Buy Stocks For Your Children During This Recession

The word is (finally) out: we’ve been in a recession for a year now. Although this is hardly news for most of us, it’s good that the “professionals” have finally agreed on it. So with the recession “news” and all the financial turmoil that we’ve witnessed all year, we’ve been tightening our belts and this attitude has carried over into the holiday season. Although I personally don’t push the “frugal” agenda, many other personal finance bloggers have been offering tips on how to save money on all kinds of things, including gifts for the holiday season.

I was reading this parenting magazine lately and I came across an article that suggests buying stocks for your children as gifts this holiday season. Of course I picked it up and I have to say that the advice that was offered was of the highest quality. I am a follower of Warren Buffett’s investing principles, and a strong believer in the power of dollar-cost averaging. It so happens that this article touches on both, in a way that’s very refreshing and is a welcome departure from the doom-and-gloom news of late.

I put up a post a while ago on my other personal finance blog, about Warren Buffett and how I think he’s behaving in this recession. It wasn’t even a wild guess, as I took it straight from one Berkshire Hathaway’s annual reports. Referring to bad economic times and the pessimism that they bring along with them, Buffett says:

“We want to do business in such an environment, not because we like pessimism but because we like the prices it produces”

He also has another saying that goes:

“Be fearful when others are greedy and greedy when others are fearful”

As we all know, the stock market has taken quite a beating this year, and this weekend the President-elect has warned us that things will get worse before they get better. But guess what? Now might be the best time to buy stocks for your kids! As a rule, if you’re looking for a short-term return on your money, stocks are not a good investment for you, as stock returns can vary greatly from one year to the next. But if you can afford to wait, they are your best friends. And who can better afford to wait than, say, your 3 year old daughter? Simply put, it’s a really good idea to buy stocks NOW for a child, who by definition has a long investing horizon. In five, ten, or twenty years, when all this is over, those companies that you scooped up for a song might very well be churning out solid profits.

The other added benefit of buying stocks for your children is that it’s a great opportunity to introduce them to the concept of investing, and to teach them about delayed gratification. Explain to them that what matters is what their stocks will be worth when they are 18, not the day-to-day fluctuations and all the noise that they will undoubtedly get from the media over the years. Getting them to understand the concept of compound interest is key, and later on, in their teens, they can fully grasp the related concept of dollar-cost averaging.

How And Where To Buy Stocks For Your Children

Even if you’ve never invested for yourself before (which is something that you should attend to ASAP), buying stocks for your children is not complicated at all. Here are a few available options:

Buying individual stocks. Websites such as Zecco, Sharebuilder, and E-Trade allow you to buy and trade stocks with low commission fees.

Buying shares in a mutual fund. Being that a mutual fund holds a diversified portfolio, it’s a better investing approach than trying to pick individual stocks. Also, a mutual fund allows you to invest smaller amounts of money (as low as $50 per month) as opposed to having to buy a fixed number of individual shares.

Investing into a 529 plan. A 529 Plan is a way to save money for your child’s college education that offers significant tax breaks. The biggest advantage of 529 plans is that once you put money in them, it’s never taxed again. Since it may be 15 or 20 years before that money is withdrawn, it’s that many years during which the money that is in this account is allowed to compound tax-free.

Finally, buying stocks for your kids can be a good time to teach them about socially responsible investing, as the concept is gaining both in exposure and popularity. The benefits are obvious, and if everyone gets their kids to buy into the concept, then they will get that much closer to actually having an enjoyable future.

Summary: Buy stocks for your children during this recession. Firstly, you will get good prices on your stock purchases. Secondly, as your child’s investing horizon is decidedly long-term, he/she will gain as the stock market trends upwards in the long run.