How I Invested my Child’s Money

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?

21 Responses to How I Invested my Child’s Money

  1. I’m not sure how I missed your first post on this. I certainly would have had some feedback. I’m about 2.5 years into the process. You can read most my thinking here: http://sunkcostsareirrelevant.com/tag/kids/

    Suffice it to say though, I was far more aggressive in my portfolio selection. I guess I just have a much higher risk tolerance with other people’s money! :-)

  2. Any reason you didn’t want to just open an account directly at vanguard? Might have saved you the $75 fee. Either way investing will help your son’s. Money maintain or grow much better than cash would.

  3. I think I would have put it in a 529 plan, but that seems like it wasn’t an option for you. Or ask the people who gave you the money what they would like to see done with it.

    • It was a lot of people who gave varying amounts and besides I think it would be a REALLY awkward question. I know if I were ever asked that by a friend or family member I would probably say go with your gut as long as it is spent on the child.

  4. What if the stock market goes down? Bye bye money.

    The smartest thing to do is just put it in a savings account and leave it alone. True, he may have less money at the end, but he will have all of his money. A stock could fall and then his money would be gone. I wouldn’t have invested it if I were you.

    • “What if the stock market goes down? Bye bye money.”

      Which is why I was hesitant to move at all, also why I ended up taking a 65% bond approach rather than a 100% market approach.

      I am not sure if the savings account is just the way to go. It is likely that inflation would eat away at all the generiousity of the gift. Lets say the amount was $1,000…what would $1,000 buy in 20 years?

        • Its hard to extrapolate numbers but lets say everything stays the same and savings rates stay at 1% and inflation stays at 3% then every year his net return is negative 2%.

          To fight that I could do 5 year CDs, but at the current rates I couldn’t pull the trigger.

    • It is the safest, not the smartest thing to do. That initial investment over 20 years could be at almost at $8,000 following the rule of 7.

      Evan hedged his bet and kept it balanced.

        • Thank you!

          No, I do not have any children just yet. I am recently married and we are “trying.”

          I look forward to learning what you have done so I am ready when it is my time.

          • I actually followed through on the plan! That being said good luck with trying. We had some hiccups some fun some TERRIBLE, but I wish you the best of luck.

            • Congrats on making it happen, probably the hardest step.

              Thank you, a lot of our friends and family encountered problems too, something I pray doesnt for us.

  5. I started out more aggressive when my kids were young, but now I’m starting to throttle it back a bit.

    I noticed that I had a tendency to invest the kid’s money and let it ride while I actively managed my personal accounts instead, but I’ve change that practice because my accounts were doing better than theirs did. So now I have their accounts shadow what I do in my Roth.

  6. Baby Frugalista’s cash is still that… cash. In a savings account earning crappy interest at the moment. She has a few Series EE paper savings bonds, but that’s about it. Not sure I would buy more, now that they’re only sold at face value and have a fixed interest rate (a paltry .60% right now). Of course, might be a good time to invest in the stock market, but I’d hate to ‘lose’ her money. I’m torn.

    • I was torn too which is why I wrote the post. Once I laid everything out it became a bit clearer. I really just didn’t feel right leaving it all in cash doing nothing.

      Maybe a CD for baby Frugalista?

  7. I’ve been struggling with this for a few years as I watch the sad return from the savings accounts of my 3 kids 4, 6, & 8 years old. Grandparents already contribute to a college fund so it was the extra’s I wanted to invest. My plan (if I have the guts) is a 10/40/40 of my own. 10% stays in their savings account so they have something to watch as they deposit on their own and track, learn to use a bank, etc. When we reach X amount we will then invest. I have created a short list of stocks in companies they know and like and have a good long term track record that they will each choose what they want to own. I invest in the last 40%, which I was thinking another stock but you’re making me nervous and now I’m looking at mutual funds and bonds. That way if they lose on the stock I’m off the hook somewhat but we’re still being aggressive and it’s doubtful they will out and out lose over 20+ years.

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