be focused on the total.

 

[Sk08]

My grandson got involved in a fantasy stock management program at school a few years ago and did the best in his class. It got him very interested in the market. So that Christmas I set up a custodial account for him at Schwab and gave him $200 to start. I told him he could use half for Schwab slices (individual S&P stock fractions at $5 increments). The other half went into a broad market index. I told him he could do whatever he wanted with money he earned but gifts should go at least half into the index so he could compare with his trading. This grandson is an outlier - funny, smart, a super athlete, but hard working and frugal. He runs a lemonade stand on Saturdays at a nearby community market and does surprisingly well. All of the proceeds go into his account as do cash gifts on birthdays, etc.

Fast forward to today, at 13, going on 14. He has about $5K in the account about 60/40 indexes and stocks. By now many of his stocks are regular shares, and he has recently gotten into buying penny stocks with a little bit of mad money. He has concluded that the bulk of his investments should go into index funds because he has done better with the simple set it and forget it approach than with his trading. He is also his sisters' FA - they also got $200 accounts. He has kept them in index funds and their accounts are in the low hundreds since they only dumped a couple of gifts in. They are just as smart is they boy but have zero interest in the market or savings.

It is interesting to see his changing interest level. He has to come to my house to review or trade (needs me to be signed in). For a long time, he would come by several times a week to see how things are going, and to buy and sell. Now, as he has become more of a passive investor, he only checks out the portfolio when he is here with the rest of the family.

Thanks for sharing about your grandsons investing journey, glad to hear that he wants to put the bulk of it in an index fund, and not looking at the portfolio weekly is a good thing.

I think your investment will be very hard to beat over the long term and would challenge anyone (like a FA) who would recommend a more elaborate portfolio. You did well.

Thanks, its nice to keep it simple and get returns that the broad market provides. Its always tempting to add some sector funds in hopes of beating the market, but can quickly end up with 15 different funds that when added all together end up being close to a total market fund anyway.

I am thinking about these things for a child account, with 20 year horizon for spending.

It's a teachable moment. You could choose Total Market AND S&P500 and see what happens.

One child may learn from that, but another would be focused on the total.

It would be interesting to have both to compare, but as I mentioned above, it is so tempting to add another fund to compare performance, and it gets messy pretty quick. I learned that several years ago in our taxable account.

 

[mpeirce]

My grandson got involved in a fantasy stock management program at school a few years ago and did the best in his class. It got him very interested in the market.

I have mixed feeling about these stock market competitions.

On the one hand, they do get some kids interested in investing and learning about it.

On the other hand, they often teach bad lessons. Because it's usually a short term competition, it's much closer to day trading than long term investing.

When I was in 7th grade, we did one of these. I enjoyed it. I even won it. You know how? I put all my "money" on one stock that did very well for a month. Pure luck. Anyone who invested in the S&P500 certainly didn't win.

I'm not sure how to fix these things while keeping them interesting and fun, but it would be worthwhile to figure that out.

 

[target2019]

Thanks for sharing about your grandsons investing journey, glad to hear that he wants to put the bulk of it in an index fund, and not looking at the portfolio weekly is a good thing.


Thanks, its nice to keep it simple and get returns that the broad market provides. Its always tempting to add some sector funds in hopes of beating the market, but can quickly end up with 15 different funds that when added all together end up being close to a total market fund anyway.



It would be interesting to have both to compare, but as I mentioned above, it is so tempting to add another fund to compare performance, and it gets messy pretty quick. I learned that several years ago in our taxable account.

Addressing the last paragraph: YMMV, of course. You can exclude the teachable moment opportunity if you prefer that. Or limit the impact of a 2nd fund as you wish.

The issue of control comes into the mix, of course. It depends on the type of account you're working with.

It is interesting how to address concerns in an evaluation of the many possibilities.

 

[OldShooter]

... It is interesting to see his changing interest level. He has to come to my house to review or trade (needs me to be signed in). For a long time, he would come by several times a week to see how things are going, and to buy and sell. Now, as he has become more of a passive investor, he only checks out the portfolio when he is here with the rest of the family.

That is a fantastic result! Congratulations.

... It's a teachable moment. You could choose Total Market AND S&P500 and see what happens. ...

Not much will happen. The not-in-the-S&P stocks are highly correlated to the 500. I like the total market because that is closer to the academic research that says we should hold "the market portfolio" but I don't think there is a strong financial argument to choose one or the other. You can use Portfolio Visualizer to compare them. IIRC one or the other will be ahead by a tiny amount depending on the time period you select.

I have mixed feeling about these stock market competitions. ...

I don't. I think they are a bad idea, especially because there is a teacher behind each exercise who clearly conflates investing with trading. I think this little story illustrates the problem this kind of education contributes to:

A few years ago when I was developing my Adult-Ed investing class I spent a bunch of time with a TDAmeritrade branch manager. At that time TD's business focus was on day traders. After an hour or so we were pretty comfortable with each other, so I asked: How did your day traders do in the market last year?" There was a long, embarrassed pause, then she said "One and a half percent." That would have been 2017, when the market indices were up between 20% and 40%. Sic transit gloria mundi.

 

[Slater]

Have multiple accts for my son but started this one at ide say 7 years old & he's 14 now...
I have my son onboard with a Vanguard UTMA & all the money I contribute to it all goes into VTI / VTSAX.....
Hopefully when he becomes a young man & starts working, he continues the path of shoveling money into it...
Trying to give him a little head start in life.....