TL:DR
If you're a parent, you know it's essential to set your kids up for success, right? But if you're reading this, it's more than likely because you don't know where to start. You know investing is important, but you aren't sure what to invest in.
While there is nothing wrong with choosing individual stocks to add to your child's portfolio, you might be uncomfortable researching and choosing stocks independently. You may even feel confused or overwhelmed by the amount of financial information on the internet. While we have made it easy for you and your family to learn how to manage finances, let's talk about why you should consider investing in index funds .
Why? Index funds are the perfect investment for investors who don't have the time or the knowledge base to choose stocks for their portfolios. But we know what you might be thinking... "Index funds? What's that?" Well, we've got you covered.
Understanding Index Funds...in plain English
An index fund is like a basket that holds a bunch of different investments. They are known for tracking a specific index, such as the Standard and Poor's 500 (S&P 500).
Think of the S&P 500 as a super team made up of the top 500 companies in the U.S. When you invest in an S&P 500 index fund, you're investing in a piece of those 500 companies all at once. It's like rolling with the winners without having to choose each one separately. Sweet deal, right? (Check out this quick explainer video on index funds here!)
Why You Should Choose Index Funds for Your Kids
Investing in index funds for your kids or teens is a great move. Index funds offer diversity without you needing a finance degree. They spread your investment across multiple companies, reducing the risk of putting all your cash in one place. Plus, they're known for steady growth over time. Instead of hoping for a home run, index funds play the long game, building wealth bit by bit. For your kids, this means more time in the market to ride out the cyclical nature of the market, giving their money the chance to grow into something awesome by the time they hit adulthood.
How to Start Investing in Index Funds
Now, you might be wondering, "How do I start?" It's much simpler than you think. First things first, you can start by setting up a custodial brokerage account or custodial Roth IRA for your kids with firms such as Fidelity, Vanguard, or Charles Schwab. (Don't worry, we also have a free class where we talk about this option in more detail and will answer all of your questions).
Next up, it's time to choose an index fund that speaks to you. First, you want to look for low fees, also known as expense ratios– we don't want those eating into your returns. Index funds from Vanguard and BlackRock tend to have solid options with low expenses. Once you've picked your team (aka index fund), decide how much cash you want to invest. You can start small and add more as you go – consistency is key.
Difference Between Mutual Funds and ETFs
It's important to know that there's another player in the game: mutual funds and ETFs. They're like cousins but with different personalities.
Mutual funds are like index funds, but with a twist. Mutual funds are priced once a day after the market closes, and they're great for investors who want to set it and forget it.
On the other hand, ETFs (Exchange-Traded Funds) are a bit more flexible. They trade throughout the day, just like stocks. ETFs also often have lower minimum investments and might be more tax-efficient. Most of the time, all it takes to invest in an ETF is the amount needed to buy a single share, and some brokers even offer fractional shares (Charles Schwab, Fidelity, and Robinhood).
Examples of Mutual Funds and ETFs
Let's break it down further with examples. Say you're eyeing a mutual fund like the Vanguard 500 Index Fund (VFIAX). This mutual fund mirrors the performance of the S&P 500 - the largest 500 companies by market cap (aka "company's value") listed on the U.S stock market exchanges.
On the ETF side, check out the Vanguard S&P 500 ETF (VOO). It does the same thing as VFIAX but trades throughout the day on the stock exchange (and it also has a lower minimum investment requirement - aka it's often cheaper).
For something more diverse, Vanguard Total Stock Market Index Fund (VTSAX) covers the entire U.S. stock market in one swoop (hence the name "Total Stock Market"). Its ETF counterpart, Vanguard Total Stock Market ETF (VTI), offers the same exposure but allows you to trade (aka buy or sell ) throughout the day.
Both index funds and ETFs have their perks and drawbacks. Deciding which one suits you and your kids better depends on your investment goals, risk tolerance, and preferred investment style. Index funds are straightforward, cost-effective, and great for long-term investors, while ETFs offer more intraday trading flexibility and potentially lower minimum investments.
[Let's practice! Your child can build their mock portfolio with the index funds of their choice with our stock market game! Check it out! ]
So, what are the best index funds? Where do you go from here?
Well, whether you decide to invest in VSFIAX or VOO, VTSAX or VTI, or other ETFs like VGT (the best performing tech companies in the U.S) we aren't here to tell you exactly what to invest in but how to begin researching the best investments that are right for you, your kids, and your goals.
Investing in index funds for your kids or teens isn't just about the money itself; it's about giving them a head start in the money game by building their investment portfolio early.
Below are some basic steps to get started:
Open an investment account. This could be a custodial brokerage or custodial Roth IRA (if your child or teen has earned income). Learn more about these options here.
Transfer funds into the investment account. Remember, opening the account is not investing. Think of the investment account like a bucket - it only holds your investments. You will need to actually buy your index funds and other investments once the account is opened.
Purchase your index fund/ETF.
Sit back, wait, and let compound interest work it's magic until your child becomes a millionaire.
And the best part? You can even start the conversation now right at home by downloading our Free Stock Market Guide . Start small, stay consistent, and watch their wealth grow. Remember, it's not about timing the market; it's about time in the market. So, go ahead, open that account, and let those index funds work their magic!
Don't do this alone! Join our next free class, Pacifiers to Portfolios and join a live community of like-minded parents!
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