Investing for Your Kids

Are stocks, bonds or CDs best when I’m investing for my kids? — H.S., Fort Wayne, Indiana

It depends on factors such as their ages and your goals. Are your kids still very young and more than a decade away from college? Are they 16 and headed to college soon? Are they 21 and hoping to buy a home in a few years?

For long-term money — funds you won’t need for at least five to 10 years — consider stocks, which have outperformed just about all alternatives over long periods. A low-fee broad-market index fund, such as one that tracks the S&P 500, can be all you need. You might also invest in the stocks of a few companies that your children know and like, and then follow them together.

With shorter-term money that you’ll need within a few years, look for less-volatile investments, such as bonds, CDs or money market accounts. Remember, though, that inflation has averaged 3% annually over long periods, so if you’re earning only 1% or 2% in interest, you’re probably losing purchasing power over time. Consider Series I Savings Bonds, as their interest rates account for inflation. Learn more about them at TreasuryDirect.gov.

Can you explain what “liar loans” are? — T.B., Greenville, North Carolina

They’re low- or nodocumentation loans issued when a borrower’s information, such as income, debt load and assets, have not been verified. Instead, the lender largely accepts the word of the borrower.

Liar loans tend to be nonprime, and they played a part in the last financial crisis. They’re not problematic when a worthy borrower provides accurate information, but they can be abused by opportunistic borrowers — and by lenders trying to cook their books.