Is it too early to start a portfolio for my one-year-old child?
I have a one year old child. Is it too early to start a portfolio for my child, and would it be better to start off with a stock or a bond?
Josh is the #1 ranked adviser on Investopedia Advisor Insights
It is definitely not too early and I commend you for taking advantage of the incredible investment growth you can get by starting an account for your one-year-old. I am assuming your child will not need the money for at least 18 years, and so a stock-heavy portfolio would be appropriate. I would even be comfortable with a 100% stock portfolio, assuming other factors align and assuming you yourself won't have need of the money. You should consider a broadly diversified, low-cost fund instead of an individual stock or bond.
What to Invest In — Type of Fund to Look At
An index fund would be an a good place to start. Appropriate indexes include the S&P 500, the S&P 1500, the Russell 3000, or the MSCI All World Index. The S&P 500 is made up of a sampling of large U.S. companies, while the S&P 1500 and the Russell indexes include smaller companies. And the MSCI index includes companies from across the world. There are thousands of potential indexes, so it is important the fund you choose tracks an index that is appropriate to your goals.
Realize any funds which track stock indices will have a higher chance for losses during a market downturn verses a fund which invests in bonds or a mixture of bonds and stocks. At the same time, the fact you don't need the money anytime soon means you can safely let the money sit in the fund until the market recovers, no matter how long it takes to recover.
What Account to Invest Through — Identify the Goal for the Money
Another question you should ask yourself is what you want the money to be used for. This will determine the type of account to put the investments in. If it is for their education, you might want to invest through a 529 plan, as you will also enjoy tax advantages. Alternatively, a standard taxable account would be preferred if you want your child to have more flexibility with the money, say for goals such as starting a business, paying for a wedding, or buying a first house.
I generally advise clients to avoid a UGMA or UTMA account, as your child would have 100% ownership of the money at age 18 and you lose all control. UGMA and UTMA accounts will also reduce their financial aid for college more than a 529 or other account.
Unless you have a very specific need you want the money to go toward, there is no requirement to have your child's name on the account at all. Instead, just open up an account in your name (or you and your spouse) and contribute to the account knowing it is for your child. This will keep you in control of the money, and allow you to decide when and under what circumstances you want to give it to your child.
Determine How Much to Contribute
Overall, your plan is amazing, and more parents should have the fore-thought you have in providing for your child's future. As a follow-up question, how much money should you contribute to the account? If it is for a college account, you should consider how much money you will need for college at age 18. Then calculate how much you need to invest each month to pay for college. Feel free to set up a meeting if you’d like help with any of it.