In this article, we will take a look at the 12 best long-term investments for a child. To skip our detailed discussion on investment plans for kids and the importance of long-term investment horizon, click 5 Best Long-Term Investments for a Child.
“My dad was my greatest inspiration. What I learned at an early age from him was to have the right habits early. Savings was an important lesson he taught me.”
“Sometimes parents wait until their kids are in their teens before they start talking about managing money — when they could be starting when their kids are in preschool.”
“Whether it’s teaching kids the value of a dollar, the difference between needs and wants or the value of saving — these are all concepts that kids encounter at a very early age, so it’s best to help them to understand it.”
All these are the sayings of Warren Buffett, the best money manager and investor in the world. Like most successful people in the world, Buffett’s path to success started early in life, thanks to his parents.
Perhaps one of the best gifts one could give to their child is helping them in achieving financial freedom early in life. Millions of Americans are struggling to buy a home, save for retirement, pay for education and cover basic expenses amid rising inflation and no savings. In a latest poll conducted by YouGov for Bankrate, about 56% of the respondents said they believe they are not able to save enough for retirement, while 37% them said they are "significantly behind” when it comes to retirement savings. The ideal nest egg amount Americans believe required to live a comfortable life in retirement is also increasing. Americans now feel that need about $1.8 million to retire comfortably, a whopping $100,000 more than the nest egg amount estimated last year.
Americans are notorious for being heavy spenders and bad savers. This problem is exacerbated by the rising inflation that is not showing any signs of cooling down significantly. The Bankrate survey showed that 1 in 4 baby boomers and 1 in 5 Gen Xers said they are not saving enough for retirement this year and they did not save anything last year.
In this backdrop, it’s important to teach investing to kids and show them the importance of compounding. Analysts recommend average Americans to not only teach basic money management and investing to kids early in life, they also urge people to start stacking away small chunks of money for their kids. And this is where the magic of investing comes in. Instead of keeping money in your bank, it’s always useful to let it do the work out there and increase. A detailed research paper by the Connecticut Government has a revealing data point to establish the importance of investing. Suppose you deposit $5,000 in a savings account for a “safe” 2% rate of interest, compounded annually. After 20 years you’ll have $7,430. But imagine you’d have put this $5,000 in one-year certificates of deposit (CDs) at the same bank, with instructions to roll over the proceeds into a new CD every 12 months. In addition, every month you also buy a $100 CD. After 20 years you’d have made 3.44% annually and $44,000 in total. See the difference.
But what if you were told that you could covert this $5,000 into $171,000 in the same time period (20 years) with minimal risks? The research paper says:
“Since 1926, the stocks of large companies have produced an average annual return of about 10%. (Remember, that includes such lows as the Great Depression, the stock slide that followed the September 11 terrorist attacks and the financial crisis of 2008.) If we assume a long-term annual return of 8%, you’ll need to add $382 a month to the initial $5,000 to reach your quarter-of-a-million-dollar goal in 20 years. If you can earn 10% annually, $279 a month will do the trick.”
When it comes to long-term investments for a child, a common advice from experts boils down to this: put your money in broader market indices and let the markets do the work for you. Since investing for kids gives you a long time horizon, by the time your kid comes of age, they’d have a sizable chunk of money thanks to the upward trajectory of the market.
A McKinsey report provides some data which shows why it’s useful to invest in ETFs and mutual funds tracking the broader market:
“In 2001, the market capitalization of the companies that made up the S&P 500 was about $10 trillion. As of mid-June 2022 (even after a bearish opening to the year), S&P 500 market capitalization was about $32 trillion. The mean total yearly returns (including dividends) of the S&P 500 from 1996 to mid-June 2022 is 9 percent in nominal terms, or 6.8 percent in real terms—in line with historical results.
Best Long-Term Investments for a Child
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Our Methodology
For this article, we scoured investing forums, analyst reports, and advice from money managers and billionaires and compiled a list of all investment options that are deemed the best for a child in the modern world. Investing for your kid via these vehicles is not guaranteed to make them rich, but data shows that these investment vehicles do give people an edge and increase their wealth over longer time horizons.
Best Long-Term Investments for a Child
12. Schwab US Dividend Equity ETF (NYSEARCA:SCHD)
Schwab US Dividend Equity ETF (NYSEARCA:SCHD) is an ETF that tracks the Dow Jones U.S. Dividend 100™ Index. The ETF is safe and gives exposure to companies that have solid dividend-paying policies and history. For example, some of the top holdings of the ETF include AbbVie Inc. (NYSE:ABBV), Pfizer Inc. (NYSE:PFE), Chevron Corporation (NYSE:CVX) and Cisco Systems, Inc. (NASDAQ:CSCO).
11. VTI Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI)
Vanguard Total Stock Market ETF is one of the best long-term investments since the ETF gives exposure to some of the major companies in the US. Its portfolio includes over 3800 companies, including mega-cap names like Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Alphabet Inc. (NASDAQ:GOOG) and Tesla Inc. (NASDAQ:TSLA).
Bank of America Corporation (NYSE:BAC) recently said in a note that Apple could see an increase in its licensing and subscription revenues. Apple Inc. (NASDAQ:AAPL) is one of the most popular stocks among the elite hedge funds tracked by Insider Monkey. Out of the 910 hedge funds in Insider Monkey’s database, 135 hedge funds had stakes in Apple Inc. (NASDAQ:AAPL).
10. Starting a 529 Plan
A 529 college savings plan is a state-sponsored investment that you can use to save money for your kid’s education. You can withdraw funds tax-free to cover nearly any type of college expense. New regulations earlier this year paved way for 529 plans to be converted to Roth IRAs. People using 529 accounts usually set up small automatic payments from their bank to 529 to save up money for their kids’ education.
9. Vanguard S&P 500 ETF (NYSEARCA:VOO)
Vanguard S&P 500 ETF (NYSEARCA:VOO) is one of the best ways to let the money work over the long term. The ETF invests in the S&P 500 Index, representing 500 of the largest U.S. companies.
Some of the top holdings of the ETF include Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN).
Microsoft Corporation (NASDAQ:MSFT) is the most popular stock among the 910 elite hedge funds tracked by Insider Monkey.
As of the end of the second quarter of 2023, 300 hedge funds had stakes in Microsoft Corporation (NASDAQ:MSFT). The biggest stakeholder of Microsoft Corporation (NASDAQ:MSFT) after Bill & Melinda Gates Foundation was Chris Hohn’s TCI Fund Management which owns a $4 billion stake in the company.
8. SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
Investing in SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is another smart and easy way to gain exposure to the US stock market. The US stock market tends to go up over time, albeit slowly. The S&P 500 average return over the past decade has been around 12.39%, beating the long-term historic average of 10.7% since the benchmark index was introduced 65 years ago. You can invest in the broader index for your kid and by the time they grow up they’d have a decent amount to use for their education and other life expenses.
A Business Insider report quoted Jordan Gilberti, CFP and senior lead planner at Facet., who said:
"Investing can be a good way to grow wealth over the long term, and offers the potential for higher returns compared to a typical checking or savings account.”
7. Schwab® S&P 500 Index Fund (MUTF:SWPPX)
Schwab® S&P 500 Index Fund (MUTF:SWPPX) is another low-cost index fund to gain exposure to the broader S&P 500 companies. With no minimum investment conditions, the fund seeks to have exposure to the leading 500 leading U.S. companies. Some top holdings of the fund include Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN).
6. Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA) Accounts
You can open a custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) to hold gifts or transfers that a minor has received. The biggest benefit of using this kind of custodial account is that you don’t need to establish a trust to gift money to your kids. Transferring money to custodial account is free of any tax up to a certain amount. When you cross this limit, the effective tax rate is still lower than normal tax rate because the government uses minor’s tax rate instead of adult tax rate.
