index fund for a child?

[crabbypatty]

I am looking to transfer my child's money into a mutal fund. It's not much, just barely enough to open an account. I do not anticipate being able to adding to it often, mostly at birthdays and Christmas. This is not education money, just money that has been given to her as gifts over the years.

DH is a bit hesitant to invest in the market with our children's money. He doesn't want to risk losing principal since the money isn't ours. But from my research it seems as though relatively speaking, an index fund is a fairly low risk way of growing money. (of course all investing comes with risk, blah, blah, blah) I wanted to find a "kids fund" of large cap stuff like Disney, Coke, etc all in one fund but never found it. That's why I think I've decided on the index fund.

I'm sure some people would say that this is not risky enough, but keep in mind that DH's low tolerance for risk in investing.

What do you think? Am I missing something obvious?

[LuxLiving]

I'd try a balanced or total market mutual fund.

[crabbypatty]

I'd try a balanced or total market mutual fund.

More to learn... what do you mean?

[poundwise]

More to learn... what do you mean?

Index Funds vs. Stock Market

[crabbypatty]

OK, so the balaced fund should be more stable than an index fund given it's bonds. And a total market fund is particuar type of index fund?

The link seems like an advertisement for a book?

[sweeps]

A balanced fund is a managed fund. It typically holds a relatively fixed ratio between stocks and bonds (and possibly other investments). An index fund is a passive fund that simply mimics an existing index, for example the S&P500. Neither comes out without risk.

But on the other hand, there are also risks in "hiding" in money market funds and CDs. Education costs are increasing faster than overall inflation, so you may lose ground with "safe" investments.

Edited to add: There are index funds of index funds. A good example of which is the Vanguard Target Retirement funds. Even though those have "Retirement" in their name, there's no reason why you couldn't use them for other purposes such as education.

[jIM_Ohio]

I am looking to transfer my child's money into a mutal fund. It's not much, just barely enough to open an account. I do not anticipate being able to adding to it often, mostly at birthdays and Christmas. This is not education money, just money that has been given to her as gifts over the years.

DH is a bit hesitant to invest in the market with our children's money. He doesn't want to risk losing principal since the money isn't ours. But from my research it seems as though relatively speaking, an index fund is a fairly low risk way of growing money. (of course all investing comes with risk, blah, blah, blah) I wanted to find a "kids fund" of large cap stuff like Disney, Coke, etc all in one fund but never found it. That's why I think I've decided on the index fund.

I'm sure some people would say that this is not risky enough, but keep in mind that DH's low tolerance for risk in investing.

What do you think? Am I missing something obvious?

YES. The market has risk inherit in it. There are 20 year periods in history where someone could have lost money investing in the index.

The higher returns the market has given (historically) is because an investor has to take on additional risk to get the higher returns.

This does not mean "don't invest", it means "manage your risks".

What is money going to be used for, and when will this event(s) happen.

I'll offer 3-4 suggestions

1) Index fund (S&P 500). Cheap, popular, has 10-20 year risk to it (it's possible in 10 years there will be less money than their is now).
2) Income fund. T Rowe has two of these (spectrum income and retirement income). These funds have the sole purpose of sending off 3-4% in dividends per year, with slight growth of capital as well.
3) Balanced fund. These funds emphasize moderate growth with much less risk than the Index fund.
4) Conservative managed equity fund. There are stock funds which don't try to "beat" the S&P 500, take on less risk, and have a solid 9% overall return. I keep a significant chunk of my retirement invested in funds like this.

CDs, savings bonds, inflation indexed bonds would also be appropriate.

[crabbypatty]

YES. The market has risk inherit in it. There are 20 year periods in history where someone could have lost money investing in the index.

The higher returns the market has given (historically) is because an investor has to take on additional risk to get the higher returns.

This does not mean "don't invest", it means "manage your risks".

What is money going to be used for, and when will this event(s) happen.

I'll offer 3-4 suggestions

1) Index fund (S&P 500). Cheap, popular, has 10-20 year risk to it (it's possible in 10 years there will be less money than their is now).
2) Income fund. T Rowe has two of these (spectrum income and retirement income). These funds have the sole purpose of sending off 3-4% in dividends per year, with slight growth of capital as well.
3) Balanced fund. These funds emphasize moderate growth with much less risk than the Index fund.
4) Conservative managed equity fund. There are stock funds which don't try to "beat" the S&P 500, take on less risk, and have a solid 9% overall return. I keep a significant chunk of my retirement invested in funds like this.

CDs, savings bonds, inflation indexed bonds would also be appropriate.

I think this money will not need to be accessible for 15-20 years. This is not money specifically for education, but could be used for education. We have other plans for paying for college. This is money that could also be used for a wedding, or a downpayment on a house.

CD's aren't paying that high, right? I could look into bonds, I forgot about those. I'm not even sure where to buy them.

Perhaps I could start with a balanced fund, then as more money is accrued, open other types? I think we want to keep the risk low in the beginning in order to preserve the principal (but still have soem growth) , and as we get more, add to the risk.

[jIM_Ohio]

I think you need to look at rates of return

Index fund, I'd want 10-11%. Obviously this is the "highest principle risk".
Conservative equity 8-10%. This has market risk, the right fund manager can reduce this.
Balanced fund (7-8%) some market risk.
Bonds (4-6%) high inflation risk
CDs/Money markets 3-5% high inflation risk

Not sure of "how much" the initial investment is... I do conservative equity investing myself, and am psyched when I get my 9% returns and the S&P only shows 7% with more risk over the 10 year time period I have been investing.

It's the risk vs return conundrum... and from past comments, it sounds like you don't want maximum risk, and you also don't want minimum return.

[crabbypatty]

So it appears that I was incorrect in saying that an index fund would be fairly low risk. Glad I asked. All of the comments have been helpful.

I think the balanced funds are what we are looking for right now.

[jIM_Ohio]

There is no such thing as "low risk", in my book. It's all about managing risk.

A CD has low principal risk and high inflation risk
An index fund has high principal risk and low inflation risk

everything else is somewhere in between (IMO).

[sweeps]

So it appears that I was incorrect in saying that an index fund would be fairly low risk. Glad I asked. All of the comments have been helpful.

I think the balanced funds are what we are looking for right now.

How about Vanguard STAR fund. Low minimum, low expenses. Currently a 63/25/12 allocation -- fairly safe.

[crabbypatty]

How about Vanguard STAR fund. Low minimum, low expenses. Currently a 63/25/12 allocation -- fairly safe.

I've heard of this one several times now. I'm going to look into it.

[Scanner]

I think when crabbypatty means risk, she means "principal risk", not "market risk" or "inflation risk."

If losing principal is really, really going to bother you and Jim is right, sometimes it can take years to recover a loss, then I would go with Vanguard's Wellesley Fund or Welllington Fund.

The Wellesley Fund is 60% bonds and 40% high quality stocks.

The Wellington Fund reverses it and it's 60% stocks and 40% bonds.

They are "balanced funds" and they are steady.

Now. . .it's not that you ever going to not lose principal but for the life of those funds, usually a negative return has only happened 1 year. The rest of the time, you are getting 6-12%.

A typical return may look like:

Year 1: 8%
Year 2: 10%
Year 3: -6%
Year 4: 12%
Year 5: 5%

Now, let's contrast this with my Janus Overseas. A typical return may look like:

Year 1: 23%
Year 2: 18%
Year 3: -30%
Year 4: -14%
Year 5: 47%

That's what they mean by "volatile"; it's a freakin' rollercoaster.

Yes, indexing is not to be confused with risk amount. You could be in the riskiest fund around and be indexed (an emerging market index for instance).

Indexing really just means a computer is picking the stocks, not some overpaid Harvard chucklehead

[Scanner]

Perhaps I could start with a balanced fund, then as more money is accrued, open other types? I think we want to keep the risk low in the beginning in order to preserve the principal (but still have soem growth) , and as we get more, add to the risk.

If I may chime in, I see your reasoning, really I do, but that's a bad plan.

The best ally, in my opinion, you can ever have on your side is time. That's why I was preaching term, term, term baby to the young attorney on the other thread when it came to debt (with debt - time is your foe). You want to be assuming LESS risk as you reach the goal (even if that's turning it over to your child for a hot rod).

You generally want to assume risk at the beginning ( but only if you are tolerant to it though, and it doesn't sound like the hubby is) and then lower it as you reach your goal.

With the Vanguard Wellesley or Wellington, I'd move it to something like an American Century Zero Coupon Bond fund when you get 3 to 5 years away from the goal. Your principal will be very safe then. Then, when you are at the goal, keep it in a money market or short term CD's.