The Best Christmas Present a Parent Can Give: 1 Stock Market Index Fund to Buy Your Kid

With Christmas just days away, many parents have probably gone to great lengths to ensure their children have a wonderful holiday. That means the stockings are hung by the chimney with care, the packages are wrapped and waiting under the tree, and the chocolate-chip cookies are baking in the oven. But parents still have time to buy their kids one more gift: an S&P 500 index fund.

It may be their least favorite present when the wrapping paper settles on Christmas morning, but there’s a good chance their tune will change a decade or two down the road. The gift of investing is truly a gift that keeps on giving, and buying an S&P 500 index fund today could help set your kid up for life.

Here is what parents should know.

An investment strategy advocated by Warren Buffett

The Vanguard S&P 500 ETF (FET 0.56%) tracks the performance of the S&P 500, a stock-market index comprising 500 of the largest US businesses, the creme de la creme of corporate America. In fact, the S&P 500 is often viewed as a benchmark for the US economy, since it represents a diversified blend of value stocks and growth stocks across many different industries.

That broad-based diversity eliminates the risk that comes with a concentrated portfolio of individual stocks. Better yet, while the S&P 500 has suffered dozens of sharp declines in the past, the index (and the Vanguard ETF) have recovered every single time. In fact, the S&P 500 has produced a positive return over every rolling 20-year period since 1919, meaning the odds of turning a profit improve as the holding period lengthens. For that reason, Warren Buffett has often said an S&P 500 index fund is the most sensible option for most investors. In fact, Buffett himself has a stake in the Vanguard S&P 500 ETF.

Of course, that background is relatively boring, so parents should spice it up a bit. The three largest positions in the Vanguard ETF are Apple, Microsoft, and Amazon. Most kids (depending on age) are probably familiar with one or more of those companies. Parents can explain that owning shares of the Vanguard ETF is tantamount to owning small slices of Apple, Microsoft, and Amazon.

A time-tested path to life-changing wealth

Over the last decade, the Vanguard S&P 500 ETF produced a total return of 220%, which is equivalent to an annualized return of 12.3%. At that pace, an initial investment of $10,000 would be worth more than $30,000 after a decade, and more than $100,000 after two decades.

Of course, $10,000 is a big chunk of change to shell out all at once, so many parents may prefer to invest more gradually. With that in mind, the table below presents several different scenarios, all of which assume an annualized return of 12.3%.

Notes: Table assumes a return of 12.3% per year.

As indicated above, small sums of money invested on a regular basis can grow into rather large sums of money. That means buying an S&P 500 index fund for your kid today could help pay for a car or college tuition a decade or two down the road. More importantly, it could help them develop an interest in the stock market, and that could truly set them up for life. For instance, assuming the same annual return of 12.3%, $100 invested on a weekly basis would be worth $2.5 million in 35 years.