Last week, in describing gifts of stock as “the ultimate 2020 holiday gift,” I acted as if shares are a kind of one-size-fits-all item.
Yes, you pick individual companies, but that’s not much different from selecting the color on a more conventional gift.
But the questions I received prove that giving stocks for the holidays isn’t so cut-and-dried. Here are answers to stock-gift and children-and-money questions sent in by readers.
Question from Margaret in Daytona Beach, Fla.: “How do I know what stocks to buy?”
Answer: If they’re old enough, talk to the children and get an idea of what they’re into. Otherwise, buy things they will understand as they grow.
My kids first stock purchases — when they were babies — involved names like Coca-Cola, Disney and McDonald’s. But when they were playing nonstop with American Girl dolls, they got shares in Mattel, owner of Pleasant Company, the maker of the dolls. As teenagers, we’d discuss options, and they chose Microsoft or Intel because they saw those companies being involved in moving life fully online.
If the grandkids love video games, or wouldn’t be caught dead without their iPhone, Activision Blizzard or Electronic Arts or Apple could be appropriate options.
As interests and hobbies change, the children can reevaluate their holdings, continuing their education.
A key lesson for investors is that if you wouldn’t buy something again today, it doesn’t belong in your portfolio; when Mattel struggled and my girls were less interested in dolls, they made trades to get a portfolio they were more comfortable with.
Thanks to dollar-value investing — buying fractional shares or slices of stocks — any stock on the market can be on your gift list. Don’t worry about the “right stock;” this is as much about teaching lessons as making money.
Question from Michael in Seattle: “I don’t know much about investing. I don’t know what I could teach them. Where can I get information to really explain how stock investing works?”
Answer: There are plenty of books that can help you raise money-smart kids. One I like for helping parents teach children is “Blue Chip Kids: What Every Child (and Parent) Should Know About Money, Investing, and the Stock Market,” written by David Bianchi about five years ago.
The brokerage houses have plenty of support materials. There is no shortage of resources.
Don’t get hung up on your perceived “lack of knowledge.”
The key thing is to show children the value of investing and ownership, to help them see the benefit of owning stock, getting dividends and growing savings. Every stock purchase — good or bad — is a learning opportunity.
Don’t overcomplicate it or be scared off; the gift of shares itself does most of the work here.
Question from Don in New Orleans: “Doesn’t establishing a stock account in a child’s name [mess] up their ability to get student loans?”
Answer: Theoretically, yes. In practice, not so much.
This is about the “expected family contribution” (EFC) part of applying for college aid and student loans. The EFC is the amount the family is expected to cover on higher education costs; the difference between the cost of enrollment and the EFC represents the amount that can be subsidized by federal student aid.
When an asset belongs to a parent — and this includes 529 educational savings plans that parents open for dependent children — a maximum of roughly 5.6% is factored into the expected family contribution.
By comparison, if a child is the account owner, the asset is treated as the student’s and up to 20% of the value hits the EFC.
So, yes, a large account in your child’s name could reduce available aid. The actual impact, however, is pretty small, especially consider that we’re talking small holiday gifts rather than large, lifetime inheritances.
Consider my daughters, whose stock accounts were opened just after birth and grew to the $20,000 range when they reached adulthood. That amounted to $4,000 in EFC; had those assets instead been in my name, roughly $1,125 would have been in EFC.
That difference could be significant, but I’ve talked with college-savings specialists who acknowledge that it usually isn’t. For my girls, the “reduced” amount of available aid still was more than sufficient to top off college savings.
These are small gifts, and few people start as young or go as long as I did.
Don — who has a 16-year-old daughter — will only amass two years of savings before college, plenty of time to teach market lessons but hardly enough to throw off the aid formula. The same could be said for Michelle in Seattle — investing for her 13-year-old son — or Randy, who wants to set aside $50 per year for his newborn.
My girls, meanwhile, got the benefit of learning about the market in their own account; if the “worst thing” was that their accounts grew bigger than expected, I’d count that as a win.
Other factors are at play in aid decisions too, but those are better saved for a discussion of college aid.
Simply put, consider the math and your options, but don’t let the aid formula scare you off. You are giving your kids some investing play money, not making them rich overnight.
Question from Joe in Richmond, Va.: “I’ve used DRIPS [Dividend Reinvestment Plans] for my kids, buying directly from the company; you mentioned ‘stocks by the slice.’ Is there one you prefer over the other?”
Answer: DRIPs are a good old-school way of investing. There’s certainly nothing wrong with using them to accumulate stock in your own account or on account for your kids.
That said, DRIPs can have fees, minimum investment levels and other inconveniences. In addition, you have to set up accounts with each company directly.
If you buy fractional shares through a broker or brokerage app, you can buy several stocks at once, in a portfolio your child can review in one place. In addition, the stock-slice programs have pretty much eliminated fees and have low or no minimum/additional investment levels.
For ease of gifting and use, the new programs carry the day (but there’s no reason to close established DRIP accounts).
Question from Bob in Toledo, Ohio: How did your Halloween experiment turn out, or did you have to cancel this year?
Answer: Cash or candy was in full force this year, albeit modified to meet COVID-19 precautions.
Attendance was down, especially among the older children — third graders and up — who get a choice of money or candy.
The four options this year were: three pieces of fun-sized candy, a $1 gift certificate to the local ice cream store, envelopes with between 25 cents and $5, or a “lottery pick” hoping for a $20 jackpot and $10 second prize among 48 empty envelopes.
In the end, just two age-eligible kids stuck with candy. Ten children took the lottery option — average envelope held 60 cents — but none won. Seven children took ice cream certificates, very happily and saying it was better than candy. A dozen kids took money envelopes, with two children winning $4 second prizes; the average winner took home $1.27 (the average envelope held $1.12).
Most important, a good time was had by all.