How I Started Investing for My Two-Year-Old Daughter & Quickly Grew Her Portfolio
Investing a little at a time, early and often.
When my daughter was born, I opened an investment portfolio in her name. My goal was to put away $1,000 a year for the next 18 years and let the compounding interest do the rest. This plan would add up to a nice stockpile that would help with college, a start-up business, or whatever else she plans on doing with her life.
I wanted to give her a headstart in life.
At 2 years old, she has much more than $2,000 in her portfolio and has double-digit percentage gains.
Once I started moving money around, I got hooked on it and made drastic changes to the amount of money I’ve been putting aside for her each year.
This did not require a lot of money either, just proper planning, following a strategy, and making intentional decisions.
In hindsight, I don’t know where the $1,000 a year goal came from. It was just a goal that I set for myself as a starting point. Something attainable that I can start working towards.
Here are some of the things that I’ve decided to do to increase her portfolio at the ripe old age of two years old.
Automatic deposits
This seems like a no-brainer, but the same way I have my deductions set every month to contribute to my 401(k), I set up a direct deposit that goes directly into her portfolio each month.
It’s a modest amount, but only a portion of the monthly contribution made (we will cover more sources below), and it adds up over time.
I then use that money to buy stocks, fractional shares, fractions of a claim, or index funds, which leads me to my next point.
Individual shares, fractions shares, and index funds
If you’ve done any research or investing, you’ll be familiar with the term “time horizon.”
Investopedia defines this as:
An Investment Time Horizon is the period where one expects to hold an investment for a specific goal. Investments are generally broken down into two main categories: stocks (riskier) and bonds (less risky). The longer the Time Horizon, the more aggressive, or riskier portfolio, an investor can build. The shorter the Time Horizon, the more conservative, or less risky, the investor may want to adopt.
My daughter has a much longer time horizon than I do, and I have a longer time horizon than, say, my father.
This is something essential to consider when determining which type of investments to make.
Index funds are safer bets as they are groups of companies you’re buying into.
Investopedia defines index funds as:
An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.
It’s like buying into a group of companies rather than one single company.
Individual stocks are shares of individual companies. Buying stocks is a riskier investment since it is tied to one company. If that company does not do well, you will lose money. But if the company does well, or if you have the guts to want out a downturn of poor performance to see the stock rebound, then your portfolio will reap the rewards.
Fractional shares are fractions of a share, which helps you invest in more expensive stocks. With fractional shares, you can buy shares in portions.
For example, as of today, Amazon is trading at $3,274. If you buy a fractional share, you can buy $100 increments until you hit the full stock price. At that point, you would have one full share of Amazon.
Think of it as a down payment towards your goal of owning a full share one day in the future.
I can be riskier in her account than I would on my own because she has a much longer time horizon than I do. She can ebb and flow with the market and ride out the bad times.
Gifts from family
We told our parents and siblings to stop buying crap. She has enough toys, and we buy her things throughout the year, so there’s no need to go overboard for her birthday, Christmas, and every holiday in between.
Instead, I asked everyone to give her money, which we then deposit into her portfolio.
This turned out to be a great idea and has made a huge contribution to her portfolio.
Stock portfolio or savings account
Similar to choosing between index funds or individual shares, deciding to invest in a stock portfolio or savings account depends on how much risk you can tolerate.
A savings account is a very safe place to stash your money, but you get little to no return on your money, letting it sit there over the years.
Putting your money in index funds or individual stocks in a portfolio has risk associated with it but can have much higher rewards.
Famed investor Warren Buffett raves about putting money in index funds instead of a savings account for retirement planning. With a net worth of $80 billion, he knows what he’s talking about.
Making it fun
I’m investing in companies that my daughter loves or has shown an interest in, like Disney, Gerber, Beyond Meat, Tesla (she loves driving in “pop-pop’s spaceship,” as she calls my father-in-law’s Tesla).
Hell, I even bought Match.com since that’s where I met her mother.
When she’s a little older, I plan to get her involved in the fun.
Each month we will use the direct deposit money in her account, and she will determine which stock we buy for that month. We’ll talk about the company, what they’re doing, and why it would make sense to invest in them.
I obviously don’t expect her to understand what’s going on fully, but she will catch on as she gets older.
I want her to believe in the company’s values. We’ll review how the company takes care of its workers and their sustainable business practices that won’t harm the planet as much as their competitors will.
Takeaways
- Find a trading app you like and set up automatic deposits from your bank account
- Determine your own risk tolerance and decide what’s is the most comfortable type of investing that fits your lifestyle — index funds, individual shares, or fractional shares
- Index funds are a good place to start
- Tell your family to skip the junk toys and instead, give your child money or checks toward their portfolio
- Have fun with it, buy shares of brands and companies that you and your child believe in
