Once your child has an emergency fund, encourage him or her to invest wisely by coming up with an overall strategy that takes into account long-term, medium-term and short-term financial goals. Ballinger says, “I recommend keeping at least 10% of your long-term savings in a fixed income or cash instrument [like a money-market fund] to take advantage of market corrections via rebalancing [to return the portfolio mix to what your child intended].”
He also suggests young adults with a 401(k) diversify in the stock market by putting money into the fund’s S&P 500 account. Ballinger explains: “Passive stock index funds are a great way to achieve market exposure. But be careful with a passive bond fund [a fund that owns and holds a variety of bonds]. If interest rates rise sharply, a passive bond fund may lose significant value,” if it has long-term bonds.
Ennis suggests talking to your child about investment risk, too.
“It is critical that a prospective investor understands how much risk they can stomach and then build a portfolio that doesn't exceed that level of risk. If their portfolio swings by a larger degree than they can handle, they are likely to get out of their investments when they get too anxious — and that usually happens when the investments have lost value.”
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