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Investing for Your Kids

What Do I Put in the Account?

Investing for Your Kids

Having decided upon the skipper and the boat, you now want to figure out what fuel to put in. That is, what exactly are you going to put into the custodian or guardian account in order to develop wealth?

Here are some of your choices:

  • Interest-bearing checking account
  • Interest-bearing savings account
  • CD (Certificate of Deposit)
  • Index Fund
  • Other Mutual Fund
  • Stocks

It may come as a shock that, if you want to open an IRA, you can do so at a discount broker, and put whatever you want into that account. In other words, contrary to the overwhelming sea of persuasion that you'll see in newspaper ads (especially around tax time) that offer IRAs from your bank, you can indeed have that vessel running not just on the skanky fumes of cornpone lawnmower gas, but on the very rocket fuel of the market itself: stocks.

This then admits you through the gateway of the eighth wonder of the world: compounded returns. Consider, for example, the following comparison -- the returns of a 5% "safe" bank account alongside higher-yielding investments:

If you only invest $100 once, growing each year by:

          5%        10%       15%        20%
1998     $100      $100      $100       $100
2003     $128      $161      $201       $249
2008     $163      $259      $405       $619
2013     $208      $418      $814     $1,541
2023     $339    $1,083    $3,292     $9,540
2033     $552    $2,810   $13,318    $59,067
2043     $899    $7,289   $53,877   $365,726
2048   $1,147   $11,739  $108,366   $910,044

Over time, of course, the market has historically been the best place to park your money. As we often point out at the Fool, the so-called "safest" investment vehicle -- putting your money in an interest-bearing bank account, or in a money-market account -- is in a very real sense the most guaranteed losing proposition of them all (short of stuffing your savings under your mattress, and watching it eaten away either by mice or by the sharp teeth of gnawing inflation).

Why is this? Because if you're getting, say, a guaranteed 5% a year, then you're missing out on the average 10.6% that an index fund, like one that tracks the performance of the S&P 500, would have been gaining for you. It's true that you're protected from losing your principal if you take the bank account-conservative route -- but you're also "protected" from any major long-term investment returns.

Now, Fool, we're moving on to how to set up an account.

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