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Q&A: Starting Young

Q:

This is a question about young investors. I would like to set up an account for my kids, age 20 and 18, to begin investing a fixed amount per month. I understand that there are DRIPs available for individual stocks, Is there something like that available for mutual funds? Would it be better to do this in a ROTH IRA? In general, what do you recommend for young investors?

A:

How great would it be if every parent did what you are planning? By investing just $100 per month in a Roth-IRA with an average annual return of just 8% (historical stock returns have been far higher), the 18-year old could retire at 68 with over $800,000. It's a great habit to start and encourage (at $200 per month that figure grows to $1.65 million).

I would not suggest individual stocks as this only encourages a form of gambling. The best way to get started is at TD Ameritrade (we are not compensated by them). They offer free, no minimum Roth-IRA accounts and a number of great low-fee Vanguard ETFs with no commission (I wonder how they make money on this, but...). Since they're young, you should consider a 100% global equity portfolio in something like Vanguard Total World Stock ETF (VT).

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