Creating a buy and ignore portfolio for a child

[KinAlberta]

I'm curious - if you were to create a small portfolio for a child under say 10 years old that you wouldn't want to have to monitor what would you put in it?  Imagine that it might sit unmonitored for years, say 15-20 years, should you get hit by a bus a day after investing the funds. 

 

Say $10,000, maybe $20,000 initial investment.  I'd also day buying odd lots in companies is fine.

 

My view is that 1/2 should be put into index funds/ETFs (probably with dividends reinvested) and 1/2 into companies that have slightly better than even odds of beating the market over the next 10-20 years.  More importantly, in terms of "beating the market" these companies I would hope would offer downside protection from a protracted 50% plus 15-year long market decline and ideally be able to take advantage of irrational market moves and act opportunistically.

 

So in the end the portfolio wouldn't have to beat a rising market in the short term but it would offer the child at age 20 or 30 some compounded growth and a early "step up" in case their lives and educational attainments aren't as great as we all hope they could be.

 

 

 

What kinds of index funds would you start with today (globally a low rate environment, with potentially high if not stretched equity valuations)?

 

 

What companies?

 

What allocations?

 

 

I think BRK.b is a natural.

I would also add FFH because Watsa has shown himself to have a bit of a gloomy view of the future (deflation bets) and so is protecting the downside.

 

Would you consider other "guru" investment holdings companies?

 

I might also consider APPL simply because it has so much cash globally invested that even if technological obsolescence hits it - that cash pile should help it for years and years.

 

Anyway your thoughts?

 

[Guest notorious546]

us financials, including BAC, JPM, Citi

 

[AzCactus]

If you want to pay next to zero attention I think I would just put 100% in Berkshire and assume that you will beat the SP 500 by 150 bp-250 bp over time. 

[coc]

us financials, including BAC, JPM, Citi

 

Please do not put your child's money in a bank and not look at it for 15-20 years. I can hardly think of something more dangerous. Banks =/= Coca-Cola. You never know when the next Ken Lewis will take over. Banks are easy to screw up.

[Guest 50centdollars]

I wouldn't buy Apple and leave it for 20 years. Hard to know where a tech company will be in 20 years. Roughly 70% of Apple's profits come from the iphone. Was that the case 20 years ago? NO.

Will that be the case 20 years from now? Probably not. Its a great company now but these companies go through cycles. Just look at the past and you will see many companies who were the leader that became dogs. Maybe Apple is an exception but I doubt it.

 

Just buy the index and leave it.

[coc]

I wouldn't buy Apple and leave it for 20 years. Hard to know where a tech company will be in 20 years. Roughly 85% of Apple's profits come from the iphone. Was that the case 20 years ago? NO.

Will that be the case 20 years from now? Probably not. Its a great company now but these companies go through cycles. Just look at the past and you will see many companies who were the leader that became dogs. Maybe Apple is an exception but I doubt it.

 

Just buy the index and leave it.

 

Not only that, but even if Apple doesn't decline, will it, at $700 billion in market capitalization, outperform the S&P 500? It might, but I think that's hardly a slam dunk.

[petec]

A few ideas:

- Buy companies that have been around for many decades (proven longevity in their DNA)

- Buy companies that sell small repeat consumables to consumers

- Buy companies that sell to and get deeply embedded in enterprises

- Buy companies with high ROIC, high free cash flow, and dividends

 

KO

CL

MSFT

JNJ

MMM

Plus lots more!

[Ross812]

Costco, TJX, MKC, Credit Card Cos (V, MC, AXP, maybe even DFS), UPS, CHRW, WSH

[writser]

If you don't want to look at it for 20+ years I would just index. No stress, no regrets, nothing to think about. You could also consider buying some well known consumer stocks just to get the kid in question 'familiar' with investing.

[Jurgis]

Buying a set of companies instead of index and "not looking" would be a fun exercise to see how many of the companies listed in this thread survive for next 20 years...  8)

 

My guess right now is not more than 80%.

 

The number of companies outperforming an index over 20 years will be likely much lower than that.

 

But that would be the fun part. Where's the fun in holding index...

[racemize]

BRK, FFH, BAM, MKL

[petec]

If you don't want to look at it for 20+ years I would just index. No stress, no regrets, nothing to think about. You could also consider buying some well known consumer stocks just to get the kid in question 'familiar' with investing.

 

I used to think this, but now I could not disagree more.  And index is merely a portfolio chosen based on size.  I refuse believe that a well chosen portfolio based on longevity of ROIC and valuation can't outperform an index.  To believe that, you have to believe that those stocks are efficiently valued...which rather defeats the purpose of having a value investing board ;)

 

Index investing is a brilliant tool for unskilled investors.  But for skilled investors, even if they are building a buy and forget portfolio, it should be possible to beat an index unless the really long lived companies are valued at a big premium to the market (which is what I believe they deserve).

 

 

[tombgrt]

I'd go for a basket of country/region ETF's heavily weighted on certain valuation metrics such as EV/EBITDA, periodically rebalanced according to current average score of the metrics.

 

Or you could look for a value etf that does that kind of thing for you. :)

 

 

[coc]

If you don't want to look at it for 20+ years I would just index. No stress, no regrets, nothing to think about. You could also consider buying some well known consumer stocks just to get the kid in question 'familiar' with investing.

 

I used to think this, but now I could not disagree more.  And index is merely a portfolio chosen based on size.  I refuse believe that a well chosen portfolio based on longevity of ROIC and valuation can't outperform an index.  To believe that, you have to believe that those stocks are efficiently valued...which rather defeats the purpose of having a value investing board ;)

 

Index investing is a brilliant tool for unskilled investors.  But for skilled investors, even if they are building a buy and forget portfolio, it should be possible to beat an index unless the really long lived companies are valued at a big premium to the market (which is what I believe they deserve).

 

Yes but the S&P 500 would have a major advantage over you in that period, which is that it gets to rebalance as good companies come up and bad companies decline. The index is constantly adding successful businesses and removing dead or dying ones. Look at its constituents now versus 50 years ago - totally different. Which is what keeps it moving up over time.

 

When you "buy and forget" - you don't get that option. You just have to hope you make good predictions a long time down the pike in an ever-changing world. I don't think it's that easy to buy 5-10 companies today and say for sure that you'll win against the "active" index, unless you plan on managing that portfolio as well. I'm not saying that your 5-10 companies might not win, but that option to make a swap if things go differently than you expected is worth a lot of money.

[Hershey]

Total Market ETF.  Its the only way to buy and never think again for 15-20 years.  I would dollar cost average just in case we are in a bubble, but I'm not sure that withstands scrutiny.  Good luck.

[ATLValue]

I would buy dividend aristocrats, preferably the smaller market cap sizes

[vinod1]

Lots of good advice above. However, I would suggest one change. Go with a equal weight fund like Guggenheim S&P 500 Equal Weight ETF (RSP) over a market cap weighted fund.

 

If you think stocks are always priced "correctly" go with market cap weights. If you believe that some stocks are mispriced equal weight is a logical choice. It is an easy way to pick up about a 1% higher return than market cap.

 

To see why assume there are only 4 stocks in the index each with a fair value of $100 billion, but only two are correctly priced at $100 billion, one is overvalued at $150 billion and another is undervalued at $50 billion at market prices. A market cap fund would have $1.5 dollars in the overvalued stock as compared to $0.5 in the undervalued stock. An equal weight would have $1 in each, thus reducing the drag caused by overvaluation of the one stock at the same time increasing the weight in undervalued stock. Over the long term this provides an additional kick compared to the market cap portfolio.

 

A market cap fund by definition would always have over invested in overvalued stocks and underinvested in undervalued stocks. An equal weight reduces this effect.

 

Vinod

 

[Uccmal]

Kinalberta,  I am guessing you are Canadian based on your handle. 

 

I have an RESP set up for my kids.  I set it up just over 10 years ago.  We may start drawing from it in 7-8 years.  I trade very rarely in this account and have some holdings since day 1.  I dont use drips, and really only buy stock when there are sales, when the dividends have added enough to make a trade worthwhile and when I add cash.  As you probably know, US dividends get nicked 15% in this account, with no tax treaty in place. 

 

I hold the following in about equal amounts:

BMO -old

RY - old

SSW - old US

MTL - new for this account - old for me

RUS - new for this account - old for me

AIG - 2011

BAC - 2010/11

SLF - 2009

WFC - 2011

and a tiny amount of PWT

 

In my Wife's RSP I hold PWF - at least 10 years.  The Demarais family needs to maintain their standard of living. 

 

Basically, I let the dividend cash build up and wait until there is a sale on something and then invest and leave it.  I have always kept it very low risk, at the same time getting probably close to 15% returns, primarily due to strategic purchases.  Hope this helps. 

 

At some point I will amend my Will to instruct where to put the money, should I croak.  I dont think one cannot manage a portfolio.  Besides, If I am gone, the family will get all of my other holdings so they will be able to spend at will. 

 

[oddballstocks]

This whole predict 20 years into the future thing is funny.  No one can do it, buy an index fund.

 

Let's think 20 years ago. Did anyone predict Apple would be the world's biggest company? No, they were on the verge of going bankrupt.

 

How about cell phones, mobile phones, smart phones?  Nope, cell phones were the exclusive domain of Wall Street types and corporate big whigs.

 

In 1995 if you would have told someone that in 20 years people would be carrying around super computers in their pockets that are always connected to the internet, you could buy ANYTHING online, make free calls to anywhere in the world, entire TV show catalogs could be streamed on demand anywhere, organic locally made food would be popular and sugary sodas were on the way out it would be unbelievable.  That along with the Red Sox finally winning a World Series.

 

Twenty years can see a lot of change.  How about this, maybe we get self driving cars and it completely disrupts the insurance landscape.  If you're not driving and a car gets in a crash who is liable? Or maybe 3d printing becomes cheap enough that giant distribution networks like Walmart, UPS, Fedex and Amazon become pointless.  Here's another, what about custom made pharmaceuticals.  No more advil, instead a special formula made exactly for your body and genes.

 

There are so many things that can change, and yet at the same time there is a lot that won't change.

 

I'd be reasonably confident to say in 20 years kids will still wear diapers, we'll still listen to music view entertainment.  We'll still be eating and sleeping and exercising when we get a chance.  There will be some sort of vehicle that will get people to and from places (regardless of who's driving).  Kids will still have toys, adults will have adult toys (electronics, golf clubs, etc).  We'll still be taking vacations places.  And on..

 

I'm also fairly confident Hanover Foods will still be trading for 30% of BV along with a few other perennial laggards in my portfolio....

 

 

[GregS]

File another one under "late cycle threads."

 

If you want to be lazy, buy index funds. Focus on asset allocation (100% stocks is fine for a child if that's your preference). It's a surprisingly effective way to invest and highly underrated.  You will spend more time filling out forms to open an account than managing it.

 

Want outperformance? Do the work.

 

"Anyone who finds it easy is stupid." - Munger

 

 

[Jurgis]

File another one under "late cycle threads."

 

If you want to be lazy, buy index funds. Focus on asset allocation (100% stocks is fine for a child if that's your preference). It's a surprisingly effective way to invest and highly underrated.  You will spend more time filling out forms to open an account than managing it.

 

Want outperformance? Do the work.

 

"Anyone who finds it easy is stupid." - Munger

 

File another one under a lazy reply.  :P

 

Just FYI Greenblatt showed outperformance of equal weighted and value weighted funds http://www.valueweightedindex.com/

 

So, yeah, you can outperform via easy methods.

[KinAlberta]

This whole predict 20 years into the future thing is funny.  No one can do it, buy an index fund.

 

Let's think 20 years ago. Did anyone predict Apple would be the world's biggest company? No, they were on the verge of going bankrupt.

 

How about cell phones, mobile phones, smart phones?  Nope, cell phones were the exclusive domain of Wall Street types and corporate big whigs.

 

In 1995 if you would have told someone that in 20 years people would be carrying around super computers in their pockets that are always connected to the internet, you could buy ANYTHING online, make free calls to anywhere in the world, entire TV show catalogs could be streamed on demand anywhere, organic locally made food would be popular and sugary sodas were on the way out it would be unbelievable.  That along with the Red Sox finally winning a World Series.

 

Twenty years can see a lot of change.  How about this, maybe we get self driving cars and it completely disrupts the insurance landscape.  If you're not driving and a car gets in a crash who is liable? Or maybe 3d printing becomes cheap enough that giant distribution networks like Walmart, UPS, Fedex and Amazon become pointless.  Here's another, what about custom made pharmaceuticals.  No more advil, instead a special formula made exactly for your body and genes.

 

There are so many things that can change, and yet at the same time there is a lot that won't change.

 

I'd be reasonably confident to say in 20 years kids will still wear diapers, we'll still listen to music view entertainment.  We'll still be eating and sleeping and exercising when we get a chance.  There will be some sort of vehicle that will get people to and from places (regardless of who's driving).  Kids will still have toys, adults will have adult toys (electronics, golf clubs, etc).  We'll still be taking vacations places.  And on..

 

I'm also fairly confident Hanover Foods will still be trading for 30% of BV along with a few other perennial laggards in my portfolio....

 

Agree with almost everything you have.  A couple points though.  Buying an equity index leaves one exposed to Great Depression level prices and who knows what the future will bring where the child may have to draw down the funds - maybe at grossly undervalued prices.  Same applies to bond indexes. So matching an index can be quite bad for one's financial well being.

 

So a diversified portfolio would naturally provide balance for an unpredictable future.  Maybe Brown's old portfolio: 25% in each of treasuries, gold, equites and bonds really does make some sense (I'd consider gold as a proxy for an inflationary commodity bubble more than any kind of insurance against financial crisis).

 

 

[KinAlberta]

Kinalberta,  I am guessing you are Canadian based on your handle. 

 

I have an RESP set up for my kids.  I set it up just over 10 years ago.  We may start drawing from it in 7-8 years.  I trade very rarely in this account and have some holdings since day 1.  I dont use drips, and really only buy stock when there are sales, when the dividends have added enough to make a trade worthwhile and when I add cash.  As you probably know, US dividends get nicked 15% in this account, with no tax treaty in place. 

 

I hold the following in about equal amounts:

BMO -old

RY - old

SSW - old US

MTL - new for this account - old for me

RUS - new for this account - old for me

AIG - 2011

BAC - 2010/11

SLF - 2009

WFC - 2011

and a tiny amount of PWT

 

In my Wife's RSP I hold PWF - at least 10 years.  The Demarais family needs to maintain their standard of living. 

 

Basically, I let the dividend cash build up and wait until there is a sale on something and then invest and leave it.  I have always kept it very low risk, at the same time getting probably close to 15% returns, primarily due to strategic purchases.  Hope this helps. 

 

At some point I will amend my Will to instruct where to put the money, should I croak.  I dont think one cannot manage a portfolio.  Besides, If I am gone, the family will get all of my other holdings so they will be able to spend at will.

 

 

Yeah, we have an RESP, a non-reg acct and as of a couple months ago an RDSP. A decade for the RESP to grow and a lifetime for the other two.  We'll be adding a provision for a trust fund(s) in our wills as well - which will depend on how long we live and what's left in the end.  The RESP is invested in some decent mutual funds.  The no-reg. account has a small bit of BRK.b since it doesn't through off dividends and cause tax headaches. (I had KXI in it for while too.) The RDSP is still in cash, so we need to make plans for its allocation.  We need to consider that should mom and dad both be run over by a bus, such accounts can sit for a long, long time being ignored. It would be nice to have a self-balancing style of fund. Say cross pollination / self (cycle) balancing  where dividend received buys fixed income and interest received from the fixed income buys equity indexes.

 

My experience with trust company administered trust funds was that they aren't reliable. A grandfather set one up for each of the grandchildren in the 1950s/60s and mine was concentrated in bonds and took a major hit in the 1970s. The original investment across all the grandchildren was likely substantial but, if everyone else got what I got, it was capital or purchasing power destruction "big time" - enough for a short holiday.  It even had something like a 1937 or '38 perp 3.25% GoC bond that was near worthless when the fund was put in my control.  It was well worth the lesson in how times and perceptions can change from era to era - rates were in the mid-teens (17% or 19% on Canada Savings bonds) and I saw that a government could issue a perpetual bond yielding next to nothing in perpetuity.  (Basically a preferred share.)

 

 

So - back to my original position - I think balanced investing in various ETFs (or a couple balanced indexes - Equity and F.I) makes imminent sense but adding an equity bias to a portion might provide a better floor in uncertain times.  Also, think of what Buffett says that he buys companies he thinks he know will be doing well in 20 yrs time and advises everyone to act as though the market could be closed for 5 years. 

[Scudbucket]

I'd buy Markel.  I can't imagine insurance going away.  I also can't imagine bread disappearing or their other venture companies.

 

Maybe FICO.  I can't imagine credit scores disappearing.

 

Others: Colfax, Danaher, Platform Specialty Products, Howard Hughes, Rollins, Amerco, Precision Castparts/Transdigm, XPO Logistics, Distribution Now, and....Whole Foods (don't kill me, please).

[KinAlberta]

It's an interesting problem because I'm starting to see issue of a 20 year horizon really does "force and issue" in terms of adults portfolios as well as portfolios for dependent children. 

 

As value investors, we believe individual security mispricing occurs.  I think we all also believe market mispricing can also occur. Then there are all kinds of beliefs about how long misplacing can persist.  Nonetheless, as value investors everyone's portfolios should also contain largely undervalued or fairly valued securities and few overpriced securities. So, should the market suddenly collapse, the question is: Would you sell your portfolio and go to cash as the market declines? I would guess that instead most would average down, if you could. 

 

So if I look at the investors of the 1920s, 30s and 40s, a portfolio of underpriced (undervalued / below intrinsic valued) securities, say bought prior to 1929 may have become a portfolio of severely underpriced securities as the market fell and stayed down.  In hindsight I would guess that in terms of intrinsic values, the late 1920s reflects an overpriced market and the 1930s an underpriced market. Similarly, as Buffett pointed out, in the 1960s and 70s the DOW moved around but after 17 years essentially ended up flat if one ignores dividends. Here we had a couple instances of decades of mispricing.  So, Buffett did very well as an active value investor in the 1960s and being largely in cash by 1974 helped too. He also traded on market volatility. A pure buy and hold approach would have been a bet on dividends/dividend reinvestment and or corporate growth or the 'outing' of hidden value at the security level. 

 

So, its interesting that many posters would feel uncomfortable picking companies that they could ignore for 20 years. It's a vote agains buy and hold for specific securities bt a vote for buy and hold regarding the market(s). I too would feel uncomfortable leaving specific securities to a child, so it's a very strong case for me to focus more on indexing, and indexing with dividends in mind (despite this horrid low interest rate environment) in order to provide more of a floor, and/or reinvestible cash flow, in case tough times arrive.