Revisiting investment options for children

Tribune staff reporter

With a couple 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 readers provided a couple of weeks ago, after I answered a question 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 -- the boy 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 illustrates the power of compounding, and I urged the father to show his son that if he invested just $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. Since 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, for example, get into the funds 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 can 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 like 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 knows the approach is a lot riskier than using a mutual fund. But she thinks 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," she said.

Readers urge parents to talk about what it means to invest in a stock. With a company like McDonald's, for example, 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, for example, caused the stock to tumble several years ago. McDonald's later introduced healthier menu options and the stock rebounded.

Parents with older children can use a tool at to demonstrate that stock picking isn't just gambling. At the site, click on "investing" and then "research stocks" to learn how to analyze a company.

Commissions also are important for successful investing because paying them erodes the power of compounding.You can cut them down to about $7 at discount brokers, instead of more than $50 at full-service brokers.

Mauretta Mattison suggests cutting costs even further by enrolling in a direct stock plan, direct stock purchase plan or dividend reinvestment plan.

These investment programs allow individuals to buy shares of stock directly from companies using cash, or by reinvesting dividends from the stocks. By going right to the company, rather than a broker, the investor avoids the commissions. And once the person has a share of stock, he or she can buy partial shares through a direct program, and add to it over time.

"I started my grandchildren with things they were interested in --Pepsi, Wendy's and McDonald's," said Mattison. "I gift them $50 to $100 on birthdays and Christmas and they can get printouts and watch their stock grow."

For information on these programs try,, or

An argument for accumulating shares of stock one-by-one through a dividend reinvestment program is that an investor can buy a couple of shares from multiple companies and be diversified. Assuming they are solid companies, the combination can insulate investors from shocks in the market that hit one industry, or a single company, more than another.

Another reader, Gerry Krupka, suggested a happy medium between having the diversification of a mutual fund and stocks with names children can recognize.

He suggests buying an exchange-traded fund that specializes in consumer discretionary stocks -- companies with names children recognize. For example, the Consumer Discretionary SPDR (ticker symbol XLY) invests in Walt Disney, McDonald's, Home Depot Inc., Target Corp., Starbucks Corp. and other companies with recognizable names.

If you were helping a child invest, you could go to a site such as, type in XLY, and then click on "top holdings" on the left.

You will be able to show a child a list of companies that might be exciting, explaining that with his small amount of money, he would own a tiny piece of each company.

On the other hand, you could have a child like the father who wrote to me. The boy didn't care if he owned Walt Disney or companies he had never heard of. He asked just one thing: "Where can I make the most money?"

The father, who is a professional investment manager himself, decided on the diversified Vanguard Star mutual fund. It's not a highflier, but it gives the child every investment he needs -- small stocks, large stocks, international stocks and bonds. And the fees are low, so the boy will get a good bang for his buck.


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