The returns can change from year-to-year, however. For example, if you’d invested $100 in an ETF index that tracked the Dow at the beginning of 2008, your $100 investment would have gone down by about $33.80 (or 33.8% as shown in the table in the “% of Change” column for the Dow in 2008) by the end of 2008. The extreme decline in investment value in 2008 was because the United States went through one its worst financial crisis in over 70 years in that year.

Over a very long period, however, the overall return of an index ETF based on the Dow would be positive — perhaps averaging around 7%.

ETF Symbols & Price

The following are the stock symbols for ETF’s associated with the 3 indexes in the above table:

1. The Dow ETF: SPDR Dow Jones Industrial Average ETF Trust - symbol: DIA

2. The S&P 500: Vanguard S&P 500 ETF - symbol VOO

3. The NASDAQ: Invesco QQQ - symbol: QQQ

At the time of this writing, the price for a share of the SPDR Dow Jones Industrial Average ETF Trust, the Vanguard S&P 500 ETF, and the Invesco QQQ were about $356, $416, and $375, respectively.

However, because ETFs trade just like stocks, your young investor can buy fractional shares of ETFs for $5 or less from some online brokers such as Fidelity and Charles Schwab.

The Riskiness of ETFs

I rate the riskiness level of the index-based ETFs discussed so far to be “Moderate” because the price of an ETF which reflects the movement of a broad stock market index like the Dow will probably not swing as wildly as the price of any one individual stock in the Dow.

However, there are some index-based ETFs such as those that target commodities like gold or even cryptocurrency which are riskier than index-based ETFs that target the broad stock market. I would consider the risk level of these types of ETFS to be “High.”

Certificate of Deposits (CDs)

• Investment Amount: $25+

• Riskiness Level = Low

Checking, savings, or money market deposit accounts are great places to keep money your child may need within days. But if he doesn’t need all the money right away, he may want to put some of it into a Certificate of Deposit (CD). In my opinion, putting money in a CD is just so a saver can resist the temptation of using it right away — it is not for making any money because interest rates are quite low as you will see later.

Here are a couple of important things you need to know about a CD:

• It offers a guaranteed interest rate for a period of time. CDs usually offer a guaranteed rate of interest for a specified time period, such as six months or one year. Once you choose the term, the bank will generally require that you keep your money in the account until the term ends (for example, until maturity).

• It offers higher rates than other bank deposits. Because you agree to leave your funds in the account for a specified period of time, the institution will generally pay you a higher rate of interest than it would for a savings, checking, or money market deposit account.
  

Interest Rate of CDs

The interest rates your young investor will get for investing in a CD will increase depending on the term of the investment. For example, at the time of this writing, online bank Ally Bank offers the following CD rates for different terms: 3-month CD at 0.15% annual rate; 6-month CD at 0.20% annual rate; 1-year CD at 0.55% annual rate; and 5-year CD at 0.80% annual rate.

Granted, these rates are pretty low but that’s because we are currently living in a low interest rate environment. By way of contrast, the 3-month CD rate in December of 1980 (when inflation was shockingly high), was about 18.7%.

The highest CD rates can be found at online banks and credit unions. When you shop for CD rates, make sure that the bank does not have a minimum required deposit or any fees.

Riskiness of CDs

I rate the riskiness level of this type of investment as “Low” because your rates are guaranteed for the term you choose.

US Saving Bonds

• Investment Amount: $25+

• Riskiness Level = Low

Savings bonds are loans American citizens make to the U.S. government. Savings bonds can really only be viewed as a way to save money, not necessarily a way to earn much interest.

Two Types of U.S. Savings Bonds

There are two types of savings bonds: Series EE U.S. Savings Bonds (or Series EE Bonds) and the Series I Savings Bonds. Both types of bonds are low-risk investments that pay interest for up to 30 years.

To buy savings bonds for your kids, you will first need to establish your own account, which is called a Primary Account. You can then establish a Minor Account which you can link to your Primary Account. This Minor Account is only for a child under the age of 18 if you are a parent, natural guardian, or person providing chief support. You may purchase, redeem, receive gift deliveries, and perform other transactions within the account on behalf of the child for whom the Minor Account was established. When your kid reaches age 18 and establishes his or her own Primary account, you may de-link the securities from the Minor Account to move them to the newly established account. These transactions are all done within the US Savings Bonds website, www.treasurydirect.gov.

Series EE Bonds

With Series EE Bonds, an investor is promised a certain fixed interest rate over a 30-year period. The U.S. Treasury announces the interest rates for new Series EE Bonds each year on May 1 and November 1.

At the time of this writing, the interest rate your kids will earn on a Series EE Bond is a measly 0.10% per year.

An investor will have to invest at least $25 in a Series EE Bond, but he cannot invest more than $10,000 in each calendar year. Your child (through you as the custodian of the Minor Account) can only cash in the bond after one year or more. However, if you cash in the bond before 5 years on his behalf, he will lose some interest. When a bond is cashed in or it matures, your child will receive the accumulated interest minus penalties for early redemptions, if any.

Series I Savings Bonds

The Series I Savings Bonds are similar to the Series EE Bonds with one important distinction: the Series I Bond interest rate is adjusted periodically based on the inflation rate. Specifically, the interest rate is based on a formula, which adds a fixed interest rate, and a rate related to the CPI-U inflation rate. At the time of this writing, the annual interest rate your young investor would earn in the I Savings Bonds is 3.54% (which is updated every 6 months).

The Riskiness of Savings Bonds

I rate the riskiness level of this type of investment as “Low” because the investment in U.S. savings bonds is backed by the spending power of the United States government.

Roth IRAs

• Investment Amount: $500

• Riskiness Level = Depends on Investment Choices

The Roth IRA was established by law in 1997 in order to encourage people to save money for their retirement. However, socking money away for the “big payoff” at retirement five decades down the road is not going to motivate your kids to invest in a Roth IRA.

Your young investors will need a little incentive from you to get going with an IRA, even though you may think the only incentive they need is that it’s for their own good. Fortunately, the Roth IRA has also become a way for people to save money while benefitting from some tax relief even if they withdraw money before retirement. There is really no minimum investment amount to establish a Roth IRA account but some online brokers may have their own minimums. For this reason, we suggest that $500 should be enough to get your kids started.

How Roth IRAs Work

The Roth IRA is not actually an investment. You can think of it more like an investment pool you establish in which you can deposit stocks, bonds, and other assets.

Adults and minors (which are young people less than 18 in most states) can establish Roth IRAs if they have what’s called ‘earned income’, which is generally considered money one makes through a job.

Kids can invest in Roth IRAs through custodial accounts normally established by a parent or guardian.

Once a Roth IRA is established, either through an online broker or a bank, your child can make annual contributions with after-tax dollars which are then used to make the actual investments contained within it. How much your child can contribute annually, however, is based on his earned income, subject to a maximum level set by the Internal Revenue Service (IRS). The current maximum annual contribution level is about $6,000 so it is unlikely that your child will breach this limit.

Contributions Can Be Withdrawn Anytime

Original contributions to a Roth IRA, as opposed to accumulated earnings (loosely coined, the profits generated by the account), can be withdrawn tax-free prior to age 59½ without a penalty, after five years. If, however, your child withdraws all his contributions, then proceeds to withdraw the accumulated earnings in the portfolio before turning 59½, he will pay taxes on the earnings and also pay a 10% penalty on such earnings. There are limited exceptions to this rule, including withdrawals for paying qualified education expenses, which is great for young people who intend to go to college.

Ultimate Benefit of a Roth IRA

Therefore, the advantage is that if your child’s investments in a Roth IRA make money (such as interest, stock gains, etc.), those earnings are not taxed subject to meeting the conditions established by the IRS.

This is an important benefit because ordinarily, you will have to pay taxes on investment gains. For example, if your child invests in the bond of a corporation outside of the Roth IRA framework, he will have to pay taxes on the interest he earns on that bond.

The Roth IRA eliminates this tax, subject to IRS rules, with the tradeoff being that the account owner is discouraged from touching the account’s investment earnings until he is 59 ½ years old.

Where to Set Up a Roth IRA

A Roth IRA, can be set up through a bank or online broker. Many brokers will open custodial IRAs for minors. However, fees and minimum balances can vary, so you should shop around.

To qualify as a Roth IRA, the account must be specifically designated as such. Contributions to the account must be made in the form of money (cash, check or money order), and that money can then be used to buy stocks, bonds, ETFs, mutual funds, and other assets for the account.

The Riskiness of Roth IRAs

As discussed earlier, the Roth IRA is not an investment but a container in which you can put in many different types of assets like stocks, bonds, ETFs, and any other investments you can think of.

This means that the riskiness of a Roth IRA depends entirely on what your child (with your assistance) puts into it. If your Roth IRA investment consists of only the stock of one company, then I would consider it to have a riskiness level of “High”. If it contains broad market index-based ETFs then I would consider the riskiness level to be “Moderate.”