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 Charles B. Carlson, CFA
Contributing Editor, Dow Theory Forecasts
You can get rich buying stocks. You can stay rich buying bonds.
It's as simple as that.
If you want
to grow your kid's investment over time, stocks may be the
only game in town. Don't waste your time on rare coins or
stamps or Picassos or baseball cards or ostrich farms or collectibles.
Buy stocks.
Stocks, given enough time to grow, may provide huge returns for investors. Jeremy Siegel, in his fine book, Stocks For the Long Run (McGraw-Hill), provides the following example of the long-term potential of stock investing:
$1 invested in stocks in 1802 would have been worth nearly $7.5 million at the end of 1997. Granted, none of us has a 195-year holding period. You don't have to hold stocks for that long to get a nice bang for your buck. For example, for the 10-year period ended December 1998, $1000 invested in large-company stocks became $5,780, a 478 percent gain. Obviously, a buy-and-hold strategy does not guarantee profits-no investment strategy does and past performance is no guarantee of future results. However, focusing on long-term investing cuts down on costly commission charges that eat away at portfolios.
If you are thinking about investments for a child, the only investments you should be considering are stocks. Why? Because your child has time on his or her side. And with a lot of time comes the ability to handle a lot of investment risk.
Volatility is a measure of short-term risk. Who knows how investments will behave today, tomorrow, a week from now, a month from now, a year from now. The shorter the time frame, the more random the likely returns. Buying and holding stocks for one year is risky. Who knows how the market will behave in a one-year time frame?
When you lengthen holding periods, however, that spread reduces. In his best-selling book, Stocks For the Long Run (McGraw-Hill), Jeremy Siegel, a professor at Wharton, writes, from a historical performance point of view, that "for 10-year horizons, stocks beat bonds and bills about 80 percent of the time; for 20-year horizons, it is over 90 percent of the time; and over 30-year horizons, it is virtually 100 percent of the time. The last 30-year period in which bonds beat stocks ended in 1861, at the onset of the U.S. Civil War."
If your child's investment time horizon is 20 years or more, there's only one investment vehicle.
Stocks.
One final point. I think individual stocks are probably better for youngsters than certain other investment vehicles because they make a more interesting teaching tool. What you are trying to do by starting a youngster investing is to instill discipline and teach them about the capitalistic system. Those lessons will probably hit home more if they feature a company in which the child can relate rather than a truly "faceless" investment instrument.
Bottom line: Certificates of deposit and savings bonds are OK investments for kids. But risk is the last thing your child needs to worry about in an investing program. You need to capitalize fully on the power of time in their investment program. You do that with stocks.
Setting Up A Child's Investment Account
Kids and the Power of Time
A "Kiddie" 401(k) Plan!
Kids Should Buy STOCKS! |
Kids Should Buy STOCKS!