TIME stocks

Apple’s Big Week Continues As Stock Price Hits a New High

An Apple Inc. logo is displayed on the company's iPhone 6 Plus during the sales launch of the iPhone 6 and iPhone 6 Plus on Sept. 19, 2014.
An Apple Inc. logo is displayed on the company's iPhone 6 Plus during the sales launch of the iPhone 6 and iPhone 6 Plus on Sept. 19, 2014. Bloomberg—Getty Images

Technology giant is on track to surpass its record close of $103.30

Shares of Apple passed their all-time high point during morning trading Wednesday, putting an exclamation point on an already strong week for the tech giant.

Apple gained steadily to start the day and eventually touched a high-water mark of $104.11 per share, wiping out the company’s previous all-time high of $103.74 from early September. (In June, the company announced a 7 to 1 stock split.) While Apple’s shares have come back down a bit more recently, they are still up about 1% on the day and they have gained almost 6% in value so far this week. The company’s market cap is around $607 billion.

The uptick in share price follows in the wake of Apple reporting strong earnings on Monday that included a 12% third-quarter sales bump and record profits thanks to better-than-expected iPhone sales. The company also launched its new mobile payments system, Apple Pay, on Monday and the much-hyped Apple Watch is set to hit customers’ wrists early next year.

Investors will surely be keeping their eyes on Apple’s stock throughout the day today. The company’s record closing high is $103.30.

Of course, even the all-time high price for Apple stock likely won’t be high enough for Carl Icahn. The activist investor sent an open letter to Apple CEO Tim Cook earlier this month asserting his belief that Apple’s shares should be worth more than $200 each and that the company should dramatically increase its share buyback program. Icahn owns almost a 1% stake in Apple.

This article originally appeared on Fortune.com

TIME Food & Drink

This Is McDonald’s Big Plan to Win You Over

McDonald's Q3 2014
A sign for a McDonald's restaurant is seen in Times Square on June 9, 2014 in New York City. Andrew Burton—Getty Images

The fast food giant's sales are flagging, and it's about to give its menu a makeover to win over customers

After McDonald’s on Tuesday yet again posted disappointing quarterly earnings, the fast food chain is ordering up a supersize strategy that’s all about the smaller things: local ingredients, regional tastes and your own personal preferences.

McDonald’s CEO Don Thompson said Tuesday during an earnings call that the company is “changing aggressively” in the U.S., German, Australia and Japan under a new platform that emphasizes personalized meals alongside its classic options.

“Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary inviting atmosphere. And they want choices: choices in how they order, choices in what they order and how they’re served,” Thompson said.

Thompson added that existing regional offerings include the chorizo burrito, which is being tested in Texas, and mozzarella sticks, which are being tested in New York, New Jersey and Connecticut. More evidence of McDonald’s plan for tailor-made options include confirming that its McRib will be available at only participating restaurants and no longer rolled out nationwide, CNBC reported last week.

But that’s not all: McDonald’s is taking a hint from DIY outlets by expanding its build-a-burger program called “Create Your Taste.” The program has been tested in four Southern California chains since September, and allows customers to use a touch screen to pick out their preferred burger toppings like tortilla chips and jalapeños, according to Businessweek.

 

TIME Earnings

Yahoo’s Minuscule Growth Enough to Exceed Expectations

Yahoo! President and CEO Marissa Mayer delivers a keynote address at the 2014 International CES in Las Vegas, Nevada.
Yahoo! President and CEO Marissa Mayer delivers a keynote address at the 2014 International CES in Las Vegas, Nevada. Ethan Miller—Getty Images

The search giant had seen its revenue fall in four of the previous five quarters

Yahoo said Tuesday that third-quarter grew 1%. Here are the most important points from the company’s earnings report.

What you need to know: Yahoo beat Wall Street estimates with $1.15 billion in third-quarter revenue, up from $1.14 during the same quarter last year. Surprising analysts is always nice, but the Internet search giant should be especially happy about the revenue bump, even if it is just a 1% increase. Sales had declined in four of the previous five quarters, including a 3% year-over-year drop in this year’s second quarter.

Yahoo also reported earnings excluding certain costs (and a huge windfall from selling shares in the initial public offering of Chinese e-commerce giant Alibaba) of 52 cents per share, which trounced analyst predictions of 30 cents per share. The company’s profit jumped to $6.8 billion compared with the help of $6.3 billion in cash, after tax, that the company netted from selling a chunk of its Alibaba shares in September. In the year-ago quarter, Yahoo had reported a profit of $297 million.

Yahoo CEO Marissa Mayer described the quarter in a statement as solid.

“We achieved this revenue growth through strong growth in our new areas of investment – mobile, social, native and video – despite industry headwinds in some of our large, legacy businesses,” Mayer said.

Yahoo shares soared in after-hours trading, gaining almost 2.8% after finishing Tuesday trading up by 2.3% – one of many stocks on the tech-heavy Nasdaq composite to enjoy a strong day.

The big number: Yahoo said its third-quarter mobile revenue topped $200 million, the first time the company has revealed the amount of money it makes from showing ads on mobile devices. The company said gross mobile sales for the year will exceed $1.2 billion. Mayer said that Yahoo’s mobile investments – which include a $300 million acquisition of mobile analytics startup Flurry – have paid off for the company. In the current quarter, mobile revenue made up only around 17% of overall sales, far less than rivals like Facebook and Twitter.

“Not only are our mobile products attracting praise and engagement from users and industry awards, they are generating meaningful revenue for Yahoo,” Mayer said.

Meanwhile, Yahoo’s display ad revenue – the equivalent on online billboard ads – dipped again, falling 5% year-over-year to $447 million in the third quarter. (Interestingly, Yahoo said in its earnings release that the number of ads sold in the third quarter increased about 24%, but that seems to have been offset by the fact that the price of each ad declined by an equal amount.) Search ads continue to grow for Yahoo, though, with third-quarter revenue in that sector rising 4% to $452 million.

What you might have missed: Yahoo plans to spend some of the more than $6 billion in cash it netted from the recent Alibaba IPO on one or more tech start-up acquisitions, according to The Wall Street Journal. Mayer is expected to discuss Yahoo’s plan for potential acquisitions as well as cost-cutting measures – a discussion that comes a few weeks after activist investor Starboard Value revealed it had taken a stake in Yahoo and pushed for Mayer to reduce costs and consider a combination with AOL.

This article originally appeared on Fortune.com

TIME Earnings

Coke Expands Its Cost-Cutting Program as Earnings Slide

Cans of Coca-Cola
Getty Images

The North America market remains a problem for the beverage giant and its top rival PepsiCo

Beverages giant Coca-Cola reported a 14% decline in third-quarter net income on Tuesday on a muted volume performance. Here’s what you need to know.

What you need to know: The North America market remains a problem for Coke and top rival PepsiCo, with both of the consumer-products behemoths reporting muted results for that market in the latest quarter, even as data shows Americans are spending more at grocery stores. Coke’s North America unit case volume was down 1% in the latest period, while Pepsi earlier this month reported flat revenue for the Americas beverages business.

Consumers are spending more on fresh produce, fresh grocery products and in the beverages aisle, favoring juices, flavored waters and other items that have fewer calories and less sugar than what Coke and Pepsi use in their products. Demand for carbonated soft drinks, the biggest category in the beverages business, has suffered a nearly decade-long slide. Coke on Tuesday said the “Share a Coke” campaign helped the company gain share in the sparkling beverage segment in North America, but volume still declined. Demand was also weaker for juices and sports drinks, though demand grew for tea, energy drinks and water.

Coke also didn’t post especially strong growth in any of the other markets it serves to help offset the North America weakness. Volume grew just 2% in Latin America and the Asia Pacific, and it feel 5% in Europe. The Eurasia and Africa region’s volume grew 5%.

The big number: 53 cents — that’s the adjusted profit Coke reported for the third quarter, and it matched the year-ago level and also what analysts had projected. The reported bottom line was dragged lower by $270 million in charges tied to a move to refranchise some bottling partners in North America.

Revenue totaled $11.98 billion, falling slightly short of the $12.12 billion projected by analysts. Citing some currency exchange fluctuations, Coke said it now expects profit for all of 2014 to be “below its long-term EPS growth targets.”

What you might have missed: Coke is targeting annualized savings of $3 billion per year by 2019. Coke issued a second press release Tuesday morning touting an “expanded productivity program” (typically, corporate lingo for cost-cutting) and a move to streamline its operations. While Chief Executive Muhtar Kent said Coke sees a challenging macroeconomic environment in 2015, the company’s plans to restructure its global supply chain, among other moves, will help the beverages company achieve a profit before tax target of 6% to 8%.

This article originally appeared on Fortune.com

TIME Earnings

Warren Buffett Just Lost Another $1.5 Billion

Billionaire investor Warren Buffett speaks at an event on September 18, 2014 in Detroit, Michigan.
Billionaire investor Warren Buffett speaks at an event on September 18, 2014 in Detroit, Michigan. Bill Pugliano—Getty Images

Losses in IBM and Coke add to a recent rough patch for Buffett

Another day, another $1 billion down the market’s drain. Spare a thought for Warren Buffett, whose portfolio is not doing him any favors this week. On Monday Buffett lost nearly $1 billion on his third-largest investment, IBM, after the company posted disappointing earnings. On Tuesday, Coca-Cola did the same thing, posting third-quarter revenue that fell short of expectations and warning of currency headwinds.

Coke is Buffett’s second-largest investment and has been one of the stalwarts of his portfolio for decades. (He left Coke’s board in 2006 and his son Howard took a board seat there in 2010). With 400 million shares, Tuesday’s decline of $2.72 cost…

Read the rest of the story from our partners at NBC News

TIME Earnings

Netflix Had a Pretty Awful Day

Netflix's logo
Netflix

Online streaming service revealed Wednesday it had missed growth targets, as HBO announces a rival streaming-only service

Correction appended Wednesday, Oct. 15

Netflix stock took a nosedive in after-hours trading thanks to a confluence of bad news for the company on Wednesday.

The streaming service missed its subscriber growth forecasts for the quarter and is one of the companies most threatened by HBO’s surprise announcement Wednesday that it will begin offering its content in a stand-alone streaming service in 2015. Netflix shares fell more than 25% in after-hours trading, erasing more than $7 billion in company value.

Netflix added 3.02 million subscribers globally during the third quarter, well off the 3.69 million the company had projected. In the U.S., the company blamed the stalled growth on a $1 price hike that went into effect in May. “Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the U.S.,” the company said in a letter to shareholders. Netflix also missed the mark in international markets, though it rolled out in six new European countries in September.

The streaming service’s financial results were more positive. Netflix pulled in $1.4 billion in revenue, meeting analysts’ expectations. Earnings per share were 96 cents, beating projections of 93 cents. Overall Netflix generated $59 million in profit.

But the looming specter of a stand-alone HBO that consumers will be able to buy without subscribing to cable may be a greater threat to Netflix than slowing growth. The company did not seem overly concerned, however, about having to convince customers that House of Cards is more worthy of their money than Game of Thrones.

“The competition will drive us both to be better,” Netflix said in its letter. “It was inevitable and sensible that they would eventually offer their service as a standalone application. Many people will subscribe to both Netflix and HBO since we have different shows, so we think it is likely we both prosper as consumers move to Internet TV.”

Correction: The original version of this story misstated Netflix’s total revenue in the third quarter. It was $1.4 billion.

Read next: HBO Will Finally Start Selling Web-Only Subscriptions Next Year

MONEY Jobs

Why Low Job and Wage Growth is Worse Than Rising Inflation

Hot air balloons floating higher and higher
Jon Larson—Getty Images

As the economy picks up steam, and employers add more workers, investors say that inflation is their biggest impediment to saving. Here’s why they’re wrong.

As the economy added another 248,000 jobs in September, pushing the unemployment rate to a post-recession low of 5.9%, investors are feeling more confident.

In fact, investors are more optimistic than they’ve been since the recession, per a recent Wells Fargo/Gallup survey which measured the mood of those with more than $10,000 in investable assets. Of course the so-called Investor and Retirement Optimism Index is still only at around half the levels of the 12-year average before the 2008 recession. Investors may be more sanguine than three months ago, but that doesn’t mean they think the economy is going gangbusters.

Nevertheless, there was one particularly interesting data point in the survey: “Half of investors (51%) think the pressure on American families’ ability to save is due to rising prices caused by inflation.” Meanwhile only 37% said the pressure was inflicted by stagnant wage growth.

Which is strange.

What inflation?

If you look at the Federal Reserve’s preferred measure of core inflation (which strips out volatile energy and food prices), prices have risen around or below the Fed’s stated 2%-target since the recession.

The Consumer Price Index, a gauge of inflation released by the Labor Department, actually fell on a monthly basis in August for the first time in more than a year, and only grew at an annual rate of 1.7% since this time last year.

Proclamations of rising inflation ever since the Federal Reserve started buying bonds and lowering interest rates in response to the recession have yet to materialize. And those advanced economies that did raise interest rates a few years ago (like Sweden), have come close to deflation.

Meanwhile wages aren’t growing at all. Average hourly earnings in August rose 2.1% versus the same period last year, and the growth rate has been stuck at around 2% since the recovery. The same is true for the employment cost index, which measures fringe benefits in addition to salaries. Ten years ago the index increased by 3.8%.

REALERw
St. Louis Federal Reserve

 

While the unemployment rate has fallen considerably this year, other gauges of jobs are still troubling. Long-term unemployment has tumbled since its post-recession peak in 2010, but there are still almost 3 million people who’ve been unemployed for 27 weeks or longer. If you include workers who’ve recently stopped looking for a job and those working part-time when they’d rather be full time, the unemployment rate is 12%, more than four percentage points above the pre-recession level.

The Fed has implemented an easy monetary policy in order to attack this problem. “The Fed is keeping interest rates low as long as they can and maintaining very loose policy in support of jobs,” says USAA Investments’s chief investment officer Bernie Williams. “They will only tighten up with great reluctance.”

Pick your poison: stronger wages or rising inflation?

In a battle between pushing wages higher and the risk of inflation, the Fed is willing to err on the side of rising wages, says Williams.

BMO senior investment strategist Brent Schutte agrees. “As a society, you decide what is good. Economics is a choice between two things. We’ve clearly decided that higher inflation and rising wages is a good thing.”

Despite years of effort, though, the Fed hasn’t been able to bring back rising wages.

If you’re still unconvinced that a lack of salary increase and slack in the labor market should be more of a concern to your finances than the threat of inflation, check out new research by former Bank of England member David Blanchflower.

Along with three other co-writers, Blanchflower recently published a study titled, “The Happiness Trade-Off between Unemployment and Inflation.”

The researchers found that unemployment actually has a more pernicious effect on happiness than inflation. “Our estimates with European data imply that a 1 percentage point increase in the unemployment rate lowers well-being by more than five times as much as a 1 percentage point increase in the inflation rate.”

In an interview with the Wall Street Journal, Blanchflower said, “Unemployment hurts more than inflation does.”

As the economy gently improves, and people start going back to work, the hope is that wages will start to rise. Inflation might then rise above the Fed’s 2% target, and Yellen and Co. may raise rates in effort to cool off the economy. But we’re not there yet. And investors, for the sake of their wallets and psychology, would do well to remember that.

MONEY College

5 Quick College Diplomas That Can Lead to Good-Paying Jobs

140929_FF_HighPayingDegrees
Blend Images—Getty Images

You don't have to spend four years on a bachelor's degree to get a job that pays at least $40,000 a year. New research from one state identifies several shorter college programs that can lead to lucrative jobs.

Over the long run, people with four-year college degrees and graduate educations earn more on average than workers who spend just a few years in school. But you don’t necessarily have to invest a lot of time and money in a four-year degree to get ahead. In some cases, new research confirms, a quicker education can lead to a good-paying job.

“There are many paths to the middle class, including two-year technical degrees from community colleges,” says Mark Schneider, president of College Measures, who authored a study of recent graduates of Tennessee colleges that was released today.

The findings are based on College Measures’ analysis of earnings data for millions of workers collected from state unemployment insurance offices. So far six states, Arkansas, Colorado, Florida, Tennessee, Texas and Virginia, have allowed researchers to track government-reported earnings after students leave school.

For the latest state report, College Measures tracked five years worth of earnings for all Tennessee workers who earned any kind of college certificate, diploma, or degree in 2006, drilling down to which majors, and which schools, produce the highest earners. The results, says Schneider, “confirms other findings from other states.”

Only a few types of two-year degrees consistently lead to high-paying jobs, however, and there is a wide variation in earnings by college, some of which may have to do with the local labor market. “You do have to be really careful about which degree you get,” Schneider says.

Those with associate’s degrees in electrical engineering earned annual salaries of about $42,000 within a year of leaving school. They typically progressed to more than $61,000 after five years. Those who earned certificates in heavy equipment maintenance made about $35,000 within a year on average and about $42,000 after five years.

Similarly, a 2011 report by Georgetown University’s Center for Education and the Workforce found that 28% of people with associate’s degrees earned more than the average salary reported by those with bachelor’s degrees.

This new data from states is helpful because it identifies exactly which community college and which majors produce students most likely to earn bigger paychecks, says Jeff Strohl, research director for the Georgetown center. “If you are going to roll the dice on a particular school or major,” says Strohl, “the new data will give you an idea of how people end up, earnings-wise.”

According to College Measures’s new report on Tennessee workers, these five programs that don’t take four years can lead to good-paying jobs.

Degree type Subject Avg. earnings in 1st year Avg. earnings in 5th year
1-2 year certificate Precision metal working $33,100 $41,900
1-2 year certificate Heavy equipment maintenance $34,800 $42,600
Associate’s Industrial production $41,400 $46,200
Associate’s Nursing $47,300 $54,300
Associate’s Electrical Engineering $42,000 $61,500

The earnings reports, however, are sobering for those who get associate’s degree in other fields. The average starting salary for Tennesseans with an associate’s in liberal arts was about $28,000. Five years out those folks were earning about $35,000, roughly equal to the pay of those who earned an associate’s in business but less than most workers with technical degrees.

What’s more, students shouldn’t assume they will earn the average earnings published in these kinds of reports, warns Thomas Bailey, director of the Community College Research Center at Columbia University. “A lot of this depends on other factors, such as the local labor market and the student.” In other words, your coursework and workplace performance matters too.

To find four-year colleges that are likely to help you find a good-paying job, you can search Money’s rankings of the best value colleges – colleges across the country with the best combination of net price and high-earning alumni. (College Measures advised Money on the development of the rankings, which used earnings estimates from a 2010 to 2013 national survey of 1.4 million Americans by Payscale.com.)

MONEY College

21 Schools Where a Liberal Arts Degree Can Pay Off Big

140910_FF_GradsEarn100K_Carleton
Carleton College, where grads clear $118,000 on average 10 years out. Steve Skjold—Alamy

It's not just math and science programs that launch college graduates into six-figure careers, a new study finds.

Updated: Sept. 10, 2014

Good news, poets and philosophers. At nearly two dozen liberal arts colleges, graduates typically go on to earn at least $100,000 a year by the time they reach their thirties, according to a new report from the salary website PayScale.com.

At Harvey Mudd College, the top school on the list, alums earn $134,000 on average a decade out of school. To be fair, many Mudd students get degrees in math and science, but other schools in the top 10, including Carleton, Haverford and Williams, focus on the humanities.

Of course, many graduates of even the top-earning schools—especially those who choose public service jobs such as teaching—make much less. And at many of the colleges, alumni typically earn six-figure salaries only after getting a graduate degree.

But overall this new data backs up other research that has identified a long, slow—yet real—payoff to the pursuit of a liberal arts degree.

In a study published in January, the American Association of Colleges and Universities found that by their fifties, college grads who had majored in liberal arts were earning, on average, about $2,000 more per year than those who had majored in pre-professional subjects.

“It is not all gloom and doom” for liberal arts graduates, says Patrick Kelly, a co-author of the AAC&U study and a senior associate at the National Center for Higher Education Management Systems.

How To Improve Your Earnings Potential

Kelly and his co-author, Debra Humphreys, AAC&U’s vice president for policy and public engagement, point out that as a liberal arts student you need to do three things to improve your chances of working your way up to six figures:

1. Budget time and money for graduate study. “If you expect to have reasonably high earnings, statistically speaking, you need to go to graduate school,” Kelly says. While their research didn’t identify which graduate degrees paid off the most, Kelly notes that many high-earning liberal arts majors work in the legal profession, in finance, or in business.

2. Work and intern during college. “You have to demonstrate workforce readiness to employers through means other than your schoolwork,” says Humphreys. That could include job experience, on-the-job training, or a technical certificate.

3. Spend a few years working and exploring before picking a grad program. “Don’t go to graduate school right away,” says Humphreys. “You might borrow $200,000 to go to law school and discover you hate being a lawyer.” Know what you want to do, and make sure that there are jobs in that field, before you spend time and money on more coursework.

The Liberal Arts Leaders

This new earnings report is based on surveys filled out on PayScale.com by some 1.4 million Americans over the past two years. It reflects the self-reported earnings of college graduates with at least 10 years of work experience.

The 21 liberal arts colleges below that offer the best shot at a six-figure income tend to have tough admissions standards. The easiest one to get into is Whitman College in Washington State, which accepts half of applicants. The most selective is Pomona College in California, which accepts just over one in ten.

Other elite liberal colleges that didn’t make the list because too few grads filled out PayScale surveys over the past two years, including Amherst, Bowdoin, and Earlham, likely have high-earning alums as well. In Money’s rankings of the best liberal arts colleges, based on earnings data collected by PayScale in the past three years, those colleges produce high earners. What’s more, in our rankings, we only considered the early- and mid-career earnings of those with bachelors’ degrees, not students who had gone on to graduate school.

College State Avg. earnings with a B.A. only and 10 years of work experience Avg. earnings with a graduate degree and 10 years of work experience Acceptance rate Money Value Rank
Harvey Mudd College Calif. $134,000 $138,000 19% 8
Colgate University N.Y. $127,000 $122,000 29% 28
Washington and Lee University Va. $124,000 $134,000 19% 40
Carleton College Minn. $118,000 $112,000 26% 80
Haverford College Penn. $115,000 N.A. 23% 123
Virginia Military Institute Va. $115,000 $116,000 46% 19
Williams College Mass. $111,000 $114,000 17% 15
Swarthmore College Penn. $109,000 N.A. 14% 33
Kenyon College Ohio $103,000 $108,000 36% 95
Lafayette College Penn. $103,000 $103,000 34% 29
Occidental College Calif. $102,000 $103,000 39% 286
Bucknell University Penn. $102,000 $106,000 27% 46
Union College N.Y. $101,000 $114,000 38% 167
Gettysburg College Penn. $100,000 $101,000 40% 139
College of the Holy Cross Mass. $100,000 $104,000 34% 102
Whitman College Wash. $98,000 $111,000 49% 215
Franklin & Marshall College Penn. $98,000 $110,000 39% 249
Pomona College Calif. $92,000 $107,000 13% 51
Wesleyan University Conn. $91,000 $100,000 24% 170
Davidson College N.C. $90,000 $100,000 25% 73
Skidmore College N.Y. $90,000 $100,000 42% 28
MONEY Kids and Money

The Best Thing You Can Do Now for Your Kid’s Financial Future

CAN'T BUY ME LOVE, from left: Patrick Dempsey, Amanda Peterson, 1987.
Your teens summer earnings can't buy love, but they can buy a bit of retirement security. Buena Vista Pictures—Courtesy Everett Collection

Open a Roth IRA for your child's summer earnings, and talk her through the decisions on how to invest that money, suggests financial planner Kevin McKinley.

In my last column, I extolled the virtues of opening—and perhaps even contributing to—a Roth IRA for a working teenager. In short, a little bit of money saved now can make a big difference over a long time, and give your child a nice cushion upon which to build a solid nest egg.

Besides underscoring the importance of saving for retirement early and regularly, opening a Roth IRA can help your child become a savvy investor (a skill many people learn the hard way).

Here’s how:

Make the Initial Contribution

Your child needs to earn money if he or you are going to contribute to an IRA on his behalf. For the 2014 tax year, the limit for a Roth IRA contribution for those under age 50 is the lesser of the worker’s earnings, or $5,500.

The deadline for making the contribution is April 15, 2015. But you can start sooner, even if your teen hasn’t yet earned the money on which you will be basing the IRA contribution. (If the kid doesn’t earn enough to justify your contributions, you can withdraw the excess with relatively little in the way of paperwork or penalties.)

For a minor child, you will have to open a “custodial” Roth IRA on her behalf, using her Social Security number. Not every brokerage or mutual fund company that will open a Roth IRA for an adult will do so for a minor, but many of the larger ones will, including Vanguard, Schwab, and TD Ameritrade.

As the custodian, you make the decisions on investment choices—as well as decisions on if, why, and when the money might be withdrawn—until she reaches “adulthood,” defined by age (usually between 18 and 21, depending on your state of residence). Once she ages out, the account will then need to be re-registered in her name.

Depending on which provider you choose, you may be able to make systematic, automated contributions to the IRA (for example, $200 per month) from a checking or savings account. To encourage your teen to participate, you might offer to match every dollar he puts in.

Have the “Risk vs. Reward” Talk

How an adult should invest an IRA depends upon the person’s goals and risk tolerance—the same is true for a teen. You can help set those parameters by pointing out to your child that, since he’s unlikely to retire until his 60s this is likely to be a decades-long investment, and enduring short-term downturns is the price for enjoying higher potential long-term gains.

You might also show him the difference between depositing $1,000 now and earning, say, 3% annually vs. 7% annually over the next 50 years—that is, a balance of $4,400 vs. a balance of $29,600. Ask your child: Which would you rather?

No doubt, your kid will choose the bigger number.

But you also want this to be a lesson in the risks involved in investing. You might talk about what a severe one-year decline of 40% or more might do to his investment and explain that bigger drops are more likely in investments that have the potential for bigger growth. Now how do you feel about that 7%?

Some teenagers will be perfectly fine accepting the risk. Others may be more skittish.

You also might explain that there are options that will not decline in value at all—such as CDs and money market accounts. But should he choose those safer options, he’ll be trading off high reward for that benefit of low risk. In fact, while his money will grow, it will likely not keep up with the rate at which prices grow (“inflation,” in adult terms). So his money will actually be worth less by the time he’s ready to retire.

Some risk, therefore, will likely be necessary in order to grow his money in a meaningful way.

Choose Investments Together

Assuming he can tolerate some fluctuation, a stock-based mutual fund is probably the most appropriate and profitable strategy—especially since a fund can theoretically offer him a ownership in hundreds of different securities even though he may only be investing a few thousand dollars. You might explain that this diversification protects against some of the risks of decline since some stocks will rise when others fall.

A particularly-suitable option might be a “target date” or “life cycle” fund. These offerings are geared toward a specific year in the future—for instance, one near the time at which your child might retire.

Target date funds are usually a portfolio comprised of several different funds. The portfolio allocation starts out fairly aggressive, with a majority of the money invested in stock-based funds, and much smaller portion in bond funds or money market accounts.

As time goes by—and your child’s prospective retirement draws nearer—the allocation of the overall fund gradually becomes more conservative.

The value of the account can still rise and fall in the years nearing retirement, but with likely less volatility than what could be experienced in the early years.

One low-cost example of this type of investment is the Vanguard Retirement 2060 Fund (VTTSX).

Of course, if you choose a brokerage account for your child’s Roth IRA, you have the option of purchasing shares in a company that might be of particular interest to your kid. Choosing a company that is familiar to your child may not only inspire her to watch the stock and learn more about it, but eventually profit from the money she is spending on “her” company’s products.

If you’re going to go this route, you should include a discussion on the increased volatility (for better or worse) of owning one or two stocks, rather than the diversification offered by the aforementioned mutual fund.

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley:

 

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