A Quiet Fortune: The twins and the ETFs
July 23, 2017
Kristen and Jerimiah are two savvy kids. Well, they aren't actually kids anymore, except to people my age. Kristen and "Jay," as we call him, have twin boys who just turned 8. Needless to say, the boys add a combination of hilarity, high energy, sleepless nights and complete exhaustion to the family dynamic. The twins' arrival also introduced that all-too-common phenomenon of parenting, financial uncertainty. Thrift has become the byword for our friends.
But Kristen and Jerimiah also know that, if they could possibly start a little investment account for their boys while they are young, financial uncertainty might not be part of the far-away future for them. The more time money has to grow, the less that has to be invested. So our young couple decided to figure out what they could do.
Enter ETFs, short for Exchange-Traded Funds. I want to tell you a few things about them; ETFs might be a good idea for you, too.
In the last column I gave you a basic list of ways we can make our money grow. One of those was through the stock market, and I listed five simple methods to begin investing in it. ETFs were one of them.
Essentiallty, Exchange-Traded Funds are a type of mutual fund, the most often-recommended choice for people who don't spend their lives studying investments. They are combinations of stocks, bonds and/or other investments that are either (1) put together by fund managers or (2) consist of a standard mix of stocks, like those included in one of the many benchmarks such as the S&P 500.
Each mutual fund tries to mimic or outdo the stock market. Even though there are plenty of times when the stock market will fall, scaring lots of people, it has always — I repeat, has always — risen over the years.
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So, back to Kristen and Jerimiah: they know that investing for their boys now will most likely pay off big when the boys are older. They wanted to buy a mutual fund for each of the twins. But most mutual funds need a $1,000 minimum initial investment, and sometimes much more. No way was that going to happen for our young parents; nor could it happen for many of us in the real work-a-day world, whether the plan is for our kids or for our own futures.
That's where ETFs come in. Unlike regular mutual funds, ETFs don't require a high minimum amount to start. They are bought and sold like stocks at any time during the trading day, and can be purchased in small amounts. Designed 25 years ago, ETFs offer some advantages to the small investor. One advantage is the confidence provided by having a fund manager or an index that follows the market; we don't have to make all the decisions alone. Another is that we can begin investing with just a little money.
So the twins' parents called a mutual fund company and talked to a representative about starting Uniform Gift to Minor's Accounts for the boys. The rep helped them set up accounts to which they would contribute $25 per month for each twin. When the amount grew to $100 the money would sweep into the automatic purchase of one share of an ETF.
Later, after the accounts grow to $1,000 or more, they will probably switch the money into a regular mutual fund. But in the meantime they have recently doubled their automatic monthly contributions to $50 each month. They are on the way; and eventually the boys will learn that saving just a little, but early in life, can ensure financial security later on.
As with all investments, there are things about ETFs you should know before you buy. For example, we incur a fee with each trade, so if we buy or sell them too often the fees can mount up. But as a good way to start investing in the stock market with just a little money, they are excellent.
To learn more you might want to look at the book Investing 101 by Michele Cagan, available in print and as an ebook.
Terrie Drake is the author of the book "A Quiet Fortune," and a retired teacher and librarian. She and her husband have lived in Glenwood Springs since 1974. She is not a financial adviser; consult a competent professional for your personal financial solutions. She can be reached at email@example.com.