Giving Money to Your Adult Children? Use it as an Introduction to Investing by Carrie Schwab Pomerantz on Creators.com

Recently

Can You Collect Both a Public Pension and Social Security? Dear Carrie: I'm 69, worked 23-plus years in the private sector and I am still working in the public sector and receiving monthly Social Security payments. When I retire and start receiving public employee's retirement payments, there's supposed to …Read more. Love and Money: Can You Overcome Your Financial Differences? Dear Carrie: My husband and I have been married for less than a year. He comes from a moderately wealthy family and my family was always scrimping for every penny. Ironically, I'm now earning more than he is, but he's still ready to spend. How do we …Read more. Retiring Early: What's the Best Plan for a Too-Small Nest Egg? Dear Carrie: I only have about $21,000 saved and I am headed into a way-too-early retirement. Should I be investing aggressively to make up for lost time? —A Reader Dear Reader: In the financial world, we often talk about the importance of …Read more. Can You Start Investing With a Small Amount of Money? Dear Carrie: Please help. I don't have a clue as to how to invest my small amount of money. Also, I don't understand what people mean by "long term" or "short term" in actual years. —A Reader Dear Reader: When you're just …Read more.

Giving Money to Your Adult Children? Use it as an Introduction to Investing

Dear Carrie: I am investing $5,000 for each of my two daughters who have graduated from college. What are your suggestions? — A Reader

Dear Reader: Giving your adult children some capital for their future is a wonderful gesture, and even more so when the gift has the potential not just to grow but to also become an important learning experience. And that's why my suggestions today focus less on what to invest in (that depends on a lot of factors, discussed below) and more on how to turn this gift into a great opportunity to teach your daughters about investing.

For the benefit of other readers, there's no gift tax on a gift of $5,000. In fact, you can actually give anyone up to $13,000 per year without triggering gift taxes, as can your spouse. I assume you're planning to set up accounts for your daughters in their names using their own Social Security numbers (so be sure to let them know that the money is not only theirs to be won — it's also theirs to manage and be responsible for). And then I'd make it clear to them that you're making an investment in their future, and that you hope they'll use the opportunity to learn a bit about investing and the financial markets. Here are some things to discuss:

— Goal setting: Investment success is a lot easier when you have a well-defined goal or set of goals with a specific time horizon. Let's say one daughter wants to buy a house in five years, while the other plans to invest for a long-term goal like retirement. Clearly, the investment decisions each would make would be quite different. House-hunting daughter should probably be very conservative with just five years to go before she needs the money, while the retirement-planning daughter might be willing to take on more risk with a 25- or 30-year time horizon. Understanding these trade-offs is crucial and helps guide the decision-making process.

— Asset allocation: When their goals are clear, you can start teaching your daughters about how to use the major asset classes to reach them: stocks (domestic and international) for potential growth, bonds for income and to add "ballast" to a portfolio, and cash for safety and liquidity.

Portfolio construction begins here, by determining the mix of the three asset classes that reflects each daughter's goals and time horizon. The longer the time horizon, the more aggressive they can be.

— Risk tolerance: This is a tricky one because everyone is going to have a different sense of comfort with risk. Most new investors need to familiarize themselves with the various risks associated with different investments and need to understand the trade-off between risk and reward. Your daughters should consider their individual tolerance for risk as well as their time frames as they make investment decisions. You can play an important role in helping them make the best choices.

— Portfolio construction: When you've figured out goals, time horizons, asset allocations and risk tolerance, the fun begins: building a portfolio. There are quite literally thousands of ways to do this, from simple-to-use target funds to low-cost index funds, to actively managed mutual funds to individual stocks. With $5,000 to start with, funds seem a practical choice because many have low costs and offer a high degree of diversification. Engage your daughters in the process, and they'll feel more connected with their portfolios — and more likely to pay attention to them going forward.

— Periodic review: Once a portfolio is created, it's important to keep tabs on its progress. Obviously, your daughters will be interested in the basics: Did I make money or lose money on my investments this quarter or this year? But the more important issues are these: How did my investments do relative to their benchmarks? Is my asset allocation still in line with my target (things can get out of line when asset classes are volatile)? Have my goals changed in a way that would necessitate a change in my strategy?

Again, I salute your impulse to invest on your daughters' behalf. But I urge you to seize this moment. Transform the act of giving into an opportunity for learning for your daughters. They'll thank you for years to come. Good luck.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.