A balanced portfolio is an essential tool for growing your wealth while minimizing risks. It refers to a portfolio made up of quality assets belonging to several sectors like stocks, bonds, and exchange-traded funds (ETFs). In this article, we will look at how you can create such a balanced portfolio for your children.
Why invest for your kids?
As a parent, one of my best decisions ever was to create an investment account for my son long before he was born. I was inspired by the Pink Portfolio, which is a series by a Seeking Alpha contributor. In it, he regularly talks about how he created a small investment for his daughter. He started the portfolio with $150, and by January 2020, the portfolio had grown to more than $11,200.
There are several benefits you get by investing for your kids, especially when they are young. First, it will be the best method of teaching your kids about financial planning, responsibility, and discipline.
Second, it is a useful way of saving for your kid’s education and other needs. For example, the average cost of college in the US is more than $100,000. Therefore, the earlier you start saving and investing for this goal, the better it will be for you.
For example, if you decide to invest $500 per month, you will have $6,000 per year. If your kid goes to college at 18 years, then you will have about $108,000. Including interest, this amount will be much larger.
Third, investing for your kid(s) will give you peace of mind knowing that your loved one has a good safety net. So, let us look at a good method of creating such a balanced portfolio.
The first step in creating a well-balanced portfolio is known as asset selection. This is where you sit and decide on the best assets to invest in for your kids. Fortunately, there are several assets that you can choose from. Some of them are:
- Stocks – Stocks refer to shares of publicly traded companies like Asana, GoPro, and Booz Allen Hamilton. Stocks are some of the best-performing assets you can invest in.
- Exchange-traded funds (ETFs) – These are funds made up of several assets. For example, the Invesco QQQ is a fund that tracks the Nasdaq 100 index.
- Bonds – Bonds are loans that investors extend to governments, companies, municipalities, and government agencies.
- Cryptocurrencies – These are relatively new products like Bitcoin, Ether, and Ripple. While they have had good returns over the years, they are known for being volatile and risky.
- Smart portfolios – These are portfolios built by companies like Betterment, Acorns, and Wealthfront.
- Real estate – You can also invest in physical or online real estate platforms. There are companies like RealtyMogul that provide you with quality real estate portfolios.
- Precious metals – These are metals like gold, silver, platinum, and palladium that have a history of growth.
After coming up with an asset list, the next stage in creating a balanced portfolio is known as asset allocation. This is where you assess your risk tolerance profile and come up with a strategy for allocating the funds. For example, if you are an aggressive investor, you can allocate most of your funds in growth stocks or ETFs. This is because historically, growth stocks tend to outperform value and dividend stocks.
For starters, growth stocks are those of relatively young companies that are seeing strong quarterly and annual revenue growth. In most cases, most of these firms tend to have minimal profits. Value stocks, on the other hand, are relatively old firms that have a stable business that is not reflected in their share prices. Some of the top value stocks are companies like Sysco, Unilever, and Kimberly-Clark.
For a balanced portfolio for your kids, we recommend a situation where you invest 50% of your funds in growth ETFs, 40% in value ETFs, and 10% in bonds. We recommend ETFs because they are diversified and have lower costs. They are also better in terms of taxes.
This portfolio is a good one for three main reasons. First, growth stocks in the fund will bring in stronger better capital appreciation than bonds and dividend stocks. Second, a well-selected dividend ETF will bring regular income, which you can use to reinvest for your kids. Finally, having a small bond allocation is a good thing since they tend to be relatively safe.
The next thing is creating a good and balanced portfolio is known as portfolio rebalancing. This is where you continually track the portfolio and rebalance its weighting depending on market conditions.
For example, if interest rates decline as they did during the Covid-19 pandemic, you can reduce your bond holdings and increase your growth stocks allocation. This is simply because growth stocks tend to do well in a low-interest-rate environment.
On the other hand, if you believe that interest rates will rise, you can add to your dividend and bond portfolio. These assets tend to perform well when interest rates are high. Growth stocks underperform in this environment.
Another way you can conduct the rebalancing is by adding more risky assets in the portfolio when rates decline. For example, you can reduce some of the assets and invest in risky assets like cryptocurrencies.
Having a balanced portfolio is a good thing for anyone involved in the financial market. As a parent, having such a portfolio for your kids is even better. It will help them become disciplined on matters to do with money and set them up for success. This article has explained the important steps you need to follow when creating such a portfolio.