Gifting a Grandchild

Stocking Gifts

What advice would you give a grandparent who would like to launch a retirement portfolio for one or more grandchildren?  To begin the discussion, assume the proposed gift is $25,000.  Should it be given as a lump sum or spread out over a period of time?

Here are two possible plans one might undertake, depending on the investing interest shown by the grandchild.

Plan I:  This model is for the grandchild who has little or no interest in investing or is too busy to give portfolio management much attention.  For this grandchild I would set up an “Intelligent Portfolio” with Schwab or a portfolio similar to the Schrodinger.  We now have a four history here at ITA with the Schrodinger.  Check it out by doing a search for Schrodinger Portfolio.  Granted, a young person may end up with a different asset allocation, but the initial process is the same.

If the grandchild does not have an account with Schwab, or another low cost broker, sit down with them and open up the account.  Then go through the few questions the broker will ask so as to determine the risk one is willing to take.  The younger the grandchild the higher risk one should take as they have many years before retirement.

As I write this the minimum initial deposit to begin an “Intelligent Portfolio” with Schwab is $5,000.  Rather than give the grandchild a lump sum of $25,000 to invest, I would begin with the minimum amount of $5,000.  The primary reason for going with the minimum amount is tied to the current over-valued stock market.  There is a high probability U.S. Equities will be much lower sometime over the next few years.  Therefore, it is a good idea to spread out the investing process by dollar-cost-averaging of the next few years.

Let’s assume we have another 36 months of government chaos which is likely to create market volatility.  With this scenario in mind, divide the remaining $20,000 by 36 or approximately $555.  Round to $500 to make life easier.

Each month transfer $500 to the grandchild or if one has access to the Schwab account, set up an automatic transfer from your bank to the Schwab account owned by the grandchild.  Set the $500 deposit time limit to 40 months.  The computers at Schwab will invest the new dollars when sufficient cash is available to purchase shares.  Once set up one does nothing.  All is automatically taken care of by the broker computers.  It does not get any easier than this.  Encourage the grandchild to add money to the account each month so they get in the habit of saving.  They need to have some “skin in the game.”

One additional advantage to setting up an “Intelligent Portfolio” or what is generally referred to as a Robo Advisor account is that should Artificial Intelligence (AI) begin to play a larger role within the investing world (highly likely), brokers such as Schwab will take advantage of this research long before such models will be employed by individual investors.

And now for Plan II

Plan II:  I recommend following the same initial seeding of the account.  Begin with a $5,000 gift and then transfer $500 per month for 40 months.  Assuming the grandchild has an interesting in investing, yet does not know quite where to begin.  A good starting point is to launch a portfolio using a John Bogle three asset portfolio.  Here are three basic low cost Exchange Traded Funds (ETFs) that provide global diversification.

• VTI for 34% of the portfolio.  This gives exposure to the entire U.S. Equities market.
• VEU for 33% of the portfolio.  This ETF provides exposure to both developed international equities and emerging markets.
  • My preference for international exposure is to break VEU into VEA (developed international equities) and VWO (emerging markets).  I would go with 23% to VEA and 10% to VWO.  Yes, this is a tad more complex, but it is my preference.
• BND for 33% of the portfolio.  BND is the bond exposure.

These three ETFs provide an excellent starting point.  Help the grandchild build a simple spreadsheet so they can keep the portfolio in balance as $500 will be added each month to the portfolio.  This will require the new investor to do a little rebalancing each month.  Each month purchase shares in the asset most under the target percentage so as to keep the asset allocation model in balance.

Additional Gifts:  Provide each grandchild with the simple yet basic investing book, The Elements of Investing by Burton G. Malkiel & Charles D. Ellis.  It can be read in one short evening, but should be studied month after month until the ideas are fixed in the mind of the new investor.

If one wishes to go a step further, give each grandchild a subscription to the software program, Investment Account Management.  I’ve been using this program since the days of DOS so you know it goes back many years.  This is the best software program one can find to keep track of portfolio performance.  It requires entering transaction data, but the two plans shown above involve very little trading.

If readers of this blog have ideas as to how you would encourage child or grandchildren to launch retirement portfolios, post them in the Comments section provided below.

Lowell Herr