Giving a grandchild | ITA Asset Management

What advice would you give to a grandparent looking to launch a retirement portfolio for one or more grandchildren? To begin the discussion, let’s assume the proposed gift is $25,000. Should the amount be provided in one go or spread over a certain period?

Here are two possible plans one could undertake depending on the grandchild’s investment interest.

Plan I: This model is intended for the grandchild who has little or no interest in investing or is too busy to pay much attention to portfolio management. For this grandchild I would set up an ‘Intelligent Portfolio’ with Schwab or a portfolio similar to the Schrodinger. We now have a four piece history here at ITA with the Schrödinger. Check it out by searching 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 doesn’t have an account with Schwab or another low-cost broker, sit down with him/her and open the account. Then go through the few questions the broker will ask to determine what risk you are willing to take. The younger the grandchild, the greater the risk one has to take, as retirement is many years away.

As I write this, the minimum initial deposit to start an “Intelligent Portfolio” with Schwab is $5,000. Instead of giving the grandchild a lump sum of $25,000 to invest, I would start with the minimum amount of $5,000. The main reason for going for the minimum amount is related to the current overvalued stock market. There is a good chance that US stocks will be much lower in the coming years. That’s why it’s a good idea to spread out the investment process over the next few years based on dollar-cost averaging.

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

Transfer $500 to the grandchild each month or if someone 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 limit to 40 months. The computers at Schwab will invest the new dollars as soon as enough cash is available to buy shares. Once set, nothing is done. Everything is handled automatically by the brokers’ computers. It doesn’t get easier than this. Encourage the grandchild to deposit money into the account every month so that he or she gets into the habit of saving. They need to have some skin in the game.

An added benefit of setting up an “Intelligent Portfolio” or what is commonly referred to as a Robo Advisor account is that as Artificial Intelligence (AI) takes on a larger role within the investing world (very likely), brokers like Schwab will benefit from this research long before such models are used by individual investors.

And now Plan II

Plan II: I recommend following the same initial placement of the account. Start with a gift of €5,000 and then transfer €500 per month for 40 months. Assuming the grandchild is interested in investing, but doesn’t know exactly where to start. A good starting point is to launch a portfolio using a three-asset John Bogle portfolio. Here are three simple, low-cost Exchange Traded Funds (ETFs) that offer global diversification.

• VTI for 34% of the portfolio. This gives exposure to the entire US stock market.
• VEU for 33% of the portfolio. This ETF offers exposure to both developed international equities and emerging markets.
  • My preference for international exposure is to split VEU into VEA (developed international equities) and VWO (emerging markets). I would go to VEA with 23% and 10% to VWO. Yes, this is a bit more complicated, but it’s my preference.
• BND for 33% of the portfolio. BND is the bond exposure.

These three ETFs provide an excellent starting point. Help the grandchild create a simple spreadsheet so he or she can balance the portfolio as $500 is added to the portfolio each month. This requires the new investor to rebalance a little every month. Buy shares in the asset most below the target percentage each month to keep the asset allocation model balanced.

Additional gifts: Give every grandchild the simple but fundamental investment book, The elements of investing by Burton G. Malkiel and Charles D. Ellis. It can be read in one short evening, but should be studied month by month until the ideas are fixed in the mind of the new investor.

If you want to take it a step further, give each grandchild a subscription to the software program, Management of investment accounts. 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 you can find for tracking the performance of your portfolio. It requires entering transaction details, but the two plans shown above involve very little trading.

If readers of this blog have ideas about how you might encourage children or grandchildren to launch retirement portfolios, please post them in the comments section below.

Lowell Herr

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