Is five too young for a stock portfolio?

Five is not too young for a stock portfolio but a five year old may be too young to manage a stock portfolio. That's where parents can be useful because the earlier a child gets started with investing, the better off he or she will be when old enough to take over the investments for themselves. What's more, depending on the type of portfolio, the wonders of compounding and the peace of mind of not having to worry about short term economic trends can all pass a 5 year old by while they play with their toys.

Advantages of stock portfolios for 5 year olds: 

When a child is young they are rich in the asset older people don't have, time. Time is money, and converting that time into money involves investing. Since 5 year olds are rich with time, a parent may want to start an investment portfolio to convert that time into money by making wise investments. Choosing the right stocks is the challenge as companies can do all kinds of things including go bankrupt so thoroughly investigating risks, potential rewards, mutual funds, exchange traded funds, brokers etc. is probably all worth some thought. A few advantages of starting a stock portfolio for a 5 year old are listed below:

• Can cause the money invested to grow
• May be a source of financing for the child's future needs
• Is a potentially good money management strategy for the parent(s)
• The child may be grateful later in life
• Reduced stress when the big kid bills come later in life

Types of stock investments for 5 year olds

The list of potential investments for a 5 year old is quite long. Essentially, a parent or parents might consider doing this after they have decided enough extra money is around to start a portfolio for the child. Choosing the right stock investment is a matter of risk tolerance, health, education, retirement and other expectations. Since the child is still young, it is not absolutely necessary to worry about every future need the child may have bet getting a head start always helps. Below are a few investments that may use stocks as an investment instrument:

• Individual Retirement Accounts
• Employer investment plans such as 401K
• Exchange traded funds
• Cash value life insurance policy
• Mutual funds

Managing a 5 year old's investment portfolio

As a 5 year old will likely need assistance in his or her investments, slowly and incrementally getting the child used to the idea of investing is one way to prepare them for managing the money themselves. This however, is not the only strategy, the parent(s) may also choose not to tell the child about the portfolio until he or she is responsible enough to manage it which might not be until they are in their late teens, 20's or 30's.

The purpose of the portfolio is also likely to have an influence on how it is used, converted and/or reinvested later on. If it is a retirement focused portfolio, restricted access and early withdrawal penalties will make re-application of the funds less ideal. If the portfolio is to help the child get started in life, the funds may grow until a certain time period in which they are used. Or it may be a part of a college, vehicle and/or marriage financing plan.

The strategy parents use when investing for a 5 year old is apt to be unique and specific to the needs and financial situation of the parents, the number of siblings, investment know how etc. Whatever the case may be, 5 is not too young to start an investment portfolio for a child. In fact, once a child is born, they are legal entities that can be the beneficiaries of assets which means parents can set up stock portfolios for them even younger than 5. Helping a child prepare for the future through stock investments may or may not be practical for a parent. However, the idea that a child's financial future can be begun young is something that is not too young a thought for a 5 year old.