Mutual funds and brokers are making it more difficult to put your grandchildren on the road to wealth with a modest initial investment and small regular additions. Fortunately, there still are still few Estate Planning ways to build a modest sum into a meaningful legacy.
Suppose your estate planning includes opening an investment account with $1,000, adding $50 each month for 10 years, and the accounts earns an after-tax amount of 7% annually. After 10 years, you’ll have made total contributions of $7,000 and the account will be worth more than $11,500. Even with no additional contributions by year 20 the account will grow to $22,770.
The grandchild could use the money at that point for a down payment on a house, to pay for school, or a host of other possibilities. Or if the money if left alone, especially if you put it in a trust, at the end of year 50, the account is worth $173,300. That’s a nice start for the grandchild’s retirement, and you did it with only $7,000.
Perhaps best of all, watching the account grow each year should teach the grandchild about compound interest, regular saving, and how the two work over time.
You have to search hard, however, for a fund that has small minimum investments and doesn’t charge a load or other fee. Even my old favorite American Century raised its minimum to $2,500. Some funds still have automatic investment programs (AIP) that let you start with as little as $50 if you agree to have that amount drafted from your checking account each month.
Many funds have lower minimums for custodial accounts. These accounts, however, have shortcomings I’ve detailed in past issues. Brokers also have much higher minimum investments, impose account maintenance fees for smaller accounts, and might impose other charges.
Fortunately, there are a few fund families that welcome small, startup investors. For long-term growth investing, I favor value stock funds, and you can get into some fine value funds with a small amount.
The Excelsior funds are run by money managers from U.S. Trust, which handles accounts only for the very wealthiest families and individuals. Its mutual funds have minimum investments of only $500. A full range of funds are available, including some sector funds and high yield bonds. The funds are no-load and also have very low annual expenses. You can buy Excelsior Value & Restructuring, which has been on my list of “Other Funds To Consider Now” for some time. Excelsior Mid-Cap Value is run by the same manager.
Three top-notch value stock fund families that have been on my recommended lists for a long time will let you in for only $1,000. These are Oakmark, Third Avenue, and Gabelli. You can find funds from these families on my list of “Other Funds To Consider Now” on page 11.
One fund family that still really welcomes small investors is TIAA-CREF. This group manages primarily index funds and charges among the lowest fees in the industry on its funds. The minimum investment is only $250 for a handful of its funds. You can build a diversified portfolio of U.S. stocks, international stocks, and bonds with a total of only $1,000 at TIAA-CREF. The funds won’t outperform the indexes, but it is a solid low-cost way to set up a diversified portfolio.
Those partial to the Vanguard family can get their loved ones started there. The Vanguard STAR fund has only a $1,000 minimum investment and charges no separate fees. Instead, STAR invests in other Vanguard funds. The fund recently was invested about 55% in U.S. stocks, 3% in international stocks, 37% in bonds, and 5% in cash.
You don’t need to stick with mutual funds to build a small portfolio. A relatively new development are the dollar-based or fractional share brokers. These Internet-only brokers accept very small accounts. Some even have no minimum investment. You can pay a small commission of, say, $4 per trade. Or you can pay an annual fee of $120 or more for unlimited purchases. The brokers are ideal for investors who want to begin investing a small amount and make regular additions each month or quarter.
With dollar-based brokers, you don’t have to buy a whole share of stock. Purchases from all account holders are grouped and the shares allocated among the investors. You can own less than a full share of each company. You can own the entire S&P 500 with a very small investment. You also can own the index funds traded on the stock exchanges, such as Dow Diamonds, S&P SPDRs, and the Nasdaq 100 or Cubes.
I covered the dollar-based brokers in detail in the January 2002 issue. You can visit these brokers at www.mystockfund.com, www.buyandhold.com, and www.sharebuilder.com.
You don’t need a lot of money to begin a legacy for future generations. Solid investments are open to those with modest amounts. These are opportunities to teach investing basics to your younger loved ones and show them how compounded returns and regular investing work.