Suggestions may interest your children in investing

On the Money

Your Money

December 31, 2006|By Gail Marksjarvis | Gail Marksjarvis,Chicago Tribune

With a couple of more days left of the winter school break, and parents scrounging for ideas to keep children from bouncing off the walls, you might want to provide a lesson in investing.

So I am going to relate suggestions that readers provided after I answered a question recently in this column from a father searching for a mutual fund for a 10-year-old curious about the stock market. The father was struggling to identify a mutual fund that would accept an investor with less than $1,000.

I suggested that if his son had income from working - even mowing lawns or raking leaves - that the youngster could open a Roth IRA and make $50 monthly contributions to the T. Rowe Price Equity Index 500. With $250, he could make a one-time contribution to the SSgA S&P 500 Index fund, or the Buffalo Small Cap or Mid Cap Funds.

A calculator at www.money chimp.com illustrates the power of compounding, and I urged the father to show his son that if he invested $250 every year until he retires, he could be a millionaire - or close to one. Try it using historical average annual returns for mutual funds - 10 percent for those investing in large-company stocks and 12 percent for those specializing in small-company stocks.

Those returns, of course, are no guarantee. Year to year, they can be higher or a lot lower. But mutual funds are a good way to put a young investor on track to secure returns near the averages for the long term.

Because funds invest in multiple stocks, the winning stocks buffer the losers and take the sting out of a bad bet on a single stock.

But readers of this column pointed out that mutual fund investments pose difficulties for children who might have some gift money but no money from working.

They can't get into the funds that I mentioned unless they have $250 in earnings to open an IRA, and other funds that welcome investors with just $250 tend to gouge them on fees - charging "loads" and expenses well over 1 percent of the money invested in a fund.

So instead of mutual funds, readers suggested choosing individual stocks. They acknowledged the likelihood that a bet on a single stock could go bad, but many said that when they help children and grandchildren with individual stocks, the children get excited about companies that are familiar to them.

Children immediately have a sense of what they are getting if they invest in a company such as Coca-Cola Co., Walt Disney Co. or McDonald's Corp.

Sue Rose of La Grange, Ill., said she learned about investing as a child because her father would help her invest Christmas gift money in a couple of shares of stock each year.

She said she knows that the approach is a lot more risky than using a mutual fund. But she thinks that there is value in learning that stock investments aren't a "sure thing," and that investors must analyze whether a company's profit potential and stock price are promising.

"Some of the stocks my father purchased for me as a child did not perform exceptionally well, but there are some good lessons to be learned from the stock market," Rose said.

Readers urged parents to talk about what it means to invest in a stock.

With a company such as McDonald's, parents could point out that the stock price won't keep going up unless profits do.

That could depend on whether more people want more hamburgers than they are now buying. Concerns about mad cow disease and a change in consumer tastes caused the stock to tumble several years ago. McDonald's later introduced healthier menu options, and the stock rebounded.

gmarksjarvis@tribune.com

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

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