An investment product for "5 grand for your new niece in 20 years..." situations

Question

Say your favorite friend or relative has a new child, or perhaps a toddler.

You want to give/invest a lump sum $5000 to the youth in question .... so it will only be available in say 20 or 25 years.

So essentially, "how to invest 5 grand for 20 years".

It would seem that you want, in a word, high-risk high-returns. And you'd want to beat inflation?

But it has to be a perfectly stable entity, and, simple/reliable mechanically over such a long time span. (eg, there's no chance Robinhood will even be here in 20 years, so that would be an epic of paperwork in the future for the youth in question.)

I was surprised to find - perhaps I've missed it - that there are not specific products offered like this. You know, the Fidelity 25 Year Grandma or the Vanguard Thoughtful Uncle product. I assumed the market would be packed with such products but no?

I know nothing about bonds/similar, so maybe that's an easy answer I just don't know about.

Regarding physicals (chunks of gold, gems, stuff from Sotheby's etc) you can't time anything like that over 20 years, it's way too short, it's swing trading. (Although it fits perfectly on the convenience/etc aspects.)

It would seem to me that real estate is a perfect solution, if the monetary scale was much bigger. So, if you're so rich you want to give $500,000 to your new niece, you'd buy her a flat and forget it for 20 years. Awesome! It passes all the tests above so (1) totally stable, will be perfectly OK title-wise in 20 years (2) easy mechanically (3) fits the mold of "with reasonable luck, high capital growth over 20 years". (Even some income along the way after fees etc!) But that's no good for amounts like $5000.

Anyway there are lots of experts on here - how would you $5000 for 20-30 years?

And indeed, are there Products fitted for this purpose (which I assumed there surely would be).

One problem is the damned internationalness of Kids These Days. So, your new niece is an ordinary New Zealand citizen born in Kansas. But in 25 years, she'll be a Korean citizen doing K-pop lighting design living in Shanghai and only speaking Russian. WTH right?

For this reason I wondered if there was a solution from the typically "International" jurisdictions, Switzerland etc.

{Indeed, again I assumed Swiss companies galore would offer WiseGrandpa™ -type products, it would be right up their alley - perhaps I just missed it?)

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{One note. I appreciate that in many jurisdictions, there are tax advantaged schemes to savings related to tertiary education. I am NOT interested in that case.}

Answer 1

When I was a mere lad, the go gift for kids was US Savings Bonds. I sold mine nearly 50 years ago and never looked back. So like you and Sergeant Klink, "I know nothing!" about bonds.

Today, the go to gift might simply be stock certificates in companies that you'd expect to be around in 20 years. In the U.S. this is handled under UGMA (Uniform Gifts To Minors), managed by an adult custodian (you, a parent, a financial institution) until the minor comes of age. The earnings (dividends) are not tax sheltered but there is a low "kiddie tax" rate.

A variation of this might be to open up a number of DRIP accounts for the stock(s) you buy. There are a numner of companies that offer no-fee plans for reinvesting dividends or purchasing additional shares. Some can be opened directly with the company whereas others require that you buy one share and then open the DRIP. There are a couple of web sites that facilitate this.

I made my earliest investments this way. I've lost touch with this but back then, many reputable companies offered as much as a 5% discount on reinvested shares and/or new purchases. I'd guess that this might be covered under UGMA. I certainly have no clue how your niece of Korean citizenship born in Kansas will manage this. Do they allow DRIPs in the gulag?

Answer 2

Here is my U.S.-centric answer: An S&P 500 index fund (or your favorite index fund) inside a UTMA account.

The S&P 500 fund gives you your high-risk/high-reward profile, should be around 20 years from now, and is expected to beat inflation. You have your doubts about Robinhood, so use Fidelity or Vanguard.

The UTMA (Uniform Transfer to Minors Act) account accomplishes your goal of giving the amount to the child now, yet keeping it relatively untouchable for the next 20 years or so. Inside a UTMA account, the fund legally belongs to the child immediately, but remains out of his or her control until the age of majority (which varies between 18-21, depending on the state).

With only $5000 to start, it will be a long time before the child makes enough income for any of it to become taxable for him or her.

If the child is a U.S. resident today, the UTMA should be fine even if she moves out of the country to follow her dreams. It will still be hers, although depending on where she goes and what she does with it there could be tax implications, of course.

Related: How can I gift mutual funds to my 1 year old nephew?

Answer 3

I will lay out some thoughts, US centric, based on investing for my children over the last 20-odd years, and my advice to them now of what they should be doing going forward.

The first question is what your intent for the investment is (note this may not, in the end, be the child's intent in 20 years). Do you want this to be a college fund, a nest egg to start saving for a house at some point, or a long-term retirement-oriented investment?

If the intent is to provide funds for college, the obvious vehicle would be to use a 529 plan, through any number of providers. That way there are no tax implications for the child or their parents. The downside is if the child does not go to college, but the beneficiary of the plan can be changed at a later date (assuming you have other relatives or your own children to shift it to). Even in these plans, you need to pay attention to the mix of investments (stocks vs bonds), particularly as the college date gets closer. For all the plans I've looked at, a $5000 investment is larger than any required minimum.

If not specifically for college, but you desire that a reasonably secure nest egg be available in 20-odd years, again one wants the investment mix to change from stock-heavy to income-heavy over that time. The $5000 investment is fine at various mutual fund companies, even to have a mix of several funds. One hands-off fund type would be to use the time-horizon funds, generally used for retirement planning, timed for the end of the 20-year period. (Example, Vanguard has Target Retirement 20XX funds, every 5 years out to 2065 at this point.) These have automatic re-balancing of investments over time and usually low fees.

If meant more for a nest egg for, e.g., buying a house sometime in their late twenties or early thirties, the extra 10 years or more before it is used means you could lean more towards a straight stock fund investment. This could be either through a 2050 target fund rather than 2040, or something like a total market index fund (or ETF). Either way, between now and 20 years from now the investment will remain highly stock oriented, and the child can start thinking about the timeframe of the use of the fund when they are a young adult.

Now, how have I implemented this for my kids?

I established educational IRA accounts for my kids when they were young. This particular vehicle is not used anymore, but it is similar to a 529 plan. Those were total stock index funds and did quite well over the 18-22 year time frame.

I also established Roth IRA accounts for my kids when they had earned income. Those were put into the furthest-out target date fund available at the time. That was to get them going and thinking about retirement even before they were 20. It is also a way to transfer a bit of money to them - teenagers don't make much money and nobody says they have to use their earnings to fund the IRA, you just can't fund them more than their earned income. As a Roth IRA there are no tax implications into the future for you or your children. (I realize this is not an option now, but could be an interesting concept in 20 odd years).

Finally, there is a chunk of money for one child coming out of an insurance settlement from a car wreck. This is invested in a total stock index fund, and is not intended for funding college. Even now the anticipated time horizon of using those funds is ~10 years in the future, so no tweaks to the investment mix have been needed.

So, bottom line:

$5000 is more than adequate for these various vehicles at several mutual fund companies. Compare costs and fees and look to minimize those.

Think about your intended use of the money for your relative, because that may impact how the investment mix should change over time. Also realize that if the money is given to them, their intended use may not be yours (although a 529 plan locks it in to education expenses).