Is it too early to start a portfolio for my one-year-old child, and would it be better to start off with a stock or a bond?
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?
It is definitely not too early, and you should be commended for taking advantage of the incredible returns you can get by starting an account at one year old. I am assuming your child will not need the money for at least 18 years, and so a stock-heavy portfolio should be where you would start. I would even be comfortable with a 100% stock portfolio based on the factors and assuming you won't have need of the money, yourself.
Choose a broadly diversified fund and you should be all set. An index fund which tracks the S&P 500 would be an example to look at, or you could look at an S&P 1500 or Russell 3000 index fund if you want to invest more broadly in small-cap stocks. Another option would be a global stock fund if you are looking to capture returns from companies around the world. Realize any of these funds will have a higher chance for losses during a market downturn verses a fun 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.
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 in 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 would 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. Unless you have a very specific need, there is no need 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.
Overall, your plan is amazing, and more parents should have the fore-thought you have in providing for your child's future.
If you'd like to talk more, please feel free to set up a consultation.
Good for you for thinking ahead and for wanting to accumulate an asset for your child! It is far more important, however, to ask why and how to invest for your child than choosing the specific investment.
For example, if your child's education is important to you (the why) you should consider a 529 or College Savings plan (the how). Many states offer income tax deductions for some of your contributions so it may be best to explore the plan(s) offered by your state of residence. Generally, growth in the account is tax-deferred and is not taxed when withdrawn to pay for qualifying educational expenses.
In addition, these contributions are considered gifts to your child so you can currently contribute up to $15,000 per child per year without triggering reporting requirements. Contributions over that amount aren't necessarily taxable, you would just have to report them to IRS on form 709. They would count against your lifetime exclusion amount of $11.2 mil. a fairly safe threshold for most of us! Maximum total cumulative contributions vary by state, from $250k-$520k
Now we can talk about the "what". States have model target date portfolios in their plans. What that means is you pick a target date for college, in your case 17 years from now, or 2035. The closer your child gets to the target date the more conservative the mix of investments in your 2035 portfolio becomes.
This is just one example of how asking "why" first can help direct you to the best why to contribute to and own an investment.
Good question. But first, depending on what your ultimate goals are will depend on what kind of account you should use.
If your goal is to save for college, then a 529 plan would be your best bet. The growth/gains on your investments would be tax free when used for college (or private school with some limitations). If so, an age based portfolio could be powerful for you. Meaning the account would be in equities now and slowly move to bonds as your child reached college age.
If the goal is to just start an account, you can use a custodial account. The funds could be used for anything that benefits the minor, and at the age of majority, the funds become the minor’s. Also, the gains and dividends will possibly be taxable annually - depending on the amount. In this case, a stock that can grow could potentially be the best and the taxes would be paid on the gains when liquidated. Bonds will have interest that accumulates and pays periodically.
Figure out what your goals are, then look to make the investment for your child’s future.
Good for you on thinking towards the future. It is never too early to start investing. In fact, the early you start the longer your money has to compound and earn more money.
Since a 1 year old is not going to need income for a long time, your best bet is to use stocks.
The only other thing you should consider is what the money will be used for. Thinking ahead to college you may want to consider a tax advantaged account such as a 529 plan.
It's never too early. However, it is also important to ask a few questions first.
1. Before saving for your child, how is your own financial situation? Are you debt free (other than mortgage)? Are you on track with your retirement plan? If not, then it is more important (and beneficial to your child) to get your own life in order first.
2. If the saving is for college, it may be more beneficial to consider 529 college savings plans.
If all is in order with your own life, then feel free to put some money in your childs name in a UGMA or UTMA account. Before doing so, realize that once they reach the age of majority, they can do anything they like with assets in these accounts - and you may not approve. I know it is hard to imagine your little baby may be a foolish and impetuous teenager someday - but trust me, it happens! This is one reason we like 529 accounts - where the child is merely the beneficiary and you retain ownership of the account. You can also open a special account in your own name, but which you understand is for their benefit, then you can gift or use the money for them as appropriate in the future.