Wealth Accumulation Portfolio for Child

[jalanlong]

I know we always talk about the PP as being a portfolio for wealth protection, not wealth accumulation. If you were starting a portfolio for a child today so that they could have a head start money wise 15 years from now, what would be your choices? Would you go all stocks at the current levels? Would you invest in some individual fast growing companies? Or maybe a dividend portfolio to throw them off some income in a few years? Any thoughts to using a risk parity portfolio containing some gold and LTTs?

[dualstow]

Interesting question.

Stocks, stocks, and more stocks.

Even though it's nice that they may be too young to pay taxes on dividends for a while, I think I would go with two slices:
1) a core made of an index fund, like total market or small cap blend. 85% of the starting portfolio in this core.
2) some handpicked stocks: Apple, Berkshire Hathaway, Alphabet, Meta (facebook), Microsoft and Nvidia come to mind.

Yes, even at these levels.

[vnatale]

Interesting question.

Stocks, stocks, and more stocks.

Even though it's nice that they may be too young to pay taxes on dividends for a while, I think I would go with two slices:
1) a core made of an index fund, like total market or small cap blend. 85% of the starting portfolio in this core.
2) some handpicked stocks: Apple, Berkshire Hathaway, Alphabet, Meta (facebook), Microsoft and Nvidia come to mind.

Yes, even at these levels.

There is that "Kiddie Tax", which has now been around for decades which causes, in some cases, certain children's income to be taxed at the parents' tax rates.

[Vil]

I would rather invest in a good education (whatever form) in every part of their life. They should be able then to find their way to riches. Good we do have plenty of good universities in Europe that are not goddamn expensive ( excluding UK).
However, as that's not exactly what you are asking - maybe Golden Butterfly. Opening such account would be accompanied with explanation that its not necessary to do all the things just perfect, more often its just fine if you do not make big mistakes (or bets).

[jalanlong]

Interesting question.

Stocks, stocks, and more stocks.

Even though it's nice that they may be too young to pay taxes on dividends for a while, I think I would go with two slices:
1) a core made of an index fund, like total market or small cap blend. 85% of the starting portfolio in this core.
2) some handpicked stocks: Apple, Berkshire Hathaway, Alphabet, Meta (facebook), Microsoft and Nvidia come to mind.

Yes, even at these levels.

So devil's advocate here...if we are invested in the PP because we have no idea what might happen here over the next 20 years (ala Japanese stock market) then why would I put a young person into all stocks, knowing that it is possible their portfolio would be extremely susceptible to those unknowable events that the PP protects against?

[Vil]

Yes, even at these levels.

At these levels I would buy massively only Turkish, South African and Mexican stocks ... what is considered undervalued crap (undervalued for a good reason of course). Yesterday, I was wondering about MSCI Turkey (hold your hat - 33% volatility).. But in 15 years it might be that US stocks will be recovered (and monitors should always be tilted vertically to display SPY charts. .). .... Maybe I should stop investing...

[dualstow]

So devil's advocate here...if we are invested in the PP because we have no idea what might happen here over the next 20 years (ala Japanese stock market) then why would I put a young person into all stocks, knowing that it is possible their portfolio would be extremely susceptible to those unknowable events that the PP protects against?

In short, because they have more than 20 years. But they can certainly rebalance into other things when they reach a certain age.
Just my opinion. That’s how I’d do it.

Oh, and contrary to my friend Vil above, I don’t think I’d invest in Turkish stocks. Maybe an index of ex-US?

[D1984]

Interesting question.

Stocks, stocks, and more stocks.

Even though it's nice that they may be too young to pay taxes on dividends for a while, I think I would go with two slices:
1) a core made of an index fund, like total market or small cap blend. 85% of the starting portfolio in this core.
2) some handpicked stocks: Apple, Berkshire Hathaway, Alphabet, Meta (facebook), Microsoft and Nvidia come to mind.

Yes, even at these levels.

So devil's advocate here...if we are invested in the PP because we have no idea what might happen here over the next 20 years (ala Japanese stock market) then why would I put a young person into all stocks, knowing that it is possible their portfolio would be extremely susceptible to those unknowable events that the PP protects against?

Devil's advocate to your devil's advocate:

First, I am presuming that a child would not be at risk of immediately needing the money for such things as food/shelter//paying bills/car loan/health care/etc if he/she lost their job because...well, one, minors don't usually have any jobs at all until 15 or 16 and even then those aren't "real" career type jobs that have to support them, and two, minors generally have their parents providing the necessities of life (roof over their heads, food, clothes on their backs, paying for their healthcare, paying the water and electric bill so that said minor can have running water and heat and lights, etc....if a child had to be worried about his/her investment portfolio being down at a critical time because doing so would impair their ability to meet their basic needs of life then I'd say that this child has a lot bigger worries to be concerned with in the first place than how their investments are doing (i.e. if a child truly has to provide those things--the basics of life like food/shelter/clothes/etc--for themselves and is NOT an emancipated minor then their parents should be in jail for child neglect and failure to provide),

Second, it would depend on how old the child was. Since the OP said this was for the child to "have a head start 15 years from now" I am assuming said child is maybe 2 to 5 years old or somewhere in that range (because if this was the case then this would make the child anywhere from 17 to 20 years old in 15 years i.e. somewhere "between just about to graduate from high school" and "either in college full time or holding down their first real full-time adult job" ). A preschool aged child can afford to take more risks than, say, an 18 or 19 year old....one, because (as above) their parents will be providing for their basic needs so there is no risk of the child themselves having to liquidate their portfolio to pay the bills, and two, because if they need the money, at, say, 24 or 25 to buy a house then they have a lot more time to recover from a bad market if they are 3 or 4 or 5 years old than they do if they are in their very late teens.

Third, a young child (or even a teenager) can afford to take more risks in the market than an adult of, say, 35 or 40 or 50 can; the child has a whole lifetime of human capital left as their most valuable asset (human capital has value even if it cannot be directly capitalized and sold) even if they do own some financial assets like stocks/mutual funds/ETFs; as such, even if stocks go down 50 or 60% the younger person still has plenty of time to trade some of their remaining human capital for something (money) that can then be used to buy stocks (which are cheaper here because in this scenario stocks declined precipitously).....while the middle-aged person has only a few decades (at most) of human capital left and as such financial assets make up a larger portion of their total net worth and any losses in financial assets are far less recoverable for them than they would be for a person 25 or 35 years younger.

Fourth, when has a diversified portfolio of equities EVER gone down in real inflation-adjusted value value over 15 or 16 years? I would never put any child (or anyone of any age, really) in a portfolio of stocks from just one country so there goes the Japan scenario right there. Even if you invested everything at once on, say, September or October 1929 you would've been fine by the fall of 1944 (or early 1945, or mid-1945) had you invested in a balanced portfolio of US stocks (incl small, mid, and large cap), developed market foreign stocks, emerging markets stocks, and perhaps a smidgen of gold mining stocks on top of all this (for their overall non-correlatedness to anything else). US stocks basically broke even over this time period, developed foreign stocks were up around 42% from 3Q 1929 to late 1944, EM stocks more than doubled over this same time period (a lot of which was due to the fact that they were never as inflated as US stocks were by Sept-Oct 1929 and thus declined less during the '29-32 crash), and gold mining stocks (using the S&P Gold Miners Index and the Barron's Gold Miners Index as reasonable proxies for a gold mining stock index fund) were up to some 4.5 times their late 1929 value not even counting reinvested dividends but on price appreciation alone. Actually, if you had used a slight value tilt in your US stock allocation (say, small value, mid value, and DOTD as a proxy for large value) in lieu of the pure TSM or "evenly split by LC/MC/SC" as above then it would've done even better than the allocation above.

Maybe we will see worse stock market performance over the next 15 or 16 years than we saw during the time that included the Crash of 1929, the late 1931 banking crisis/devaluation of the world's reserve currency the British Pound/the run on the KreditAnstalt and the near collapse of the Austrian and German banking systems that followed, the Great Depression, a quarter or more of America's banks going under and depositors losing everything, the recession and crash of 1937, Hitler taking over most of Europe, Japan attacking Pearl Harbor, and every major country eventually being involved in WWII...but I wouldn't count on it. I don't know if a portfolio of US stocks will do that great over the next 15 to 16 years (actually, over the next 7-10 years both Vanguard, Bank of America, and JP Morgan Chase are predicting either negative real returns or barely positive real returns for US large cap blend stocks--i.e. the S&P 500 TR--and both negative nominal and real returns for US large-cap growth stocks) but I bet that a diversified stock portfolio as in the paragraph above will beat or at least match the PP over this time frame (albeit probably with higher volatility and greater maxDD).

[Vil]

Oh, and contrary to my friend Vil above, I don’t think I’d invest in Turkish stocks.

Come on, you know that was not my point. What I meant is that US stocks looks a tad expensive for me now (yeah I already agree with your point stating what's expensive and what not is a relative thing).
In short - I would go with Golden Butterfly if it was my kid. European one looks quite fine based on my past research, and EU SCVs have a very nice low historical correlation with US stock market (which comes as additional benefit).

[seajay]

Gold, hedged with small cap value stock (50/50) https://bogleheads.org/forum/viewtopic. ... 8#p6382468

If gold does well you may end up with a similar amount of ounces being held but where the price had appreciated; Or maybe where the price had declined but you'd accumulated multiple more ounces of gold.

[barrett]

Fourth, when has a diversified portfolio of equities EVER gone down in real inflation-adjusted value value over 15 or 16 years?

This actually was the case from 1966 to 1981 (inclusive) using S&P 500 data. So that is a 16-year period with negative real returns.

Source:

https://www.officialdata.org/us/stocks/ ... dYear=1981

Scroll down to "adjusting stock market return for inflation". 1966 is one of those "unfortunate retirement years" that Michael Kitces has written about when equity returns were especially bad during the first 15 years of retirement.

Not saying that the 100% equities strategy is wrong for a youngster, just that it can fail to produce a positive real return over substantial periods

[D1984]

Fourth, when has a diversified portfolio of equities EVER gone down in real inflation-adjusted value value over 15 or 16 years?

This actually was the case from 1966 to 1981 (inclusive) using S&P 500 data. So that is a 16-year period with negative real returns.

Source:

https://www.officialdata.org/us/stocks/ ... dYear=1981

Scroll down to "adjusting stock market return for inflation". 1966 is one of those "unfortunate retirement years" that Michael Kitces has written about when equity returns were especially bad during the first 15 years of retirement.

Not saying that the 100% equities strategy is wrong for a youngster, just that it can fail to produce a positive real return over substantial periods

Fair enough...but I said a DIVERSIFIED portfolio; a portfolio of 100% US LCB (S&P 500 TR) is not really a diversified portfolio.

Actually...come to think of it I specifically implied (by mentioning the Japan scenario and saying that going with a portfolio that was not just one country would avoid a risk like that) that a one-country only portfolio could indeed have a long period of significant negative real returns.

A portfolio split between US LCB, US MCB, US SCB (or even better, US SCV), developed intl ex-US (1968, 1969, 1971, 1972, 1977, and 1978 it utterly clobbered US stocks in terms of return; in 1981 it did slightly better than US stocks, in 1973-74 about the same as US stocks, in 1967 somewhat less than US stocks, and only in 1980, 1979, 1976, and 1970 did it really do very badly as compared to US stocks....but overall for the 1966-81 period intl developed ex-US stocks beat US stocks to a pulp in terms of return), emerging markets (if you look at either the GFD or Credit Suisse EM indices for the period from 1966-1975 and then--since 1976 was as far back as the S&P IFC EM TR index goes and this was the first real EM index created--the S&P IFC EM TR index for 1976 to 1981 you will see that EM stocks over this period walloped both US and developed ex-US stocks), REITs (over the 1966-1981 period they killed the S&P 500 in terms of return), and a few percent of gold mining stocks (1966 to 1980 was a--pardon the pun--golden period for these with 1969 and 1975-76 being the only truly bad years; 1981 was a really bad year for them too but by then gold miners had beat regular US stocks for so long that they were still far ahead anyway) and rebalanced regularly then you would've achieved positive real returns over the whole period.

[mathjak107]

I would put it in a simple total market fund and let it run for decades..

I am a big believer in investing for what was ,what is and what stands a reasonable chance over the long term of continuing ..that means equities for the youngins

[l82start]

no recommendation for a PP/VP combination? set them up with a permanent portfolio for wealth preservation, and some money to invest with a different risk profile time horizon...

seems the obvious choice if you want them to get a deeper understanding of investing, one that will serve them well..

[mathjak107]

no recommendation for a PP/VP combination? set them up with a permanent portfolio for wealth preservation, and some money to invest with a different risk profile time horizon...

seems the obvious choice if you want them to get a deeper understanding of investing, one that will serve them well..

At this stage it should only be about pedal to the metal investing .

As a long term investor there is no logic in them mitigating temporary dips and permanently hurting long term returns

[dualstow]

Oh, and contrary to my friend Vil above, I don’t think I’d invest in Turkish stocks.

Come on, you know that was not my point. What I meant is that US stocks looks a tad expensive for me now (yeah I already agree with your point stating what's expensive and what not is a relative thing).
In short - I would go with Golden Butterfly if it was my kid. European one looks quite fine based on my past research, and EU SCVs have a very nice low historical correlation with US stock market (which comes as additional benefit).

I thought that it was tongue-in-cheek from your last line, but you took the trouble to say “undervalued for a reason.” So then I thought, oh, maybe the whole thing is serious. It’s that dangerous mix of serious lines and humor. Hard to untangle. So, Golden Butterfly is your real choice. I like it!

[dualstow]

…Even though it's nice that they may be too young to pay taxes on dividends for a while,…

There is that "Kiddie Tax", which has now been around for decades which causes, in some cases, certain children's income to be taxed at the parents' tax rates.

i did not know that! thank you.

[l82start]

no recommendation for a PP/VP combination? set them up with a permanent portfolio for wealth preservation, and some money to invest with a different risk profile time horizon...

seems the obvious choice if you want them to get a deeper understanding of investing, one that will serve them well..

At this stage it should only be about pedal to the metal investing .

As a long term investor there is no logic in them mitigating temporary dips and permanently hurting long term returns

as a long term investor it makes no sense to share the portfolio management wisdom, that people have come here to this, the "Permanent portfolio forum" to discus... with future generations... ??

why don't you go find a 100% stocks portfolio forum to post on?

[l82start]

having a 100% stock VP, that is larger than their PP when starting out, would be a supportable position.. that doesn't change the value in sharing harry browns wisdom..

[mathjak107]

no recommendation for a PP/VP combination? set them up with a permanent portfolio for wealth preservation, and some money to invest with a different risk profile time horizon...

seems the obvious choice if you want them to get a deeper understanding of investing, one that will serve them well..

At this stage it should only be about pedal to the metal investing .

As a long term investor there is no logic in them mitigating temporary dips and permanently hurting long term returns

as a long term investor it makes no sense to share the portfolio management wisdom, that people have come here to this, the "Permanent portfolio forum" to discus... with future generations... ??

why don't you go find a 100% stocks portfolio forum to post on?

This post isn’t about mitigating downturns it is about growing wealth …did you lose your way here ? Perhaps stay in the pp section then

[l82start]

this place is ruined by trolls..

wealth accumulation is useless without understanding wealth preservation and the psychology of investing..

intelligent debate was killed by trolls in 2020, if talking about the PP is no longer why we are here.....

?? ? ?? ?

[mathjak107]

I would differ…anyone can buy an index fund , let it grow decades and look again …they need to know nothing else.

When I was on the 401k committee at work we had hundreds of employees with no clue .

They contributed , let things grow , and today are retiring with hefty sums

[vnatale]

…Even though it's nice that they may be too young to pay taxes on dividends for a while,…

There is that "Kiddie Tax", which has now been around for decades which causes, in some cases, certain children's income to be taxed at the parents' tax rates.

i did not know that! thank you.

https://www.policygenius.com/taxes/what-is-kiddie-tax/