Almost four months ago I questioned how I should invest my child’s money, but I never ended up doing anything about it until recently. I felt strongly that this was his money as he received it from very generous family members and friends who cared about him so I was/am acting as a de facto fiduciary. This left me with the question of how I should handle his money. I provided four choices and wanted to hear from both parents and non-parents about their opinion. As a reminder the four choices I provided were:
- Leave it all in cash as it isn’t mine and I shouldn’t touch it
- Put it all in an index fund tracking the broad market as this is money he isn’t using for 20 or so years
- Put it in a low cost dividend/fixed income fund so it would be low risk but more than just bonds or cash account
- Put it all in bonds
I am almost ashamed that despite some fantastic comments I failed to act until the last few weeks. Before telling you what I did, I will discuss what I decided against and why.
How and Why I Did Not Invest my Child’s Money in Certain Ways
I should have mentioned in that original article that The Wife and I decided that the gifts he received should be “his” and that college should be our, (The Wife and I), responsibility. As such, putting the money into his 529 plan was not an option. Since that was off the table I didn’t discuss the fact that just putting it in a 529 wouldn’t have really solved the post’s question anyway since a 529 is just an account to hold assets and not an investment decision in it of itself.
With the 529 off the table I read and responded to each comment as I really was looking for someone to sway me one way or another. I quickly decided against the cash idea. As I saw the monthly interest deposit to his account I just felt like I was doing him a disservice. Inflation could make him think that his family and my friends’ gifts were anything but very generous.
I really wanted to get into buying individual bonds for him because I felt like it was taking a conservative approach, while giving him some upside yield. I quickly found out that buying an individual bond takes a lot of research just as buying an individual stock does. That caused a bit of a paralysis by analysis and it was the main reason it took me so long to act in his stead. After I overcame my inertia I learned that my broker required me to buy bonds in lots of 5 with a minimum purchase of $1,000 this would really limit his diversification and took me to an uncomfortable zone quickly.
How I Ended up Investing my Child’s Money
I was not comfortable just putting it in the market and closing my eyes nor was I comfortable just buying a bond fund and hoping it all worked out. As such, like most things in my life I took a near middle ground approach that leaned toward the more conservative side. I created a 70% Bond / 30% Stock Portfolio.
Bond Portion of the Portfolio
Once I decided that the larger portion of the portfolio is going to be put into a conservative bond fund I had to research my options. An important part of the equation was trying to avoid my taxable income for the next decade and a half so I primarily researched bond funds that are likely to provide Federal and State Tax Free Income (in my case New York State Municipal debt).
Once I compiled my list, I eliminated those with a load (since I didn’t feel like I should be paying to invest as I was doing the research myself) and put them in order of fees.
I ended up choosing a vangaurd fund and was charged an initial fee of $75 to buy the mutual fund through my broker.
Stock Portion of the Portfolio
I had to find a place for the remaining funds. My broker provided an S&P 500 Index ETF that I could purchase with no fees and had expenses of .09% I figured I would just go with that option.
With his portfolio set up it is on auto-drive until he receives more gifts.
How have you handled your children’s money?