How to best invest $10K for my newborn?

December 29, 2004 7:58 PM

InvestmentFilter
You've got $10,000 to invest for your 6 month old child. How do you invest it for security and growth? (+)

I want to make the money as safe as possible but encouraging strong growth. I expect to continue to add chunks of money to the investment over the course of its run.

I would like to present the funds to him at 18 or 21 or when he needs it.

How much could I realistically expect with a $10K initial investment and an average of $1500 a year until he's 18? Also, how much can I legally gift to him for savings without being taxed?

posted by fenriq to work & money (26 comments total)

529's are something to look into, but I would honestly talk to people you trust and respect in your area who can reccommend a broker. You don't want to pay an arm and a leg for the advice/service, but then again, you will probably do better with a good director than just guessing. ( I do work for a national bank, and we do have an investment group. One of the guys is someone I'd say is conscientious and I'd be happy to email with you about it.)
posted by Medieval Maven at 8:16 PM on December 29, 2004

I want to make the money as safe as possible but encouraging strong growth.

Pick one or the other. Risk and reward are correllated. That being said, 18-year periods where stocks outperform bonds are exceedingly rare. If it were me, I'd split my money between a Wilshire 5000 index fund, an EAFE index fund, and a low-cost emerging markets fund. You should buy low cost mutual funds(higher internal costs, lower trading costs) if you will make frequent additions, or ETFs (lower internal costs, higher trading costs) if you will make infrequent additions.

As far as tax goes, if the money is being earmarked specifically for education, you can grow it tax-free in a 529 plan. Otherwise, I would suggest that you avoid registrations like UTMA, because the tax benefits are small compared to the inflexibility of the registration. ETFs and index funds are tax-friendly vehicles, for the most part.

As far as expected return, it's really tough to say, but using your numbers over 18 years, 8% will fetch you 90K before inflation, 65K after inflation. Bump that to 10% (optimistic, but reasonable), and the numbers shift to 115K and 80K.

This is one of the web's better growth calculators, if you want to play around.

You do not need to worry about triggering gift taxes at this stage in life unless you have millions that you are not disclosing, but $11,000 is the number. If you are married, your wife may also chip in $11,000.

On preview, this is the best-known unbiased 529 site. If you can, keep your costs as low as possible. For 529s (but not many other managed products), I suggest TIAA-CREF.
posted by trharlan at 8:34 PM on December 29, 2004

trharlan's got some good advice there (although I think s/he mean to say 18-year periods where bonds outperform stocks are exceedingly rare. That is, stocks generally do better over the long haul.)

As for diversification, ETFs (exchange traded funds) provide broad market coverage at very low cost. The Sensible Investor has some good commonsense advice even though I don't think it is being updated any more, as does the free area of Index Investor.

CNNMoney's savings calculator is another online tool. If I'm using it right, at 5% per annum, a $10k initial amount followed by $1500 contributions for 17 years will generate $61,680.73. At 10%, $111,361.76. No one can predict the future (and of course markets can go down), but that gives a conservative range of expectation.
posted by mono blanco at 9:16 PM on December 29, 2004

although I think s/he mean to say 18-year periods where bonds outperform stocks are exceedingly rare.

D'oh!
posted by trharlan at 10:05 PM on December 29, 2004

Since you seem to have a very specific target date in mind, you might want to think about a "lifecycle" mutual fund (for example, Fidelity's Freedom funds or one of the Vanguard Lifestrategy or Target Retirement funds). Basically you choose a target date - say you wanted to cash it out around 2025 for college, or you wanted to give them a nice head start on their retirement or something else that's farther out - invest in the fund with that target date, and the fund gradually becomes more and more conservative as the target date approaches.

One of the criticisms of these funds is that they are sometimes too conservative and don't take enough risk, even when the target date is far off. However, they are extremely easy, offer instant diversification and asset allocation, and are pretty hands off - you don't have to think about when or where to reallocate.

With mutual funds, it's kind of important to consider the fees you can run into. Morningstar.com requires registration, but has a lot excellent information, including fees and risk/return statistics.
posted by milkrate at 10:18 PM on December 29, 2004

I don't like TIAA-CREF for 529's, and suggest Vanguard for 529s and investments in general. Vanguard Wellington is a conservative balanced fund that still shows results. Vanguard's 529s have low fees like the rest of their funds (although slightly higher than their regular fees).

Ask on the Vanguard Diehards message board. They are probably the kings of being stingy with fees and should provide some great answers, many of which will have nothing to do with Vanguard.
posted by calwatch at 10:36 PM on December 29, 2004

Remember to keep an eye on the Euro/Dollar crisis.
posted by codeofconduct at 12:19 AM on December 30, 2004

Jeez Louise. If you want your money to be stable (read: safe) you need to keep it as resistant to in/deflation as possible. For God's sake, don't put it into bonds. And don't put it into a savings account, either! If you've got faith that the European market is somehow more intrinsicly stable than the U.S. (though I don't know why their banking institutions should be any more trustworthy and honest than our own), you can take advantage of everyone taking the short-bus to "Eureka"-ville and getting on the Euro bandwagon. But then you've got to know when to pull out, and if you don't know anything about foriegn currency markets, you'll probably miss.

If you want a safe, stable answer, nothing--I mean nothing-- is safer than precious metals. If you feel wierd about the whole "shiny rocks" thing, you could invest in companies who's job it is to extract the shiny rocks from the earth.
posted by Civil_Disobedient at 1:15 AM on December 30, 2004 [1 favorite]

If you want a safe, stable answer, nothing--I mean nothing-- is safer than precious metals

On Jan. 21, 1980, gold was at $850. On June 21, 1982, it was at $296.

Diversify.
posted by mono blanco at 4:04 AM on December 30, 2004

Diversify.

Oh, wait, that's been said. (oops, I mean, on preview, what mono blanco said.)

But do it anyway.

Personally, (I may be talking out of my goatse, but I'm betting this way) I'm betting very hard and long against the dollar and the US equity market as a whole. However, I don't trust gold right now -- the numbers aren't adding up, and too many people have too much metal hoarded. Of course, if things get really bad, they'll win and I'll lose -- but your investment will be hosed anyway.

I'm thinking that the US is going to have a bad bout of inflation in the next decade. So, to be honest, I'd make sure a third of that is in Euros. (The other currency I'd look at is China's, but I've no idea what instruments you'd invest with.)

Leaving everything in US dollars over the next 10 years is going to hurt.

Any MeFier over 45 should seriously think about moving a fair chunk of your money over -- you're at the sucker age for poverty-by-inflation: Just enough time to wreck the value, not enough time after to recover.
posted by eriko at 4:53 AM on December 30, 2004

The other currency I'd look at is China's, but I've no idea what instruments you'd invest with.

Start here. All you need to do to get foreign currency exposure is to buy foreign stock (even ADRs), and a mutual fund is probably the best way to this.

Inflation is often a global phenomenon. A broadly diversified portfolio of natural resource stocks (Oil, gas, timber, metals, precious metals) is probably a better hedge that merely being out of dollar denominated assets.
posted by Kwantsar at 5:54 AM on December 30, 2004

What about a Roth IRA? All of the earnings are tax free once they reach a certain age (59 and a half, I think). I think you can put up to $3,000 in one now. That is going up next year. Also, there is no age limit as to when you can start one, atleast now.
posted by jasonspaceman at 6:12 AM on December 30, 2004

What about a Roth IRA?

Unless fenriq Junior is a child actor or has other earned income, he doesn't qualify.
posted by Kwantsar at 6:41 AM on December 30, 2004

A broadly diversified portfolio of natural resource stocks (Oil, gas, timber, metals, precious metals) is probably a better hedge that merely being out of dollar denominated assets.

Normally, I'd agree with you completely. However, given the current economic conditions in the US have left the US dollar is at a very precarious position.

The only thing holding the dollar together is the fact that it's still the world's reserve currency and the de-facto oil currency.

We're balanced on three bubbles -- debt is cheap, housing is cheap, energy is cheap -- and all three are at collapse positions (and tied together.)
posted by eriko at 7:04 AM on December 30, 2004

Unless fenriq Junior is a child actor or has other earned income, he doesn't qualify.

thanks for the heads-up kwanstar. Upon a little more research, I found the following link about setting up a kid's Roth IRA account. It's not exactly illegal but professionals advise against it.

link
posted by jasonspaceman at 7:09 AM on December 30, 2004

Wow, I was impressed with trharlan's response and am blown away by all of the great info you all have offered up.

I've got some ideas to go with now and will likely still talk with a financial planner to make sure we're headed down the right path.

Thanks very much for all of the good info and ideas!
posted by fenriq at 8:16 AM on December 30, 2004

On Jan. 21, 1980, gold was at $850. On June 21, 1982, it was at $296.

That's a completely deceptive response. Gold was priced so high because the U.S. was going through double-digit inflation in the late 70s. By the early 80s, Reagan had started selling off our future by extreme borrowing and debt--people with some smarts knew that it was time to take the money out of a stable form and put it into "unstable" form (stocks) where it could actually make some money. Thus the price dropped. If anything, the "volatility" of the gold price is simply a reflection of the volatility of the dollar, not the other way around.
posted by Civil_Disobedient at 9:06 AM on December 30, 2004

Here's an interesting essay from the New Yorker a few months ago about the urge to buy gold in times of crisis. From the article:

Yet gold is valuable only as long as we collectively agree that it is. It may be soft, shiny, durable, and rare, but it has no more intrinsic value than feldspar or quartz. Just because it has a long history of being used as money doesn’t mean that it has a future. In the end, our trust in gold is no different from our trust in a piece of paper with “one dollar” written on it. The value of a currency is, ultimately, what someone will give you for it—whether in food, fuel, assets, or labor. And that’s always and everywhere a subjective decision. Gold or not, we’re always just running on air. You can’t be rich unless everyone else agrees that you’re rich.

posted by arco at 10:28 AM on December 30, 2004

You can’t be rich unless everyone else agrees that you’re rich.

Actually, I think just a critical mass of people have to agree that you're rich before you are rich. But I get the point and like how succinctly it was stated.
posted by fenriq at 11:21 AM on December 30, 2004

The other currency I'd look at is China's

eriko, why do you say that? Isn't China's currency pegged to the dollar? Do you expect China to float their currency in the near future?
posted by jacobsee at 11:32 AM on December 30, 2004

It may be soft, shiny, durable, and rare, but it has no more intrinsic value than feldspar or quartz.

This is plainly, stupidly, false.

There are a number of physical, chemical reasons why gold is far more special than almost any other (rare) element on earth. Chief among them is that gold, being the most non-reactive of all metals, does not oxidize, so it never breaks down. Under normal circumstances, gold is indestructable; it never rusts or tarnishes. Gold is chemically inert, yet has a high electrical and thermal conductivity. Gold is the most ductile and malleable metal on the planet. The scientific world would be sunk without gold. But you go on believing it's just a shiny rock.

And I wouldn't put anything into China -- when their biggest buyer (us) tanks, their economy is going to get hit hard.
posted by Civil_Disobedient at 12:53 PM on December 30, 2004

eriko, why do you say that? Isn't China's currency pegged to the dollar?

Currently, yes.

Do you expect China to float their currency in the near future?

Quite possibly. The falling dollar helps exporting nations based on the dollar -- which describes China accurately.

The problem: China need energy, badly. The reason you'll never see a $25 barrel of oil again is that China is buying oil like mad to fuel thier rapidly growing economy.

And I wouldn't put anything into China -- when their biggest buyer (us) tanks, their economy is going to get hit hard.

Not nearly as hard as us -- or just about anything else in the Pacific Rim. For one thing, with the Euro high, they can just point thier exports at Europe, and get Euros, which will let them keep buying oil -- doubly so once oil starts moving out of Russia via Euros, not Dollars.

Yes, it'll hurt them. But China's moves have been very much hedging their US debt exposure. This is starting to turn a weakness -- the massive amount of US debt they own -- into a weapon. If China can get to a position where they can write off that debt, suddenly, they can seriously hurt both Japan and the US in one move.

And if it looks like the US is doing *anything* that might stop the flow of oil into China, they will.
posted by eriko at 2:25 PM on December 30, 2004

Since it's for a six month old child, look into education savings programs and prepaid tuition programs through your state. I don't know how great they are now or in your state, but about 20 years ago in Michigan the MET (prepaid tuition program) was a good deal.
posted by dagnyscott at 4:29 PM on December 30, 2004

Looks like fenriq's got all the answers he needs, but one final comment.

fenriq, whatever you decide to do I'd say your son has a hell of a good father.
posted by mono blanco at 7:28 PM on December 30, 2004

likely still talk with a financial planner to make sure we're headed down the right path.

DO NOT, under any circumstances, talk to a financial planner who is not a fee-only planner. You're likely to get better answers from the Diehards or people here (despite their pessimism) than from a financial planner who's also there to sell you insurance, investments, or anything else. If you want good advice, you're going to have to pay the fee. Enough said.
posted by calwatch at 10:41 PM on December 30, 2004

mono blanco, thanks alot! My parents did the same thing for me when I was a baby and it helped out quite a bit. Circumstances are allowing me to do the same so I am jumping all over it!

And calwatch, thanks for the good tip. I have a good company to work with in USAA, I've been a customer of theirs for 15 years and they have not screwed me once! And that's for insurance, banking and auto loans.

Excellent info everyone, thanks alot. The hard part about the investment will be leaving it untouched except for adding to it.
posted by fenriq at 10:09 AM on January 1, 2005