Want to give your child a million dollars, but your bank account can only spare $1,000? Then give her some stock -- or better still, spark a lifelong interest in the stock market.
It's not crazy to think about a million dollars if you're dealing with kids or young adults, because they are far richer than the rest of us in a vital wealth-building ingredient: time. A 15-year-old has a full 50 years before she hits the standard retirement age, and that's enough time to turn $1,000 into almost $120,000 if it grows at the market's long-term annual average growth rate of roughly 10%. If you start a 5-year-old off with a $3,500 investment and it grows for 60 years, it can top $1 million.
All these elements can be tweaked. If you keep adding money over the years, the account will grow much faster. If you start earlier or later, start with a larger or smaller sum, or your overall average growth rate is higher or lower than 10%, the results will also differ.
How you get your kids involved in investing is up to you. You can use discount brokerages, for example, or you can go through Drips -- dividend reinvestment plans -- among other options. (If your child has earned income, perhaps look into a Roth IRA.)
What to buy
The next question is: What are the best stocks in which to actually invest? One simple option, and one that's arguably the best, too, is a broad-market index fund, such as the Vanguard Total Stock Market ETF (NYSEMKT: VTI )
It can be good, though, with kids, to add a few individual company stocks to the mix, to keep things more interesting. A solid, dividend-paying blue chip such as Waste Management (NYSE: WM ) can be a smart choice, in part because it's relatively easy to understand. It's reliable because garbage collection is likely to be in great demand for a long time, and the company has become a major recycler, too, even generating energy from some waste.
If you and your child really get into it, you might start discussing the merits of various companies together, and evaluating their business models. Get your child to appreciate that the best stocks often have compelling models, such as that of Silver Wheaton (NYSE: SLW ) . This precious metals specialist's business model is rather beautiful, as instead of being involved in relatively risky and capital-intensive mining of silver and other metals, it simply obtains the rights to streams of produced metals from mines in exchange for providing financing to the owners of the mines. The stock is down nearly 20% over the past year, but it sports a five-year average annual revenue growth rate topping 40% and a net profit margin above 60%.
When seeking the best stocks for your child's portfolio, it's also good to focus on industries of interest to him or her, such as, perhaps, smartphones or alternative energies. In those arenas, consider Cirrus Logic (NASDAQ: CRUS ) and Westport Innovations (NASDAQ: WPRT ) . Audio-chip maker Cirrus has been pounded due to an apparent slowdown in Apple, which is a major customer. It's now looking attractive to some, though, and is forecasting continued double-digit revenue growth rates. Westport, meanwhile, is designing engines powered by natural gas, including some heavy trucks. It's looking to expand in China, as well. These kinds of companies are riskier than stalwarts such as Waste Management, but following and investing in some can deliver profits or lessons or both.
Get your children into investing when they're young, and have them start investing in the best stocks they can find (or simple index funds), and they can make the most of the long lives ahead of them and end up much better off financially.
Learn more about Westport
As the most advanced designer of engines powered by natural gas, Westport Innovations is a small company with a big goal: To lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition, and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has released a premium report breaking down the company's opportunities, competitive advantages, and risks. To get started, simply click here now for instant access.