Expert: Paul Henneman - 9/1/2006

Question
We have a 6 month old and would like to start an investment...something for college or what she wants.  We don't even know how to start.  Please help.

Answer
Thank you for your question!
  I congratulate you on thinking about this so early. Investments take time to grow, and by starting now the funds that will be available for your daughter when she is of age to consider college, or need to establish her first home, will be far greater.
  The best suggestion I have for now are CD's. Longer term CD's typically return a bit more, so I suggest looking into three year CD's. You should be able to find 4 to 6 percent return rates on these CD's. These investments are perfectly safe, no risk, and will grow slowly and steadily over time.  Growth will be much enhanced if you can add to it on a periodic basis. For example, setting aside a small amount once per year to add to the CD's. They will mature every few years depending on the time table of the CD's you do get, so you will have to reinvest them every few years. You can add to the amounts at that time, or simply purchase a new CD every year with your additional contribution.
  You may also want to consider mutual funds. This is more risky in the short term, but will give much greater returns over the long term. True the market and resulting value of a mutual fund can go down in the short term. But even terribly market crashes like the one in 2001 recover in just a few years. You have a 17 or 18 year time frame, and in no time in history has the performance of the overall stock market been less than the CD's for such a time frame. Generally you can expect two to three times the returns on average.
  It may sound difficult to research and find a mutual fund, and from your email I am guessing that you do not feel confident in this. There is an easy answer. Consider an index fund. These are mutual funds that simply track the overall market or an index. An index fund based on the S&P500 would be the most stable and appropriate for you I believe. Vanguard has a good one. The ticker symbol is VFINX.
You can purchase a mutual fund on any online brokerage website, you will need to set up an account. Some good ones are www.Scottrade.com, www.FOLIOfn.com. Some of the larger and most established ones (but with higher fees) are www.etrade.com, www.TDameritrade, Morgan Stanley, Merrill Lynch, there are many others. I would stick with the discount brokerage firms that I listed first, fees are MUCh lower, and you don't want to get sucked in with a financial advisor making things overly complicated. Scottrade.com may be the one to look at first.
For the CD's, you can purchase at any major bank, so check with your banking institution regarding the interest they pay out and fee structure. You can then compare what they have with an online source, such as www.Netbank.com which has genrally industry leading rates and fees. NetBank is FDIC insured, very important, and easy to use should you find the rates better there. There are other online banks as well, this type of banking lacks the local branch to walk into, but makes up in terms of better returns, lower fees, and usually very good telephone customer service.

I would also suggest that you pick up a copy of "Investing for Dummies". While not a very flattering title, it does give a good summary of both mutual funds and CD's, as well as other possible investments such as bonds. Reading this may be helpful to your own finances as well. With some attention and planning, you can dramatically increase your wealth for later in life. I strongly suggest you think about and create a financial plan for you new daughter, as well as for yourselves! It does not take much, just a steady interest and at least a very small contribution to investments each month, and discipline to keep it up over the years.

I hope this helps to get you started! Please do not hesitate to follow up with me if i can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com