Expert: Paul Henneman - 3/7/2011

Question
Paul,
First and foremost thank you for taking this time to answer my question. I am becoming a father on May 10th and i am very interested in investing for my daughter so college and becoming an adult will be an easier transition. I read one of your answers with a similar question about getting a mutual fund. Sounded great and i will do that if its the only best option but i was thinking more in the lines being able to add more money as the years go. Also i was born in Brazil originally and would not shy away with currency options/investments in Brazil. Thank you again and hope to hear from you soon.

Luiz Antonio

Answer
Luiz,
  Thank you for your question!  Congratulations on becoming a father! I have a three year old and second baby on the way, so am very familiar with exactly what you are talking about. We have gone through the same sort of planning personally.
I think that there are several things to consider:

1. General mutual fund or ETF (exchange traded fund) that tracks a major stock market index. The S&P500 is typically thought of as the most stable and appropriate index for this, a simple google search will reveal  many mutual funds and ETF's that track this index.  ETF's typically have lower fees, and are worth a close look.  There are also internationally focused ETF's and mutual funds, even ones that focus specifically on Brazil.  This would be the simplest way to invest in a foreign market.

2.  There are college savings plans with tax advantages. These are 529 plans, where you can save and invest for your child's college, and gain some tax benefits.  You can continue to add to this type of plan over the years.

3.   Depending on what state you live in, there may be a pre paid college tuition program.  This type of program usually locks in tuition at current levels, and you would pay a small monthly sum into the program for the next 17 or 18 years, then your child's tuition would be completely paid by the time they graduate high school. Of course this limits the colleges to the state University schools in your state, but this is a cost effective way to save for college, particularly if your state has a good public university system.

4.  Life insurance is complex, but worth a look.  Its called Investment Grade life insurance, and it comes in several forms: Whole Life, Universal Life, and Variable Universal life. It sounds silly to get life insurance for a new born, but it is so cheap to get it for a young child that the investment side of the policy can grow over time and then be used to pay for college down the road. Or, if you do other things and end up paying for tuition in some other way, the life insurance policy can then be turned over to your child and used to purchase a first home, or continue to supply life insurance if your child forms a family of their own down the road. Life insurance is tricky and complicated, be very careful to understand exactly what fees are involved as it can vary greatly.  Life insurance should be considered only with very long time horizons.

5.  Bond funds are typically more stable than stocks.  A portion of any good portfolio should be in bonds, and this can be done through a general bond mutual fund or etf (it is too tricky to try to buy individual bonds on your own).

My final suggestion would be to consider all of the above together, or at least more than one of the above options to diversify and come at this from a few different angles.  All of the above allow for continued input of more funds to further grow the investment as time goes on, except the prepaid college tuition plan as that is typically a set payment each month.

I hope this helps!  The main thing is get started on something quickly. Investments take time to grow, and the more time your investments for your child's future have to grow, the better.

Best Regards,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com