Question: My dad cashed in a certificate of deposit he bought five years ago for my 8-year-old daughter. Since interest rates are falling and stock valuations have continued to fall, do you think it is a good idea to invest the money in a beaten-down aggressive-growth technology fund that would be held as a custodial account?
Answer: It all depends on what other investments you have for your daughter. If this is her only money, it should not be in an aggressive-growth technology fund, beaten down or otherwise.
Children, like adults, need a diversified portfolio. If you are just starting an investment program for your daughter, you'd be better off putting her money into a broader-based stock or index fund, such as Vanguard's Total Stock Market Index.
Once you have established that account, you could take extra cash in the future and invest it in more narrow slices of the market, of which aggressive-growth technology is one. But specialized sectors should never make up the bulk of your portfolio, or your daughter's. Be especially leery of jumping on last year's bandwagon.
Question: We've been making monthly contributions to large-company growth funds for each of our children, ages 5 and 3. It's been hard to watch the value fall, but we've kept investing. Should we put money away in CDs instead until the market turns around?
Answer: I can give you the intellectual answer and the psychological answer. You'll have to decide which you feel more comfortable with.
Intellectually, this is precisely the time to continue investing in your growth funds — especially if they have good long-term records and their fall has been in line with the overall dip in the market over the past year or so.
Look at it this way: Your money is buying a larger number of lower-priced shares. It's almost impossible for investors, even professionals, to time the exact moment the market will bottom out.
Usually investors wait too long and buy when stocks are already on the upswing. But if uncertainty in the market makes you nervous, you might as well put your money in CDs or some other relatively safe investment, such as money-market funds, at least until the stock situation becomes clearer.
Chances are you won't be able to call the precise moment you should jump back in, but psychologically you'll be a lot calmer.
Have a question about kids and finances for Dr. Tightwad? Write to Dr. T at 1729 H St., N.W., Washington, D.C. 20006. Or send the good doctor an e-mail message (and any other questions for this column) to jbodnar@kiplinger.com.