Buying Only One Fund for Long Term Estate Planning for Grandchildren

Setting money aside for a grandchild, or helping a grand-child who is starting to save without proper Estate Planning, presents a problem. Usually the initial savings are relatively small. Few grandchildren begin with portfolios of $100,000 or more. A portfolio of a few thousand dollars or less presents a problem when you are trying to invest for the youngsters or teach them basic investment principles.

You used to be able to start them in safe investments such as certificates of deposit, money market funds, or savings bonds. These offered decent returns plus showed the power of compounding. But interest rates are so low now they don’t teach the benefits of compound interest and may even encourage youngsters to spend instead of save.

In the 1990s, adults were advised that the following generations had plenty of time, so they should invest for the highest long-term returns. That meant investing entirely in stocks. That estate planning approach hasn’t worked out well, generating negative returns over 11 years, also not a good experience for the youngsters.

The small sums available to many grandchildren aren’t enough to develop fully diversified portfolios.

Minimum investments have been rising at most funds, so a hefty five-figure portfolio often is needed to fully diversify.

Fortunately, there still are a few funds that will deliver full diversification and perhaps tactical asset management, and that have reasonable minimum investments. Here are a few funds I recommend you consider.

Hussman Strategic Growth invests in a full portfolio of 150 or so stocks that sell at discounts relative to their growth rates and comparable stocks. The fund also uses options to either hedge or leverage the portfolio, depending on market conditions and valuations. For the last few years the portfolio mostly has been hedged. The minimum investment is $1,000, $500 for IRAs.

Broader-based funds to consider are PIMCO All Asset and PIMCO All Asset All Authority. The two funds are allowed to invest in most of the funds offered by PIMCO. The manager changes the allocation based on valuations and investment outlook. The difference between the two is All Asset All Authority also can use leverage and buy funds that sell short. So far it has the higher returns. If your discount broker can’t get you into the institutional or administrative share classes, the D shares are best. Their minimum investments are $1,000.

Other asset allocation funds include Berwyn Income, with a minimum investment of $3,000, and FPA Crescent with a minimum of only $1,500. Price Capital Appreciation changes its allocation between stocks, bonds, and cash. The minimum investment is $2,500.

Also available are traditional balanced funds that don’t alter their allocations much. Vanguard Wellington is 60% stocks and 40% bonds, and Vanguard Wellesley Income is 40% stocks and 60% bonds. Each has a $3,000 minimum investment.

RW December 2010

Bob Carlson, the #1 retirement and estate planning expert, shares with his readers insight and strategies on retirementwatch.com.