An acquaintance of mine recently contacted me with a small problem he is having: a five year old daughter with an $80k inheritance. He's had the money in the bank for two years, and didn't know what to do with it. He asked if I had any suggestions. Here's what I sent him:
Richard,
If I were 5 or 6 and had 80k to invest, this is what I would advise my parents to do:
Split the money 4 - 7 ways and invest it in a portfolio of mutual funds. I would strongly suggest using index funds because their fees are by far the lowest, they are based on preexisting indexes (not a "smart" investor), and she can leave the funds invested as-is indefinitely and not concern herself with market trends. Lets face it, when you're 5 you don't want to worry about market trends or what your fund managers are doing. Remember, index funds have performed better over time than about 80% of funds that attempt to beat their performance, so they are a prime choice for long term investing in the stock market.
Also important to consider, 5 year olds have a lot of time for compounded returns to accrue, so don't be risk adverse. The market conservatively returns 9% over long periods of time, at that rate, with no other investments, she'd be worth 1.6 million at age 40, mid life crisis hello!
I like Fidelity. They have low cost index funds that are I believe high quality. Vangaurd and TRoweprice are two other low cost providers of index funds, but I just happen to prefer Fidelity.
Here are the funds I would choose (these are all Fidelity funds):
Spartan Total Market Index Fund (these are large cap stocks)
Fidelity Large Cap Value Fund (not an index fund)
Spartan Extended Market Index Fund (these are mid cap stocks)
Spartan International Index Fund
Fidelity Balanced Fund (hybrid stock/bond fund - not an index fund)
Fidelity Nasdaq Composite Index Fund
If you end up talking to a Financial Advisor, keep in mind that most work on commission, so use a jaundiced eye!
After he read my email he said,"but what if the whole market goes sour," to which I replied, "well, than you lose value, that is the risk, but she has a quite a long time to make up for any short term losses." But what I thought was: "The same thing that will happen if you don't take any action - you lose."
He asked what I would do and I told him, but what I won't do is tell him I think he is making a mistake by not following some similar course of action, and leaving a small fortune of future earnings on the table. Maybe not young and rich after all!
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3 comments:
Oi, achei teu blog pelo google tá bem interessante gostei desse post. Quando der dá uma passada pelo meu blog, é sobre camisetas personalizadas, mostra passo a passo como criar uma camiseta personalizada bem maneira. Se você quiser linkar meu blog no seu eu ficaria agradecido, até mais e sucesso. (If you speak English can see the version in English of the Camiseta Personalizada. If he will be possible add my blog in your blogroll I thankful, bye friend).
One of the greatest pleasures of hosting this week's Carnival of Personal Finance was stumbling upon your blog. Thank you for sharing such a wonderful and insightful resource.
I was browing through some of your earlier articles and burst out laughing when I stumbled across this, "... That is unless you are so obsessed with investing (like me) that you eat rice and noodles because you know the future compounded value of that $2.50 your saving."
To think, all this time I thought I was the only one with such bizarre thinking patterns! ;p
I look forward to reading more delightful articles.
Fantastic advice. If the father is concerned about the markets, maybe he puts $10k into a fixed income investment. I would hate to do that myself, and would tell him basically exactly what you told him, but in the end he has to do what he's most comfortable with because money shouldn't cause stress... it should relieve it.
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