Give your child a head start in life
Show MenuHide Menu

Should Your Kids Buy Stocks?

December 11, 2016

We all know that investing in our Children’s future is something that we all have to do. The usual way to do that is through an RESP which is an investment vehicle used to save for a child’s post secondary education. The Government actually contributes 20% of the amount that you put in up to a maximum of $500 per year. This method is really a no brainer and every parent should do this for their children to take advantage of the free money from the government. How often does the government give you anything for free?

stock-marketOnce you have the RESP account setup through a financial institution and you have made your contributions, you need to decide which investments are best for long term gains. Much like an RRSP, you can choose any investment product you like. You can use cash, mutual funds, exchange traded funds (ETFs), bonds, and individual stocks. In my opinion mutual funds are a lost cause and should never be purchased because of their poor returns and high fees. Sure the person that sold you the mutual fund at the bank, and person managing the fund will make some nice money off of you, but once they take your cut, there won’t be much left for you. Even if they invest your money wisely, you will be lucky to get a 2 or 3 % return once they take their cut. That is why almost everyone has a story of holding on to mutual funds for ten years without gaining much. Obviously cash will not do much for you, and bonds do not perform well in a low interest rate environment. ETFs can be very good, but in my opinion nothing beats individual stocks.

However, you need to really do your homework before plunging into this type of investing. To be safe, only invest in blue chip stocks that have been profitable for many years. I am taking about the banks, insurance companies, utilities, telecom companies, oil companies, and pharmaceutical companies. It is also very important to buy stocks that pay a dividend. That way you get paid a certain percentage every quarter and you can reinvest that money by usingĀ it to buy more of that particular stock. Make sure you do not invest too much of your money in any of these companies. You need to be diversified so that if one of these stocks crashes, you won’t lose too much money. This is what happened to people that worked at Nortel back around 2001. These employees had all their retirement savings invested in Nortel stock, and when Nortel begin to decline, they eventually lost everything because the company went bankrupt and the stock value went to zero.

I can’t stress this enough – do your homework and learn about the companies you are considering. Kevin O’Leary has some good tips in this video about buying stocks.