Getting investor started at age 10

Your Money

November 19, 2006|By Gail MarksJarvis | Gail MarksJarvis,Chicago Tribune

My 10-year-old son is suddenly excited about the stock market, and he's bugging me to teach him about investing. I thought I'd put some money in a mutual fund for him and have him match it. But I'm having trouble finding a fund that will accept less than $1,000. Do you have any suggestions?

- G.G., Minneapolis

This sounds like an easy question, but it isn't.

As you have discovered, few mutual fund companies are interested in investors who don't come through the door with at least $2,500.

This is too bad, and not merely because it's difficult to get children started. It's also a deterrent to young adults, or low-income people, who want to stash away small amounts of money.

But there are some possibilities.

If your son has earnings from a job - even mowing lawns or raking leaves - you could open a Roth individual retirement account for him.

The trouble with a Roth IRA is that your son can't simply remove all the money on a whim. Maybe that's a benefit, but he might not see it that way.

Roth IRAs are set up for retirement savings. But investors are allowed to withdraw their savings, without paying a penalty to the IRS, if they use the money for college or a down payment on a house.

People also can withdraw money they have deposited as long as they don't pull out the earnings they've made on their investment.

So if your son's $250 becomes $300, he would be free to use the original $250 to pay for computer equipment, a bicycle or anything else at any time. But the $50 in earnings would have to stay invested.

Your son might be enticed to leave all the money deposited, and perhaps even add more, if you show him the power of investing small amounts early in life.

For example, if your son invests $250 every year from now until he retires in a small-cap fund - a fund that invests in small companies - he could be a millionaire when he retires. You can demonstrate this on the compounding calculator at www.moneychimp.com.

Historically, small-cap stocks have averaged a 12 percent return annually over the last 80 years. And while there's no guarantee that history will repeat, if it does, investing $250 every year could give him $1,186,000 at age 65.

If you are a believer in index funds, it's tough to find any options for an investor with little cash. The TIAA-CREF Equity Index allows investors entry with just $50. T. Rowe Price also has an array of funds, including an S&P 500 index fund, that will accept people with $50.

This is an excellent opportunity for young adults with small, but regular paychecks. But this model might not work for children trying to invest gift money and earnings from odd jobs.

Many low-minimum funds have sales charges - known as loads - that erode the power of investing. They also tend to have high expense ratios.

Searching for a fund might be an opportunity to teach your child about the power of compounding working against him, as well as for him, as an investor. Notice the fees funds charge by examining loads and expense ratios, and make your son aware that seemingly small fees can deliver a large blow.

You might also want to provide a lesson on diversity. Funds such as the T. Rowe Price Spectrum Growth fund invest in the full array of U.S. stocks, and also international stocks.

That will give your son the advantage of making money during the inevitable cycles in the market that hurt one type of investment, but not another.

With these three lessons, he will have the basics for investing: Use compounding; keep fees low to retain as much of the earnings as possible; and stay diversified to take advantage of cycles that are friendly and to insulate against those that aren't.

gmarksjarvis@tribune.com

You also can leave a message for Gail MarksJarvis at 312-222-4264.

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