The situation is real; our first grandchild was born a couple of months ago. The parents are both successful federal employees and do already invest, from the sounds of what I hear they have FANG or similar stocks. I am tempted to offer a modest amount so that the parents might start a fund for our grand daughter, in hopes that we or they could add periodically. The question is how to do it right.
My parents gave us lump sums for a couple of our kids, but seemed to forget the last two. No advice, no strings, no great interest. Parents-in-law gave share certificates directly to my wife on no schedule. Sears, Kodak, Pinnacle West, and the Hancock regional bank fund. No advice, no rationale, no pointers on dividend reinvestment at a time in my life when I knew squat about money. Both sets of parents had money, but did no better talking about it than they did with sex ed. Glad we sold the first two when we did, but if someone had told me that selling electricity to the Four Corners area was a sure thing, and to reinvest the dividends, we'd probably be sitting on a college fund for at least one kid. Same for the MF; it was a great idea, but if you don't tell the donee how to benefit from it, it's kind of useless. Fortunately, the past is the past.
David's and Charles' write ups of BBASX and MASNX, and the mention twice that these could serve as core funds for young people set me to thinking. Should I donate a position in a fund and tell my kids why I chose it and why I think it should be held and how to make it grow and the whole 50-minute lecture on buy-and-hold, including how to avoid all the screw- ups I made on my investing journey? Conversely, should I count on my over-achieving kids to pick the right investment for their daughter and skip the lecture on risk management?. (Actually, I'm not qualified to deliver that, but it sounded good.) With respect to the two funds above, I'd be reluctant to pick such funds because I don't really understand how the managers make money. I can read the beautifully written and cogently reasoned descriptions by our colleagues, but I myself could not take my son-in- law aside and explain in my own words why Ella would be in great shape 18 years from now. On the other hand, I could suggest a conservative allocation fund which is on my high conviction list, namely BRUFX. I could do ok explaining that one and have no qualms about buying it for the child. For comparison's sake, I manage a UGTM fund for my 18-year old. It's composed of positions in VIG, AKREX, DSENX, and HIMVX. 50% of all money this daughter earns is direct deposited into it.
All suggestions are welcome. I don't want to be a control freak, but I sure don't want to give a tool without a user's manual.
Comments
I started my grandson with a stake in OAKBX the day he was born roughly 6 years ago. I add to it on his birthday, at Christmas and whenever I jus think about it. At that time I tried explaining to his parents why, why that fund, etc., etc., and basically got the deer in the headlights look. It wasn't that they weren't grateful I don't think, it was probably more along the lines of them being overwhelmed by being new parents and all. I'll have another go at it soon.
They also have a relative on the other side who works for and is pushing all manner of PrimeAmerica stuff at them. They get guilted and consoled in all manner of financial matters that they don't understand and feel pressured to help the uncle out because he's MIL's brother. You know how that goes. Thankfully they've managed to glean a few things from my mumblings and haven't gone too deep with this guy.
But back to your situation. It sounds like your kids might be on top of this financial stuff since they have investments of their own. Why not just have the discussion with them with respect toward what you would like to do and see where it goes. I know I make it all sound so easy but maybe you all can agree on a plan and investment choices. Don't make it complicated, the simpler the better. Heck, even Mr. Buffett says 90% SPY + 10% bond fund and go about your life.
On the other hand they might have way too many other things that weigh on their minds on a daily basis and you might get the same reaction as I did. In that case put your hands to pencil and paper, write down your plan including why you're doing what you're doing and just get started. There will come opportunities in the future to add to your writings and hopefully they'll begin to show an interest.
Good luck.
hawk
Regards,
Ted
As an added benefit, Ron Baron has an annual meeting with a suprize entertainer that some years caught her attention when the stock performance did not. (Paul McCarthy one year) a nice bennie although who knows what that cost us shareholders?
Now we should lighten up but who wants to pay capital gains?
Couple of thoughts
1) Not a big an issue now but back then (1990s) hard to find decent funds that would take small amounts of money
2) given the vagaries of managers and performance would pick a fund with something resembling a team approach in a big company so you dont get stuck with an under preforming fund with a a large capital gain years hence.
But realistically best to use SPY or VTI
I think the asset allocation question is interesting. Once, a long, long time ago, I concluded that the only fund a long-term investor needed was a U.S. microcap value fund; highest possible returns, volatility be danged. (Remember Fremont US Microcap FUSMX, a favorite?)
I'm not 100% sure of that anymore. Over the past decade (at least through late last year), bonds has outperformed stocks. Over the 40 years period from 1969-2009, bonds outperformed. From the period from inception of the benchmark to the last presidential election (1994-2016), EM bonds had pretty much matched the S&P 500 and utterly buried EM stocks. You might say, "that's unfair, you've picked periods where the stock market has three of its worst crises in a century and two 'lost decades.' The bond market meanwhile had a 35 year bull market."
Mostly, I'd nod. On the other hand, you also had a period of the most amazing drivers of economic growth we've ever seen, from the rise of the internet and mass computerization to the fall of trade barriers and financial deregulation worldwide.
So, how much confidence do you have in describing the state of the markets in 2050?
I'm clueless and might well be ... ummm, "watching from the sidelines" by then.
So if I had to make a suggestion, it would be "spread your bets, stay agile, keep your costs down."
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In that way, BBALX is rather more aggressive than most. That is, they've structured-in exposure (for example, to natural resources and emerging markets) that others might dodge. It dropped 30% in '09. Is that bad? Mostly if you think of it as designed to be "conservative" rather than "risk-conscious." Fidelity Global Balanced and Vanguard STAR, for example, both dropped noticeably more. The global balanced funds from PIMCO, T. Rowe Price (RPGAX) and Templeton weren't around, so we can't use them as benchmarks.
Do I love BBALX? Nope. I respect it as a well-designed tool. it's cheap, disciplined and less subject to manager risk than a purely active fund. Is it the right tool for your project? Don't know. But I have faith that you'll figure it out.
For what that's worth,
David
I didn't read the write up of this fund. It appears to be a fund of funds. I know that many here look at all sort of metrics in evaluating mutual funds. Color me stupid but I thought the whole purpose in buying mutual funds was to accumulate wealth - at least when we are in the accumulation phase. Based on this fund's performance over the past 1, 3, 5, 10, and 15 years it can't hold a candle to a simple passive investment in an S&P index fund.
I opened an account for each grandchild -- two of them with T Rowe Price (Alaska state plan) and three with Nebraska state plan. I don't use their target date funds -- there are some regular mutual fund choices (that's what I looked for when starting). It's mostly on automatic pilot -- $100 per kid per month out of my checking account. With an extra contribution at birthday and Christmas. It's hard to find time to examine the results closely, but the total has grown nicely and the individual funds' numbers stack up pretty well with S&P 500. The two older boys are in the sixth grade now, so in a few years I'll see how complicated it is to get the money out.
"Here's my summary of financial planning. Or, you could read a 300 page book and get the same information with more details.
1) Have an emergency account. Ideally, it should have three months cost of living in it. At a minimum, have a couple of thousand dollars so you can fix a broken car, etc. without panic.
2) Plan a budget. Specifically, you should know your weekly, monthly, quarterly and annual spending requirements in advance for the most part. Make sure you have the money set into "buckets" for those expenses. Examples: rent, insurance, food, loan payments, vacations, etc. Also, there should be a bucket for allowances for each of you. Just because you have money left over doesn't mean that it is "allowance". Actually plan in advance how much "fun money" seems reasonable. Left-over money should go into savings for #3 or #4.
3) Save for retirement.
4) Save for a house or condo.
The easiest way to save for retirement is through a work 401k plan if they offer one. For most folks starting in their 20s, plan to save about 12% of your gross income. The company match if there is one is added on to this. If there is no company match, plan to save 15%. If you don't have access to a 401k, or if you want to save more, just open an IRA for each of you. Invest it 80% or more in the stock market (see details below). This will probably get you retired around age 60. If you save more, you can retire sooner.
The stock market is the best place for long term investing. The reason is stocks go up and down in the short run, but in the long run the market has always gone up. One easy way to invest is to just put 100% of your money into the Vanguard VTI exchange traded fund (ETF). Just add more money every month or every quarter or every year or whatever. If you want to "smooth out the bumps" some, you can get a little more complicated. Invest some of it in a fund that invests internationally instead of just the US. Some years that will be better, some years worse, but you'll get similar results with a smoother ride. An example ETF for this is VXUS. Another option is to invest some money in the bond market (usually slightly lower returns in the long run but definitely smooths the bumps). Finally, to probably increase your results in the long run, invest in small companies (fund VBR) more than large ones.
Keep in mind that the dips the stock market goes through don't really hurt you in the long run and actually help a little. If you are investing a certain amount every month (say $1000) to buy stocks, when the stock price goes down you get to buy more of them. Then when it goes back up, you gain faster than if it just went up the same amount every month.
The way to use the multiple funds is to:
- set target percentages
- each time you add money to the investments add to the ones that are trailing your targets
Example targets you could use:
40% VTI (total US stock market)
20% VXUS (international stocks)
20% VBR (small company stocks)
20% BND (total US bond market)
Saving for a house/condo is different. It should be in some pretty secure investment, like a credit union savings account or CDs, but not the stock market. You'll probably want to actually spend the money in just a few years, so you don't want to have a down stock market right when you need the money. Most folks living in a high cost-of-living area like Seattle probably spend about 30% of their gross income on housing. So for you, if you make a combined $130,000, 30% is 39,000. If you currently pay rent of $22,000 per year, save the other 17,000.
OK, where/how to open an account. I use Vanguard and Schwab for my retirement accounts and like both of them. You can open the accounts online and they both have good phone support, and Schwab has a Seattle office if you want to talk with a human being. The steps are:
- open the account (an IRA or a Roth IRA or a regular investment account)
- make an initial deposit (usually by an ACH transfer from your credit union savings or checking); this goes to a basic money market fund (kind of like a checking account)
- move the money into your chosen ETF investments
IRA and Roth IRA accounts are called "tax advantaged". The government wants people to save for retirement so they try to make it enticing. An IRA (like a 401k) lets you not pay income tax on the money you save. Instead, you pay income taxes when you take the money out 40 years from now. This is called "tax deferred".
A Roth IRA or a Roth 401k is different. You do pay income tax now on the money that you save. But when you take the money out later you do not pay any taxes then.
If the income tax rate now and 40 years from now is the same, it makes no mathematical difference which approach you use. If you expect your tax rate to be higher in the future, use the Roth approach. If you expect your tax rate to be lower in the future, use a regular IRA. Or you can do some of each to hedge your bets. Use a Roth 401k at work and a regular IRA, or a regular 401k at work and a Roth IRA.
I've got some good books if you want more details, but this is the basics."
Thank you BenWP.
I think long-term investing using balanced allocations is a perfectly satisfactory strategy.
By long-term I mean ... a life time.
I like for example the 50/50 portfolio of BBALX and FFNOX referenced in our December commentary.
FFNOX is Fidelity's Four In One 85/15 stock/bond allocation. Combined with BBALX, the portfolio produces a 75/25 equity/bond global allocation.
Here is break-down using Morningstar's Allocation tool:
Perhaps more conservative, a 50/50 stock/bond allocation would similarly reward long term investors handsomely. Say, 1/3 each to BBALX, FFNOX, and FTBFX:
Several such combinations possible, of course, like the one suggested above by billr. It depends on your platform (Schwab, TIFF, USAA), fund house preference (Vanguard, Fidelity), etc. Just be sure fees are low!
Holding 1, 2, or 3 such funds is a perfectly acceptable approach, even over new platforms like Betterment, which charge 0.25% annually on top of underlining fund fees.
Put on auto investment (making sure there are no recurring transaction fees) and forget about it ... for a life time.
From a strategy approach, I would have no problem even recommending 50/50 to BBALX and MASFX, except the expense of the latter (and most alternative funds) makes it harder for me to recommend as a significant part of a life time portfolio.
I have similar reservation with fees of AKREX and HIMVX, but that's just me ... I always cringe when a mutual fund charges more than 1%.
My two cents.
c
Regards,
Ted
BBALX vs SPY & QQQ
http://performance.morningstar.com/fund/performance-return.action?t=BBALX®ion=usa&culture=en_US
FFNOX vs. SPY QQQ:
http://performance.morningstar.com/fund/performance-return.action?t=FFNOX®ion=usa&culture=en_US
Regards,
Ted
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
https://edvisors.com/plan-for-college/saving-for-college/529-college-savings-plans/financial-aid/
fastweb.com/financial-aid/articles/how-do-grandparent-owned-529-college-savings-plans-affect-financial-aid-eligibility
Also, here's a EFC (Expected Family Contribution) Calculator:
savingforcollege.com/financial-aid-calculator/