Kids Investment Strategy Statement (KISS)— Part 1

Kids Investment Strategy Statement is an outline of the speculation choice-making process including the focus of investing area, investment process, evaluation and return based on time. We should start this process once you are planning for pregnancy with your spouse and should begin your investment in any brokerage account after the first trimester. Since you are starting kids investment at a very early stage, investing area and investment process is no brainer activity. Pick random high-quality stocks or index funds in any large brokerage firm. They are four big brokerages out of dozens of stock brokerage houses. Each of these firms — Charles Schwab, Fidelity Investments, E*TRADE, and TD Ameritrade — comprise the top in terms of customers and assets with zero transaction fees. A reason behind opening an individual account in any of these firms is to manage all brokerage accounts and these companies offer flexible options to their customer to move your money to Custodial IRA or Education and Custodial account in the future. I mentioned that it is a no-brainer activity but now your brain is filled with a lot of questions about custodial accounts and how to open this account. We will see it one by one in the next section.

Investing Area

The first thing in the KISS process is an Investing area, we should learn how to do stock trading if you are a beginner or new to this area. For sure, you should learn to teach your kids because it’s never too early for parents to include their children in money management decisions. There are multiple areas to explore an investment opportunity for your kids. Now you have a question rattling around your head “Can I open a brokerage account for my child?”. The good news is YES, you can open a guardian account i.e. Custodial account or Education accounts like 529 or State-based college savings account in any brokerage firm. My personal recommendation is to invest in the custodial account at the initial stage of your kids. A custodial account is the brokerage account held in the name of the minor, usually by parents or guardians. You don't own this account, meaning once your money invested in this account, it can be only used for your child's expenses. It is the same account as your brokerage account where you can buy stocks, indexes, and mutual funds in the name of your child. Over time, you will make your investment decision with your child till your kid reaches the age of majority. The age of majority is completely based on the state where you live, so consult with a financial expert or do your diligence before investing in the custodial account. I don’t want to dig more into the diversification of your portfolio here but you should consider and educate a child on the investment mix, types of assets, and performance reports.

Next Education accounts i.e. 529 or Coverdell education savings account tax-deferred investment account helps your child to pay for educational expenses. There is a contribution limit for each account based on the state where you live and marital status. Unlike a Custodial account where investment gains are taxed at the child’s rate, educational accounts are completely tax-deferred up to your contribution. You should consider moving some amount into the educational account from the custodial account based on the college’s expense and university. Because a custodial account, weigh more heavily against financial aid eligibility than do the parents’ assets or assets held in a 529 account or an education savings account (ESA). Since 529 accounts and ESA accounts require a lot of research before saving into the right scheme otherwise amount invested will be forfeited or you may need to change the beneficiary whereas the custodial account doesn’t grant you permission to change the beneficiary. Finally, the custodial account is not the right area for you to transfer large significant money to a minor, doing so trust is often the best choice.

Investment Process

The second thing in the KISS is the investment process where you have to execute the knowledge that you have acquired during investing area. Choosing the right securities is not the end of the process whereas you should monitor and reallocate the stocks or indexes based on performance. Before diving deep into this stock discussion. I would like to start with the baby step of the investment process.

Baby Steps of the Investment process

1. Baby Step 1: Maintain an Individual brokerage account till your kid receive a Tax identification number.
2. Baby Step 2: Move your investment from an Individual account to a Guardian account.
3. Baby Step 3: Fund a guardian account whenever you are about to buy things unnecessary to your kid at their age. At least automate your contributions.
4. Baby Step 4: Select securities or bond wisely and invest them for long term
5. Baby Step 5: Educate your child to buy and sell stocks.
6. Baby Step 6: Slowly hands off from the guardian account and let your kid do it under your support.
7. Baby Step 7: Completely transfer your asset to your kid after the age of majority.

Forget everything about your situation and money management, with these seven steps, your custodian asset might have grown significantly nearly in two decades. Now your kid will carry your legacy to his kids. Parenthood is an investment in time and effort but the payoff is priceless.

Choosing the best stocks or mutual funds for your kids

1. There is more popularity on ETFs and Indexes than stocks, buying an individual stock always falling out of your favor. When you choose ETF or Index, buy the best with a solid track record. Here you can maintain a double aggressive portfolio than yours since it is going to be invested nearly two decades before harvesting the gains.
2. Best ETFs or Index are not mattered if it is weighted more on individual stocks like Apple, Amazon, Facebook, Netflix, etc., Investing individual stocks is the preferred way to investment success so invest in companies that you foresee their dominance in the future. For example, Zoom's annual revenue increased from 331 million (2018) to 2.6 billion (2020) in two years.
3. Reallocate your portfolio in a timely manner, always advised keeping some buffer money to time the market (It requires a lot of knowledge, so kids learn easily from their mistakes but make sure, the mistake is not expensive)
4. Always teach your kids to enjoy the profit by selling 20% of your gain at least. Life is a matter of living so rewarding for their small success and earning something for themselves gives immense pleasure to move forward. Kids should not feel more personal or greedy when they are investing in stocks, so selling stocks at right time or with a target price could teach them an exit strategy.
5. Whenever you invest in securities, understand their business and their sector. So you don't overload your portfolio with a small number of sectors. Diversification is the key everywhere. Kids should learn different businesses and sectors which will help them to choose their career. Career opportunities are widening every decade based on their business model. Cloud companies like Microsoft, Amazon, and Google launching their new technology every year, and companies like DataDog, Fastly and Crowdstrike growing along with them by illustrating how the cloud has transformed.

Evaluating your investment and Return factor will be covered in the Kids Investment Strategy Statement (KISS) — Part 2. Please encourage this post by giving your clap and subscribe to Medium for more posts to read.