By Andrew Leckey
Many parents and grandparents chat each year about giving holiday financial gifts to children, yet only a portion actually follow through with it.
Sidetracked by other gifts that will make them heroes, they rationalize that financial presents can wait until the kids are older to better appreciate them. In other instances, the youngsters had been given investments that initially declined in value and were therefore never repeated.
That's a shame. Holiday financial gifts, besides their potential investment benefits, are important learning tools that put youngsters on the proper financial road for life. They also give you an opportunity to teach something really useful.
Children can follow the progress of companies whose stock they have chosen, watch their savings grow in a bank account or track the path of a mutual fund that owns the stock of many different companies.
It's possible to make small investments so you can still buy the fun presents that will give you more instant admiration in the kids' eyes. Start the process early, involving the children more and more as they're able to comprehend more.
"When I was a kid my parents gave us Walt Disney Co. stock and would pull us out of school to go to shareholder meetings," recalls Mary Sullivan, now a chartered financial consultant with Protected Investors of America in San Francisco. "During the meeting we got to see a first-run Disney movie, got free popcorn and got a pass to Disneyland!"
Not bad. Starting at age 6, she amassed money for additional shares in other companies in a small bank account. Much of it came from her dollar-a-week allowance. "That's why today I suggest investing for kids in the stock of something they are interested in, whether it's computers, iPods or anything else," Sullivan said.
It's not difficult to find companies or products to which kids can easily relate.
Popular stocks such as motorcycle-maker Harley-Davidson Inc., chewing gum giant Wm. Wrigley Jr. Co., computer chipmaker Intel Corp. and software monolith Microsoft Corp. are typical stocks that might be considered for such a financial gift, according to Charles Carlson, editor of the DRIP Investor newsletter (www.dripinvestor.com) in Hammond, IN.
"You want to personalize the experience and perpetuate the investment process long after the gift is given," said Carlson, who believes parents often don't consider this simply because they have so much on their plates these days. "It can definitely change a life."
Carlson recommends dividend reinvestment programs that permit you to buy initial stock directly from more than 300 U.S. companies. Dividends are then reinvested through the plan, and you can also buy additional shares over time.
"Very often we simply recommend that you give the child cash, then take that child for a walk," said Harold Evensky, certified financial planner with Evensky & Katz in Coral Gables, FL. "During the walk, say they can do whatever they wish with the money but that they are expected to use it responsibly."
Spend some time educating the child about important financial concepts such as asset allocation before the money is invested, he added.
Mutual funds provide an excellent opportunity for a child to learn about investing because more than 300 funds have initial minimum requirements of $1,000 or less.
"You talk about what you're saving, which is a great thing to share with a child," said Christine Benz, associate director of fund analysis for Morningstar Inc. in Chicago. "Tell the children that as owners of a fund they own a piece of each company, then look down its list of holdings for familiar names you can discuss."
Benz recommends the $1,000-minimum-investment shares of these mutual funds:
- Ariel Appreciation Fund (CAAPX), five-year annualized return of 11 percent.
- Ariel Fund (ARGFX), five-year annualized return 14 percent.
- Oakmark Fund (OAKMX), five-year annualized return 8 percent.
- Oakmark Select Fund (OAKLX), five-year annualized return 11 percent.
- Selected American Fund (SLASX), five-year annualized return 4 percent.
In regard to taxes, you can make a tax-free gift of up to $11,000 annually to each child, and if husband and wife contribute, the total can be $22,000 per child.
Gifts can be made outright to the minor or through a custodial account such as that under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. Bear in mind that whenever using a custodial account the minor must receive the fund at reaching the age of majority, either 18 or 21 depending on state law. That's a ticklish point for many parents.
"Decide whether you want to give the gift outright or put some protections on it, such as in a trust," said Joe Votava, a certified financial planner and tax attorney with Nixon Peabody LLP in Rochester, NY. "There are also tax-advantaged 529 college savings plans for future educational costs that have proven to be especially popular with grandparents."
The more complex your wishes for the money, the more you'll need professional assistance in your strategy. But whatever way you choose to give holiday financial gifts to children and no matter how small the investment, seize this opportunity to provide a valuable life lesson.
Editor's Note: Andrew Leckey is a regular contributor to The Bull & Bear Financial Report print version.
