Grandma Wants to Invest for a 9-year-old

Dear Dr. Don,

What equity mutual funds would you recommend for a portfolio intended for a 9-year-old? Ideally, these would be stocks that interest my granddaughter. I'd like to help her follow the companies. I just cashed her $1,400 certificate of deposit after making almost nothing on the investment or savings.

Thanks,

-Lois Lesson

Dear Lois,

An equity mutual fund makes the most sense for a portfolio. It typically is well-diversified but contains too many stocks for a young child to follow. Even a concentrated mutual fund can hold dozens of different company stocks. There are plenty of great mutual fund companies and index funds from which you can choose.

I like your idea of letting her pick investments so the two of you can follow them together. There are a lot of anecdotes about successful investment professionals who were taught this way at an early age. Your granddaughter will be fortunate to have your guidance.

You'll need to minimize commissions and account fees to keep them from being a drag on the portfolio's return. Personally, I'm not a big fan of using dividend reinvestment plans, or DRIPS, to avoid brokerage commissions. It's rare to find a DRIP that doesn't have fees and expenses, making them just as costly as an account administered by a traditional brokerage. I'd suggest you go with a discount brokerage, if that works for you.

She'll learn that stock prices go up and down. Help her to manage the emotional reaction if the market goes down and the portfolio takes a hit.

Because she's a minor, it's important how the account is titled. Assets held in her name have kiddie (income) tax implications. This could also influence her financial aid eligibility when she heads to college. But a valuable portfolio is a good "problem" to have. With any luck, the portfolio will grow over the years.

Here's hoping you can have fun, teach her some things and make some money.

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