Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

In the long run, we'll all be dead - but our children might not be.

edited August 2013 in Fund Discussions
While I find this discussion board a source of useful ideas, I doubt any fund manager profiled here will be working when my last child (if he's lucky) retires in 40 years.
Therefore, if you were funding an IRA to reward your progeny for sharing some of your genes and not yet falling afoul of the law, what would you select? If Social Security survives, they don't need bonds now.
I'm leaning toward a platform such as TDA (but maybe Vanguard would be better) and ETFs or Vanguard indexes, and 70% non-US, but there are a lot of smart people commenting, and the advice is free. (Please avoid the gratuitous comment about cost and worth.)
Thanks in advance. Perhaps my children will thank you later (but they'll think it was all me).


  • I plan on leaving multiple portfolios at different brokerages, each cohesive on its own, and telling them to sell one portfolio at a time or all at once based on how much trouble they want to take to understand what I had done.

    Leave them cash to make their own mistakes.
  • beebee
    edited August 2013
    To me investments are a way of funding future (retirement) opportunities or obligations. I tend to look closely at my personal retirement obligations...taxes, premiums, monthly bills, loan payments, etc. My goal is to have enough retirement income ( from part time work income, SSI / pension, and investments to cover my monthly bills). If I am lucky, smart, or inspired my investments may also help fund my favorite charities, family member's goals (weddings, schooling, reunions, etc.), or any other great idea (travel to the moon, salt and pepper shaker collecting, salsa dance lessons, etc.) I want to consider.

    As far as the longeveity of today's funds, I believe funds managed by comittee often have a good chance of a long life. Index ETFs or Index funds do seem to get rid of this decision by comittee dynamic. These investments also usually carry a low ER (expense ratio) making the costs a good long term choice. The "flavor of the day fund" may not be tomorrow's favorite fund so I see these not being a good choice for a "perpetuity account".

    Finally, I would consider this account being a Roth account. It would give you the flexibility while you are alive to access this account without tax penalty (review these IRS rules) as well as providing a tax free inheritance for your heirs.

    As an aside, if my parents had invested in VWELX back in 1929 with a $10,000 investment it would now be worth almost $7M today...the power of compounding over time.

  • Bee hit one of the points I was going to make - thinking in terms of team management.

    Somewhat related is the way Vanguard funds are managed. The management of many of their funds is outsourced - Vanguard has ultimate responsibility, and exercises that responsibility by overseeing each fund, watching how well it is managed, and making changes (sometimes too slowly) as needed. (In addition, it often allocates sleeves to different management companies, building on Bee's theme of team management.)

    So with Vanguard, you've delegated not only the management of the portfolio, but watching over that manager. I think that reduces the worry over management succession. (This differs from in-house management, where it is the management company that decides on the successor, occasionally for its own reasons and not necessarily for the good of the fund. Think of how often Fidelity funds make 180 degree turns, or at least 90 degree turns, when they swap managers.)

    FWIW, another company that outsources management pretty well is American Beacon. Finally, I'd add T Rowe Price as another family to turn to if thinking about multi-decade active management. They do handoffs very well, preparing successor managers well in advance, maintaining fund objective, style, and quality.

    Regarding asset allocation - a forty year horizon doesn't need bonds, with or without SS. IMHO, bonds serve two purposes - stability (ability to sleep at night is the only thing this affects if the money's not needed for decades), and free cash flow (again, not needed). The argument for 70% international is that's where the money is. I think there are arguments for keeping the allocation lower (e.g. that you're going to be spending dollars, not rupees or rmb). But if you want to follow market allocations, and like index funds, why not just get an all world index fund (VT) and be done with it? (Seriously; I think that's a reasonable approach.)

    Note also - inherited IRAs, including Roths, are immediately subject to RMDs (unless inherited by spouse, or depleted within five years of inheritance). This doesn't mean that anything needs to be liquidated (withdrawals can be in-kind); just that some portion of the portfolio switches from tax-deferred (or tax-exempt) to taxable over time.
  • Reply to @msf:

    There are no RMD's on ROTH's. Right?

  • Reply to @Art: There are RMDs on inherited Roths.

    In fact, the RMD amount is more severe - you may wind up using the single life expectancy table rather than the usual uniform life expectancy table. In addition, once you start the RMD, you have to subtract a full year (from your expected lifetime for the RMD calculation) each successive year (instead of looking up your new expected lifetime, which will have decreased by less than a year).

    And it gets (slightly) worse. The earnings are still taxable if the (original) Roth wasn't around for at least five years. That's usually not a problem, because you take out contributions first, and in the first few years of withdrawals, that's all you'll be tapping.
  • Reply to @bee: Two questions. Why did you not chose 1920 or 1928?:-)
    And $10K in 1929. How much is that in TODAY's dollars?
    We need to be realistic here. I forever worry such "statistics" gives people false sense of confidence.
    Finally I want to know ANOTHER fund not from Vanguard and also still available and see how much it would be worth today if also invested in 1929. This under the assumption an investor would have as much chance of selecting that fund instead of VWELX.
  • beebee
    edited August 2013
    Reply to @VintageFreak: Happened to be the year VWELX originated (1929) you can see in the chart that I provided above it took a sizeable hit soon after 1929...lost 60% of its value during the depression years. If your parents were smart enough to have invested the $10K at the end of the depression (1932ish) it would be worth about $17M today.

    Using an online inflation calcuator $10K equates to $136K in todays dollars. A little steep for some investors, but not an unreasonable amount to consider being "passed on".


  • Reply to @Art: If I understand Roth rules correctly the orginal owner has no RMD so long as the 5 year rule is meet. A spouse can inherit another spouse's Roth without worry of RMD. It's when a non-spouse inherits a Roth that RMDs come into play.

    Do I have this right msf?
  • Reply to @VintageFreak:
    Another fun fund to look at long term is LEXCX ING Corporate Leaders...been around in one form or another since about 1935...$10K worth $21M today.
  • Sons, daughters, cousins inherit a Roth IRA and must then worry about such rules? A bogus bonus. Catch-22. Pay your tax now (Roth) and the thing is tax-free later. Unless, X or Y or Z or A or B or C..... Let's chase our tail and see how far we get. Gummint lies.
  • Reply to @bee: Okay. So my parents weren't alive in 1929:). Now let's see who of us can plonk $136K in ANY one fund today...Not me. if I had 1.36 Million Dollars and I owned 10 funds, maybe...but still doubt it.

    So do you know a way to find out other funds available in 1929 and still available today and not from Vanguard?
  • Reply to @MaxBialystock: Well Max, you just made the NSA watchlist!
  • MJG
    edited August 2013
    HI Guys,

    I deleted my original post here. I planned to submit it to another website.

    Sorry for the error and any inconvenience it caused.

    Best Wishes.
  • Reply to @bee: Almost perfect. One very minor tweak, and then a subtle addendum.

    Tweak - the five year rule only affects whether the distribution is taxed; it doesn't affect RMD - that is, the original Roth owner has no RMD, period.

    Addendum - a spouse can inherit an IRA "worry free" only if the spouse is the sole beneficiary. In that case, the spouse can transfer the assets to an IRA owned by the spouse (as opposed to owning an "inherited IRA"). The spouse cannot do that if there are multiple beneficiaries. In that case, the spouse must treat the IRA as an "inherited IRA" with its RMDs.

    Here's a pretty good rundown of the options from Schwab. On p. 4 you'll find the options for a spouse. Option 2 (treat the IRA as your own) is not available if there are multiple beneficiaries - it says so in column 2.
  • edited August 2013
    Reply to @MaxBialystock: If the Roth IRA becomes an Inherited IRA, I think the earnings up to that point will still be tax fee as well as the original contributions. Only the new growth will become taxable. As you take RMD you will tap into this new growth and pay taxes on the new growth.

    If you liquidate the portfolio on the day that you inherit you will pay nothing (assuming Roth was created 5+ years ago)

    I don't think you yourself is short changed. Not even your spouse (which gets preferential treatment) and not the kids, etc. that inherit it later either. It just becomes an Inherited IRA with the "cost base" set to the day they have inherited. It is no longer a Roth IRA. I think even they are getting fair treatment.
  • Back in FA-land, I would post my "Annual Angst' question about investments in kids Roth IRAs. I was (am) trying to build a port that they can maintain. I am thankful for the gracious and helpful replies I always received. The kids are now 31 and 36; we started their IRAs in their early teens and each has about 150K now. Here's the present line-up:
    Bridgeway Ultra Small Co BRUSX
    Dodge & Cox Stock DODGX
    Dodge & Cox Intl DODFX
    Matthews G&I MACSX
    Primecap Odyssey POAGX
    Sequoia SEQUX
    Tweedy Browne Global TBGVX
    Vanguard Energy VGENX
    Artisan Global ARTGX (new, small)
    Cash, about 22%

    We shoot 5K in every year. I am thinking of using Vanguard's Div Gro Fund VDIGX going forward for a while, maybe a long while. I think most of these funds have multiple managers. With a small regret and a large resolve I got rid of Fairholme FAIRX for them; I don't think they should be keeping tabs on BB and neither should I. (a) don't like some of his stuff (b)Charlie left (c) needs a steamer trunk for the ego. Not something I want to dump on my kids.

    This is just FWIW, and if any one finds it helpful I am glad. I am usually on the receiving end of useful info.
    best, hawk

  • Reply to @hawkmountain: Hey there Hawk- long time no see... glad to see you're alive and well!

    Take care- OJ
  • Reply to @Investor:

    Earnings in inherited Roth IRAs (including new growth) are tax-free, so long as you follow the five year rule (earnings on Roths are taxable if withdrawn within five years of establishing the IRA).

    Quoting Fidelity, where they discuss inherited IRAs: "[T]he longer you keep the money there, the longer you will enjoy tax-deferred growth, or in the case of an Inherited Roth IRA, tax-free growth."

    Quoting Ed Slott (from his fine Q&A on inherited Roth IRAs): "The better option is to withdraw over your lifetime. This allowes the inherited Roth IRA to grow tax-free for the longest possible time."

    To Max: Under no circumstances does one ever have to pay taxes on IRA moneys that were already taxed.

    The somewhat convoluted rules have to do with whether the earnings are tax free (e.g. you owe taxes on Roth earnings if you withdraw them within five years of establishing a Roth IRA), and whether you pay a 10% penalty (e.g. for withdrawing money before you are 59.5).

    Note that this penalty in turn only applies to money that has never been taxed (so it doesn't apply to post-tax contributions, whether to a traditional or a Roth IRA). See IRS Tax Topic 557.

  • MJG
    edited August 2013
    Hi STB65,

    Once you have crossed the happy threshold of reasonable portfolio security and survival for your lifetime, you are now free to invest like an institution instead of as a private investor.

    Given that comfortable circumstance, your investment time horizon expands from something like 30 years to a more forgiving 60 years and beyond. That change in time scale gives you a longer financial lever = time. And time is critical in the compounding interest and wealth accumulation equation. As Albert Einstein noted “ Compound interest is man’s greatest invention”.

    Asset allocation can be adjusted to reflect the very extended time horizon. Since stocks have historically delivered the best rewards over the long haul, you might consider increasing the equity holding percentages in your portfolio. I did. For example, if you normally favor a 60/40 equity/fixed income split, you might want to modify that to a 80/20 mix. The odds are that the more aggressive positioning will substantially increase the end wealth number after a 6 decade holding period.

    By the way, I take issue with your forecast that foreign markets will produce superior rewards in the future. Yes we have problems, but we have always faced challenges, and as a nation, we have overcome these hurdles successfully. We respond well to adversity. There is precious little evidence that the world in general does as well as we do. I would certainly take international equity positions, but not to the high degree that you have proposed.

    In most instances, your kids will be the beneficiaries of your largess. I would emphasize a continuing financial education for them. I would make sure they became very familiar with the works of the likes of John Bogle, Rick Ferri, and Burton Malkiel. Discuss their investment concepts with your progeny. Our guys are married now, but the education continues. We give each one a subscription to the Wall Street Journal annually. With a continuing financial education, your team can be very knowledgeable and skilled investors when the transition takes place.

    Frugality has always been the watchword in our household. I hope it is in your household also. In particular, my wife has been a leader in this dimension. We managed to save even when inflation hit double digits. My wife was a tough financial disciplinary sergeant who demanded that our guys stay within their earnings and allowances at all times. They now practice what she preached. For most folks, being frugal, with an ability to delay satisfaction, leads to success in life and in portfolio management.

    I’m sure you are familiar with the behavioral study that tested long term outcomes for children who were exposed to a choice at a young age. One sweet was placed on a table before each subject. The child was told he was welcomed to the one treat immediately. But if he waited until the test conductor returned, he/she would be rewarded with a second treat as well as the original one. Some did; some didn’t. Fifteen years later, the test subjects were assembled and were interviewed to measure their life progression and happiness. Those who delayed satisfaction were far more successful compared to those who demanded immediate satisfaction.

    I concur with you and the many contributors to this thread who recognize fund management issues over a six decade timeframe. Team management should do better than an individual star philosophy. The 800-pound gorilla firms (Fidelity, Vanguard, T. Rowe Price, American) should do well since they have training and succession plans in place.

    However, overall, if your gang is well versed in the investment arena, you can rest easy. They will handle any of your portfolio shortcomings soon after the transition date. Keeping your family fully apprised of the investment game is the essential key.

    Best Regards.
  • Reply to @msf: Hey I was wrong but the situation is even better.:)
  • beebee
    edited August 2013
    Great discussion... thanks stb65 and everyone else for their insight.
  • Reply to @MJG: +1 for an epic post. There is a fantastic book on self-control written by a professor that is based off a course she teaches at Stanford. If anyone is interested, it's called The Willpower Instinct: How Self-Control Works, Why It Matters, and What You Can Do To Get More of It. Maybe someone can post an Amazon referral link to support MFO
  • Thanks for all the comments. Only reason I selected a higher than currently recommended percentage for non-US companies was that I thought it might somewhat more closely match the location of the world's companies in a score of years.
    I think I saw a comment by John Bogle that Social Security represented a bond investment (and I'm not trying to start another discussion.)
  • Reply to @STB65: Since you'd mentioned ETFs and index funds, I figured your allocation was based on matching market cap, not biasing away from domestic stocks. As this table from Bespoke shows, at the end of 2012, the US was already down to 32% of world market cap.

    Perhaps MJG was talking about short term trends in suggesting that the US will do better (indeed, the Bespoke table shows the US going up to 34% through May). But I think the long term trend is clear.

    If the intent is to match market allocations, and you like indexing, why not just use VT (Vanguard Total World Stock, or as I like to think of it, total total stock market - both total domestic and total int'l)? Serious question - there's a good case for keeping it simple (I don't, but that doesn't mean I don't see virtue in the approach).
  • Reply to @hawkmountain: Hi hawkmountain-- I thought that one could only contribute earned income to a Roth IRA and only as much as earned. My teenagers certainly don't earn 5k in a summer job. Is there a loophole?

  • Reply to @lrwilliams: That is correct. For any IRA (Roth/Traditional IRA, etc). you need earned income except that Spouses can contribute for a non-working spouse if they are filing jointly.
  • To MJG; Probably the logical approach to use VT, although I may look for a small or mid cap global fund to try to pick up the historical extra gain from that part of the market with a portion of the investment. With 4 children, it may be difficult to hit the minimums with funds yearly, but that's my problem.
  • Reply to @lrwilliams: When they started, the max was 2K, and that sure wasn't hard with snow-shoveling, baby-sitting plus summer work. All they had to do was keep a log and file schedules C and SE. As the max increased over the years,, they logged more jobs...
  • Reply to @hawkmountain: Thanks for the reply.
  • Reply to @STB65:

    Hi STB65,

    I suspect you meant to address your comment to “mfs” since he introduced the Vanguard VT total equity market ETF option. But since you directed your reply to me, I suppose that permits me to drop my nickel down the slot.

    I too admire investment simplicity. However, I believe that a single equity position for the entire world might just be “a bridge too far”. It just doesn’t allow for individual assessments and preferences.

    Since I always include some fixed income in my portfolio to dampen volatility and for emergency purposes, I would prefer a combination of a Vanguard total US equity position, a Vanguard total international holding, and a total Vanguard bond component. As a core portfolio, these 3 elements encourage asset allocation flexibility to adjust for your risk profile.

    I agree with your judgment that the portfolio returns could be enhanced by adding Fama-French small cap and value oriented units. These additions potentially increase rewards by one or two percent annually. I would also consider using a small percentage of REITs and precious metal products to control portfolio volatility. Vanguard offers funds and/or ETFs in all these categories.

    Overall, this expanded portfolio, which I believe is more comprehensive with little added complexity, is manageable and should marginally increase returns while controlling volatility. The recommended portfolio has grown to only 7 holdings. You decide on the overarching asset allocation.

    Congratulations on the size of your family. Your children will contribute to keep the marketplace humming and to increasing US GDP growth rate. That’s all goodness for investors, although it certainly will test your household management skills. I’m sure you will handle it with high distinction and grace. Embrace the challenge; it is a fun and happy period.

    Best Wishes.
Sign In or Register to comment.