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The best Christmas gift a parent can give: 1 stock index for your child to buy

With Christmas just a few days away, many parents have probably gone out of their way to ensure their children have a wonderful holiday. That means stockings are carefully hung by the chimney, packages are wrapped and waiting under the tree, and chocolate chip cookies are baking in the oven. But parents still have time to buy their children another gift: a S&P 500 index fund.

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

Here’s what parents need to know.

A parent puts money into a red knitted sock decorated with white.

Image source: Getty Images.

Investment strategy advocated by Warren Buffett

The Vanguard S&P 500 ETF (VOO 0.56%) tracks the performance of the S&P 500, a stock index that includes the 500 largest US companies, the creme de la creme of corporate America. In fact, the S&P 500 is often viewed as a benchmark for the US economy, as it represents a diverse mix of value and growth stocks in many different industries.

That broad diversity eliminates the risk that comes with a concentrated portfolio of individual stocks. Even better, while the S&P 500 has suffered dozens of sharp declines in the past, the index (and the Vanguard ETF) have recovered each time. In fact, the S&P 500 has produced a positive return over every rolling 20-year period since 1919, meaning that the chances of profit increase as the holding period lengthens. For this reason, Warren Buffett has often said that the 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, Microsoftand Amazon. Most children (depending on age) are probably familiar with one or more of these companies. Parents can explain that owning shares of the Vanguard ETF is like owning small pieces of Apple, Microsoft, and Amazon.

The time-tested path to life-changing wealth

Over the last decade, the Vanguard S&P 500 ETF has produced a total return of 220%, equivalent to an annual return of 12.3%. At that rate, 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 pay out all at once, so many parents may prefer to invest gradually. With that in mind, the table below presents several different scenarios, all of which assume a 12.3% annual return.

Time period

$25 invested weekly

$50 invested weekly

$100 invested weekly

10 years

$24,570

$49,141

$98,281

15 years

$52,703

$105,406

$210,812

20 years

$102,951

$205,901

$411,802

Note: The table assumes a return of 12.3% per year.

As stated above, small sums of money invested regularly can grow into quite large sums of money. That means buying an S&P 500 index fund for your child today could help pay for a car or college tuition a decade or two later. More importantly, it could help them develop an interest in the stock market, which could really set them up for life. For example, assuming the same annual return of 12.3%, $100 invested weekly would be worth $2.5 million in 35 years.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon.com and the Vanguard S&P 500 ETF.

The Motley Fool has positions in and recommends Amazon.com, Apple, Microsoft and the Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long March $120 calls on Apple and short $130 calls on Apple March 2023. The Motley Fool has a disclosure policy.

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