A Penny Saved: How to Help Your Children Learn to be Investors
With the younger kids it tends to start with a piggy bank, and later a savings account at a bank or credit union. As they get older, a checking account will make sense as well. But after those basic accounts are covered, it is good to get the kids thinking about broader investment opportunities—especially as the low interest rates paid on saving accounts these days can make it hard to inspire your kids to save and invest when all they see on the savings account statement is a few cents worth of interest.
Once they have established a savings account, I’ve encouraged my kids to go further with their investments by considering mutual funds, exchange-traded funds or even individual stocks. But purchasing mutual funds can be a bit challenging given that account minimums typically range from $1,000 to $3,000, which can be a steep entry point for young adults just starting their careers and families.
I recently came across a solution for starting an investment account with very little funds: Acorns at www.acorns.com operated by Acorns Advisers, LLC. Acorns is an application that you can load onto your smartphone or laptop. The great thing about an Acorns account is that you can start your account with zero. Your account gradually grows by rounding up to the nearest dollar each time you make a purchase with a debit card. Those nickels and dimes can add up over time, but more importantly, this allows your child (must be 18 years or older) to start to get a sense for how the investment world works and how they can participate and take advantage of investing for their future.
The Acorns app will take those nickels and dimes and allocate the funds invested in accordance with a chosen investment objective. The investment objective is developed by answering a variety of questions to help determine your tolerance for risk, your investment time horizon and your overall financial goals. The asset allocation decision process is similar to what occurs with “robo-advisors,” where funds are managed and allocated by computer-based investment models.
As you might expect, the asset allocation models that are derived from the investment questionnaire range from a conservative allocation to an aggressive allocation with moderate allocations in the middle of the spectrum. As an example, the moderate allocation invests 16 percent in large company stocks, 19 percent in small company stocks, 10 percent in emerging market stocks, 16 percent in real estate, 33 percent in corporate bonds and 6 percent in government bonds. The portfolios use exchange-traded funds to gain exposure to the various asset classes.
Another approach you might want to consider for your child is to open a discount brokerage account, or using dividend reinvestment programs (DRIPs), to invest directly in stocks. This approach makes building a diversified portfolio more challenging, but it can give your child a comfort level with owning and investing in individual companies, which can be an enriching experience over the years.
The idea here is to empower your child to learn, develop and expand their knowledge of the financial world. With modern technology, and with access to financial information easier to come by, the next generation has the opportunity to be better informed investors and, with compounding returns, the earlier they start the better. Why not start stashing away a few acorns today?
Bill Wallace, CFA, is director of research & strategic development for Soltis Investment Advisors.