Portfolio for Kids

Kids, they're here to replace us so how can we make our downfall as fast and efficient as possible? I'm Matt Robison. This is the Mike Morton podcast, financial life planning. I'm your host for reasons that we explored in our last episode. I guess I'm Mike Morton's rent-a-host. Mike, welcoming yourself back here. It's great to be back with you again, as your unpaid host, you know what it occurred to me. I was listening to our last show, which was great. It was about whether you should you finance your car, it's really not about that, and you brought up this idea that I'm like your unpaid rental host. And darn it all dawned on me, I'm the world's worst host. This is terrible. I'm like, you're like shaking, sir. Tell me about my financial life. Put me in a HELOC. It's terrible. What am I doing?

It's only because you're unpaid Matt. That's why you're the world's worst it's a bad business model. You know what you should do? You should hire a financial planner to really help you out with your future finances.

That's, again, once again, this is the beauty of your whole business. Your whole show is it's about financial planning, but it's really not. Okay, we did do an episode a couple of weeks ago, as I teased a moment ago, about, hey, we've got kids, many of us in our lives want to save for college. How do we go about doing that? And you wanted to drill down a little bit further, all joking aside, in about how you set that up.

Yeah, that's right. I just wanted to continue that conversation, because hopefully people tuned in and thought, oh, this is good. I have a little bit of extra money. 20 bucks a month, 50 bucks a month, something to get started that I would like to springboard my kids, we talked all about how the opportunity makes a massive difference to young people, even just a few thousand dollars can make a big difference. Hopefully, if that resonated, your next natural question is going to be I have started some savings. What do I do with that? So I just thought we'd talk through a little bit on some high level thinking on how to think about it. And then some practical steps in different ways of implementing that saving investing so that again, it's automatic, it's set up, and you can just check in once a year.

Got it, and just remind me from that earlier episode we did. There are many ways that you could potentially use some savings you've set aside for your kids that was part of your point is that you just don't know. But there is like a Swiss Army knife of hey, if you've got some assets, it's going to be super duper useful to them in a variety of contexts. Are you most focused on college here? Or is it still like that broader...

Yeah, in fact, I'm not focused on college in this conversation at all. So I would put like retirement, college, some of those big goals, living expenses, some of these big things that you have to pay for or save in advance for to the side, this is really the idea that I would love to support my kids, man. It's so funny to say because I do this every day, I'm exhausted from supporting my kids in everyday activities. But if you want to get ahead a little bit, if you think I want to financially support them as much as I can down the road, maybe a little bit extra here, like a down payment for a house, maybe helping them 50% off their first car. So things that you think, yeah, I'm here to financially support them as much as I can maybe in 5-10-20 years from now, in different ways. This is a way, this is an opportunity to earmark some saving and investing towards that where you don't know exactly what it's gonna be. But you just have the interest in continuing to support your kids.

What was that incredible statistic you gave that if you put $1,000 away in like the stock market the moment they're born, by the time they retire, like how much is that? Is it like it's 3 million?

$3,000 compounds to a million or 50 million depending on the time period. So millions of dollars. It's amazing, compounding interest is a wonder of the world. It's a hell of a drug and we can't wrap our minds around. It's one of those things and this is why you know people come to financial planners, it's I can understand today, I can understand this year my budget and expenses, but we can't with inflation predict 5, 10, 20 years. Remember a pack of bubble gum it used to be like a couple of pennies. So it's just really hard to wrap your head around interest inflation and compounding.

Good gracious. I hate bubble gum. Is there anything worse? There's no single aspect of bubble gum that's good. I think honestly, it's like Satan's chew toy. Like why does this thing exist? You know, the major reason is that I'm against baseball, big league chew those two are tied together. They're both horrible, and they're the major reason for America's decline. You know, honestly, this whole conversation is reminding me of the movie, The Wedding Singer where Adam Sandler suddenly shouts, information that would have been useful to me yesterday, that would actually be for this podcast, because it's like what people pay you for is it's what you were saying a moment ago. It's that you're thinking to yourself, I already support my kids plenty. I want to support them less because I'm spoiling them and there were people that are like so don't tell me how to support them more. But I'm gonna get to put ourselves in a time machine until 20 years from now, where it's wow, this is information that would have been useful to me when I could have done something about it 20 years ago, and it would have really made a meaningful difference today. Here's another reference for you. The Hitchhiker's Guide to the Galaxy, there's this whole joke that you could go to the restaurant at the end of the universe, but it's insanely expensive, it's galactically expensive. So it's easy, all you do is you get back in your time machine, you go back to the big bag and burger bar, you put one penny in your savings account, and then through the magic of compound interest, you can afford your dinner at the end of the universe. That's basically what you're setting up here. Okay, we've belabored this enough. So you've already committed to, you're going to put some money away, what next?

So hopefully, you know, you're thinking this is a good idea, I'm going to put some money away, set up that automatic payment. And you could do once a year, a one time thing, if you get a bonus or something like that, or just setting up some monthly savings. So you sweep that out somewhere. And let's start at the high level, we want to get that money invested, right? So you're sweeping out some money, maybe it's $1,000 a year and so we don't want to just have it sit there in cash, we all know where cash is going a thousand dollars today is not worth what it was a few minutes ago. So you definitely want to have this investment because the beauty of this money is it's invested for the long term, you're going to be using this in 10, or 20, or 30 or 40 years, maybe it's for your kids and retirement or something like that, you know that you want to be using this money. So you have a long time horizon. And when we have a long time horizon, you can get paid for that on the risk of volatility, your money could go up or down with those investments, but get paid for taking on that risk in terms of potential reward down the road. So I would definitely get the money aggressively invested, I would put it 100% into the stock market to get that invested. And then again, since we don't have specific goals it's unlike retirement or college savings where we are targeting some specific numbers. We don't know what it's going to grow to let's just swing for the fences get paid for taking on that risk, and get it fully invested into the stock market.

And I was going to ask you but I think you just answered this question a little bit, I was going to ask you would this be like the ultimate use of a target date fund. But it sounds like that uncertainty around when you're going to use it means that you can't exactly say, oh, target date, 60 years from now, boom, we're done. You might want to be a little bit more nuanced.

I'm a big fan of target date funds for where they sit, which is mostly in those employer retirement accounts. And that's the best place for using them. And it's the best place for using it for people that want one stop check in once a year, boom, click it, I'm all set. But beyond that, I'm not the biggest fan because they do shift that risk profile over time. And it might not be right for you. And so in this instance, I would not use target date funds because they always carry at least 10% in bonds, at least all the ones that I reviewed recently. So even those ones that are 30 or 40 or 50 years in the future, they still have 10% in bonds, which is not too bad, you're getting 4 or 5% interest, hey, much better than like a year ago, but I would still get it 100% into the market.

I see. Is this a situation where you want to be in a kind of a tax-free or tax-deferred account?

So we talked about that a little bit. And my recommendation is just leave it in your taxable account, and open up a new brokerage account. So let's say let's talk some tactics. Alright, how can we actually go about doing this? So the easiest thing, yes, we do the tax-deferred accounts for our kids. We talked about that the Roth IRA, but then it's oh, slow down. It's five steps. And I've got three kids and yeah, it's not happening. Wherever you currently have brokerage at Schwab or Fidelity or TD or whatever, Vanguard, just open up a new account, go to the like open account, they love you opening accounts. So you can do it there. You can open up a new account, just make it a brokerage account, and then you can auto-sweep money from an existing account into that new one. Okay, and then you can invest from there. And I'm going to talk about some specific investments. That's one way of doing it. So now it's in that account and I'll tell you about investments to do there. The other way, there's a couple other places you can do this one that I like, oh you could use a robo-advisor too. I was thinking about this Matt, you could set up a new account at a robo-advisor again just put in your name, make it super simple don't deal with a minor kids and all that account stuff. Okay. And then you can just say set it to 100% super aggressive and you can put in 50 bucks a month into Betterment or robo-advisor Wealthfront or whatever robo-advisor you could use. Another one that I love Matt and I use is M1Finance, okay so this is M1finance it's another brokerage you can click open up an account what I love about it is you can set your own...

You have no connection to this, you get no compensation.

I am paid by no one except my clients. Okay, so I don't get commissions or trust me even when Matt and I are talking about advertising on this podcast. First of all, who's going to advertise on our podcast? Matt will, get Matt gets 100% of everything that we make.

This is going to end up in my podcast feed. I, there is advertising in this podcast. And Mike literally 15 minutes ago said to me, yeah, you can keep all the money from that. And I was like, we agree.

Yeah, you can keep the 15 cents I agree, no, no affiliations. Good point. Thanks, man, no affiliations, any of these things. And M1finance, what I love about it is it's your own robo-advisor. So you can put in 50 bucks a month, and you set up your own little portfolio, which I'm going to tell you about in a second. And then that 50 bucks gets automatically put into your portfolio. So rather than using like the Betterment portfolio, which is fine, you can make your own, which is a little simpler, because instead of sort of 15 different funds, I'll tell you can get into three or five and that's it. And so M1finance, I'm a big fan, it's automated, I check it like once a year and just monthly it just pulls from my account and gets it invested.

Does this have to be in separate accounts that like have your kids names attached to them in some way?

Yeah, so yeah, we talked about that, again, my recommendation, let's just start simple, Matt. So open up one account, just name it, you can name sometimes add it, like, you know nickname to the accounts just put 'For kids' or something like that. But it's your account, it's just owned by you, or a joint account with two partners. So yeah, keep it super simple. Down the road, we can get into the fancy like the kid has a job, they're making thousands of dollars, let's open up a Roth IRA for them. And then you can move money from this account into the Roth IRAs. So you've already saved so you can help them out. So it's another use for saving now.

Do you ever run into, sorry to get a little bit into the weeds, but let's say I do what you just outlined and put in several thousand dollars a year, and compound interest yada, yada and now in 20 years, my kid is going to try to I don't know she needs a down payment on a house, do we, if they're let's say there's $50,000 in there at that point would we run afoul of default rules through the IRS if it's too much, just or do you... What do we do if I need this to be something that my child owns.

Yeah. So listen, Matt. Great question. But you're bringing up problems we don't have. So I like to solve problems that we have today. That is not going to be an issue. So yes, good question to be aware of, it's not going to be an issue. Yes, there are gift taxing rules and there's other laws, okay. But let's stay focused on like, you know, solving problems we had today, I want to get this done, because I have an interest in supporting my kids in 20 years. So we have to start today. You know, we talked about when's the best time to start was 20 years ago, but today is the second best time. So get started today and deal with those problems down the road, which will not be issues. So I'm not too concerned about that.

I see, there are ways to work around it. Okay so all right. So now you have gone ahead and set this up. What do you need to do at that point? Because we've talked on this show about how often do you check your accounts, like how often do you like looking at your . And you mentioned a moment ago that like target date funds aren't necessarily appropriate here because of the uncertainty? Well, partly the bond mix and partly the uncertainty about when you're going to use this? How often do you check in on this along the way? Again, I know that is a future problem but is this the kind of thing that you truly can afford to fire and forget? Or was this the kind of thing that you need to be a little bit more attention.

Nope, fire and forget, man, I checked mine like once a year if that, and then just make an adjustment. Like I wasn't missing that maybe I can up to 75 bucks. So that's why you check once a year. Now let's get into what you're actually going to invest in.

So now you have the account. You've got it at your brokerage, where are you using M1finance Mike, what do I actually invest in first starting point, just invest in US stock market?

Okay, so Vanguard, I was gonna say index funds definitely low cost index funds. Definitely start there. Just invest in a single stock ticker, just pick a ticker that you like, and put all your money into that one. I love low cost index funds. So that's a great starting point, just total US stock market, you can put 100% of the money you're saving into that. And I do want to bore listeners with some numbers just for a minute. Okay. So we've got the total US stock market. The next place I would look, these are called asset classes. Okay. The total US stock market is all 3,000 plus companies here based in the US, there's large companies, middle sized companies, small companies, okay. It's mostly dominated by large companies because you put more of your money into the larger companies. And so that's how those index funds work. So if you buy the total US stock market you own a lot of big companies, which is great. They do really well think of like Apple and Microsoft and Walmart and Johnson and Johnson like these guys make a lot of money, people buy their products. So that's great. But we could diversify into smaller companies, okay. And so there's an area called small cap value. That's another asset class, smaller companies, and then they're splitting this value spectrum. And the reason I like adding that is because of historical returns. So that would be my second place that I would add some money into a small cap value fund. And then finally, you can go international, it's good to get a little international diversity and so I have specific recommendations I'm going to tell you about but before I do that, I'm going to bore the listeners with some historical returns. And here's why I recommend those different asset classes. Over the last one year period fluctuations, you have no idea what's going to happen like the US large companies, or total US stock market generally has like a 10% return each year over the last 100 years. That's pretty awesome. The best return was over 50% in one year, but the worst return was like minus 50%. So lots of ups and downs in a single year. Okay, but let's go out to 40 years. Okay, so a 40 year time horizon, what's the average return? Over 40 year periods the US stock market, it's about that 11%. All right, and the highest is 12%, and the lowest is 9%. So now you see over 40 years, it's really hovering right around that 10-11%, the small cap value 40 year time periods is 16%. Okay, so we've gone from 10 or 11%, to 15, or 16% per year, over 40 years time. Okay. And again, the best and worst, you know, fluctuates around that. So that's why I like adding when we had that long time horizon, we talked about taking on more risk and getting paid for taking on more risk. Because in one year it could go up or down significantly, but 40 years, the US stock market is about 10-11%, small cap value is around 15 or 16%. And that's why I like to add more of that into those young people's portfolios.

Makes sense. And I just want to note that we are going to be sponsored by Ambien because for our listeners who are not into numbers, that last segment of the show will actually do that exact same for you. But for those who are into numbers, which I hope most of you are, because you are listening to this show, like we didn't force you, man. That was really interesting. Because that difference you've talked about this a little bit before, I'm not going to make you do math on the fly, but like a five percentage point difference over 40 years is I mean, like just on the basis of $1,000 I don't know, I don't know what the compounding is on that. But I would gather it's in the millions.

It's super significant. And I was just trying to scroll around that to see if I have some numbers on that which I did somewhere.

Don't worry about people can take this as an article of faith, trust me like Big Bank Burger Bar to Restaurant at the End of the Universe, compound interest, it's a hell of a drug. Okay, so that makes sense. So just to read this back to you here, you're trying to make this as easy as possible. And it does actually sound pretty easy. This is the kind of thing that I could do in maybe about 10 minutes, because surely people have some kind of existing financial firm you through some like Fidelity, Vanguard, whatever, you go there, you set up an account, you set up an auto transfer, maybe monthly, you're probably already doing that frankly for other accounts, and you name the account, and you just select broad low cost index funds, you throw some small cap into the mix to take advantage of that long time horizon. I mean, that's it, man. Now, alright let's, I know again, this is straying a little bit from where you wanted to focus, mostly on people who have not taken this step. And you're trying to nudge them by saying, look at how easy this is just take the step. And so I get that. But I bet there are people out there who have done this, there are people out there who have some existing savings, or maybe they're managing an inheritance, maybe they're managed, you know, like, the grandparents left something behind. So you've got these assets and you're beginning to think to yourself, hmm, I'm actually looking around the corner not to a 40 year time horizon, but to like, a three year time horizon, a five year time horizon, I could see some potential uses of this coming. What do you do with that?

Yeah. So what you do then is you start de-risking. So when we have money that you want to spend soon, then you need to get that into safe bonds, or cash. Okay, and when I say the word cash, I mean, money market funds where you can get 4 or 5% for six months there's a version I have tools where you can still have this quote unquote, cash available, don't just take it out of the bank and put it under your mattress. Don't do that. So yeah, you need to start de-risking. If it's one to two years, I like cash. If it's seven years, I like short term bonds. And then beyond that anything beyond seven or eight years it's 100% into the stock market. And that's why you end up with a mix match of a portfolio like 80% stocks and 20% fixed income, because maybe some of that, some emergency savings for just in case you don't want it to lose value, maybe some of that you're gonna be spending, you're not sure. So you have a little bit there, and that drag that 20% that's in fixed income, doesn't really give much drag to your overall portfolio. So yeah, you start doing that. The other thing I remembered is for the grandparents, and the inheritance, think of your dollars in terms of that long term, what are those dollars actually going to be spent towards, and you're like, I like supporting my grandkids, and I'm sure some of this, I'm going to leave to my kids in the next 10 years or 20 years. So that can be aggressively invested. Even if you're in your 60s, 70s, 80s, you can be very heavily aggressively invested with some of your money, because of where it's going to end up.

Right. Right. And I know your whole goal here is this is like behavioral economics, Richard Thaler 101 is like make doing this the easiest possible thing, you're trying to nudge people by saying like, it's not complicated, people agreed, agreed, agreed. I think I want to ratify that point. And at the same time, for people who want to connect a couple of dots, we've talked on this show before about how to start to teach your kids about savings and financial planning. And I mentioned in our episode about this, you could kind of combine strategies here a little bit, I talked about the app green light, we're not being sponsored by green light. And the fact that, you know, you can integrate this into the green light system, where if you're giving your kids an allowance, you can give them more than like, oh you know, like you did your chores, this week, you get three bucks, or whatever it is, you can say, actually, you're getting ten bucks, but seven of it is going into savings. And they get a little bit involved in the process, they see where it's going, they're aware of the fact that this money is there, you talk a lot about the use, you understand, you know, here's compound interest, here's what we're doing. And it can become more of a hands on opportunity. But I assume that that's something you both agree with. But just focus on the main point here, which is actually the poor thing you need to do is da...

Yeah, no, I totally agree that having financial education, topics, discussions within the household as kids are growing up, now, we talked about don't make it a burden. Don't be like, ah, I haven't had a discussion this week. Like, I have to like, do something. But just as the opportunity comes up, don't shy away from it. Engage in what can be uncomfortable conversations right? There, kids will ask you all kinds of questions about how much money do you make? How much does this cost? How much are you worth all kinds of stuff? And of course, answer them fully. But don't shy away. They're uncomfortable, but they're important conversations to be having with your kids. So here, yeah, it's another opportunity to pull that in. But again, for this specific thing, what I found with clients, many of them want to support their kids. Okay, most parents I've run across, like to support their kids. And here's another opportunity to feel really great to get something going in the real world. It only counts if you do something and you can do something and feel really, really good about it in terms of another way that you're supporting your kids.

Well, I'm definitely not going to ask my kids what I'm worth because according to Mike Morton, the answer is zero.

According to your pay you're worth zero, Matt, that just happens to be what I got you for.

That happens to just be the going rate. That's all you're saying. All right. on that happy note. We're gonna have to leave it there, Mike Morton and I'm Matt Robison we'll see you next time.

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