Whether you are giving a child his or her first investment nest egg or setting aside some funds for children in your will, consider your investment choices carefully. Children need large, stable, long-term investments so that they can pay for such major life events as college or a down payment on a home.
Long-term U.S. government bonds are a wise choice because they are virtually guaranteed of returning all of their value. Federal government bonds tend to have lower interest rates than tax-free state and municipal bonds. During times of financial crises and uncertainty, many investors tend to pile into government bonds, which lowers the overall interest rate. Consider the current bond rate and compare it with the current inflation rate. If the interest rate is higher, it might be a good idea to invest in these instruments for children.
Children who connect with their investments may take more interest in them and gain a greater financial education. Consider investing in large, brand-name food, entertainment or technology companies that children will recognize. These firms both advertise and cater to children. In addition to choosing a brand-name company, pick one that is large, stable and produces steady dividends over time. For example, companies that have been public for several decades have demonstrated long-term viability.
Large, Stable Companies
Large, stable companies that will be around for the long haul are also good investments for children. Whether they go up or down, they will certainly be viable when the child needs them to pay for large expenses such as college. Choose important, evergreen sectors such as pharmaceuticals, household goods, utilities and large retail firms. In each sector, choose one of the category leaders that has established a competitive advantage against other firms.
High-dividend companies provide regular cash payments that build up over time. The dividends can also provide an "allowance" for kids. That tangible reminder of an investment can spur them to learn more about investing and the companies whose stock they own. Some mutual fund companies also provide high-dividend funds that make the process of choosing an investment much easier.
Kathy Zheng is a personal financial planner. She holds a Bachelor of Arts in economics and is certified as a level 1 financial adviser.