Dear Carrie: My 15-year-old grandson called me the other night and asked if he should open a brokerage account now that the market is so low. (He has $100 to invest.) What should I tell him? Thanks! -- A Reader
Dear Reader: Someone must be doing something right with this teen who not only wants to invest $100 rather than spend it -- but who knows that the market's decline could signal a good opportunity to buy stocks. I would absolutely encourage and support him. You'll be starting him out on a lifetime of investing, and what he learns with this modest beginning could pay enormous dividends in the years to come.
Getting started should be easy. Because your grandson is a minor, he will need an adult (most likely either you or a parent) to open the account and act as its custodian until he reaches the age of majority (typically 18 or 21 -- or up to 25, depending on his state). First, look for a brokerage or mutual fund company that has low (or preferably no) fees and a low account minimum. Then he and his custodian will simply have to complete some paperwork, mail in the check, and he's ready to start investing. (I'll point out here for the benefit of others that if large sums of money are involved, custodial accounts may not be the best option given tax issues and college financial aid -- but small accounts offer a fantastic way for young people to get their investing feet wet.)
Once the money is in the account, it's time to invest. Here's where the real learning (and the fun) begins. I'd start by explaining the fundamentals of building a portfolio. Explore with him the importance of establishing goals, which in his case will probably be pretty simple: long-term growth. Discuss the critical need for diversification (though as I'll explain below, diversification may not be a big concern in a small portfolio). Teach him about asset allocation and dividing his capital among equities, bonds and cash (again, not super-critical for a portfolio of $100, but something he'll need to understand in the future). Explain the different ways to create a portfolio: buying individual stocks or investing in mutual funds. And finally, talk about the risks inherent in different types of investments and the risk/reward tradeoff.
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