Grandparents who want to begin modest accounts to benefit their grandchildren face fewer choices.
Many grandparents would like to invest a small amount of money for a grandchild and add a little to it each year. After a couple of decades or more, the grandchild will have a nice sum of money to pay for college, help buy a home, start a business, or even for his own retirement fund.
You can put aside $1,000 this year and add $500 per year for 15 years. Let’s say the account earns 8% annually. After 15 years, the account is worth almost $17,000. You contributed the $1,000 starting amount plus $7,500 in annual contributions. The rest of the account, more than half, came from investment returns.
Unfortunately, to save money many fund companies do not accept small accounts. Because of the high cost of small accounts, most fund families have minimum opening amounts of $2,500 or more. Plus, they impose maintenance fees on smaller accounts. But there still are quality options for smaller accounts.
A great long-term fund is Hussman Strategic Growth, a mainstay of some of our Managed Portfolios for several years. It invests in attractively priced stocks but also hedges against the market when it is overvalued and trends are unfavorable. The minimum initial purchase is $1,000. The minimum for automatic investment plans is $100.
There also are two fund families that offer good funds, have excellent long-term performance, and are friendly to small investors.
The Oakmark Funds have a minimum investment amount of only $1,000. Automatic investment plans can be as low as $100.
Oakmark funds generally use a value approach to investing in stocks. The best long-term fund in the group is Oakmark Select, which recently re-opened to new investors. The fund can be more volatile than others, since it invests in a limited number of stocks. The flagship Oakmark Fund is more diversified. There also are funds in the group that invest in international stocks. Oakmark Equity and Income is a balanced fund that invests in both stocks and bonds using the same value approach as the other funds in the group.
T. Rowe Price also welcomes small investors. Its minimum investment amount for most accounts is $2,500. But accounts under its automatic monthly investment plan can be opened for less if they agree to invest at least $50 each month. Such accounts also are not subject to the annual maintenance fee for accounts with balances below $2,000.
Price has a wide number of high quality fund offerings. The funds tend to look for growing companies selling at reasonable prices. As a general rule, they hold their values well in market declines. In addition to solid stock offerings, the family offers a wide range of bonds, international stocks, and specialized funds.
For safe, long-term investing, good choices are the Capital Appreciation and Balanced funds. These are balanced funds that switch between stocks and bonds according to how the managers see the relative values. Capital Appreciation has the superior long-term return, because Balanced has lagged since mid-2000.
Don’t forget to look at the brokers. Scottrade, TD Waterhouse, and Ameritrade traditionally have opened smaller accounts.
If you already have a broker or mutual fund company, that should be your first consideration. Many companies will aggregate accounts for family members when considering minimum balances and charging fees.
Under today’s tax law, it can make sense for a grandparent to hold such an account in his or her own name. That also avoids problems that can be associated with Uniform Gift to Minors Act accounts, trusts, and other options. The account can be transferred to the child when he or she reaches maturity. The strategies to consider are discussed in detail in the July 2002 and April 2003 issues and in the web site archive in the Grandkid’s Watch section.