Expert: Paul Henneman - 12/19/2004

Question
Paul,
Thanks for your time.  I recently became an uncle and was thinking about starting an account with about $1000 for a long term investment in his name.  What is my, or rather his best option to get the best return over several years.  I'd like to be able to limit access until a certain age if possible.  Maybe for college.  Maybe for when he turns 35.  I don't know.  Do you have any idea of what I should do?

Thanks.

Answer
Donovan,
  Thank you for your question! Such an investment for a newborn is fantastic. Investments compound over time, so the longer the funds have to work and gain interest, the greater the final result. Typically you can expect to double the initial investment every 5 years with a very conservative strategy.   If you do that math, it is alot of money by the time he turns 35!
  For a fairly conservative strategy, I would suggest buying a mutual fund with the $1,000. Perhaps the most appropriate to buy would be an index fund that mirror the overall market, or at least mirrors one of the major indexes. The S&P500 would be the most appropriate index as it is the most stable and diverse.  This is a great option because it requires not additional attention, and will just 'work' for your nephew for a long time to come.
  It is important to realize that the returns in a mutual fund will vary. Some years will be good, some bad. The fund may even lose money some years. But as you are in this for the long haul, monthly or even yearly fluctuations should not worry you. There will be good years as well.
  I would not recommend anything more aggressive such as holding individual stocks. This could do well, or it could really bite back with negative returns. Stocks take alot of research and attention to buy and sell, and with $1,000 you would not be able to buy into more than a couple of stocks so would not be very diversified. Stick with a mutual fund.
 If you want to be even more conservative, a money market account is very stable. A good money market will earn just under 2% each and every year, and will never lose money. However, this is barely enough to keep up with inflation. So the funds will slowly grow, but as prices rise slowly over time, even after decades the funds will be larger but would not be 'worth' much more than the initial investment.
  A mutual fund is clearly the best option for what you are looking to do. For some further research, www.morningstar.com is the best known and respected website for mutual fund research and information. finance.yahoo.com is also good.  The book "Investing for Dummies" has a great section on mutual funds, and does cover most other major forms of investment if you are interested in covering all bases to be sure of what you would like to do. It is available at most major bookstores and www.amazon.com
  The main thing is that the longer the funds stay in, the more it grows. I would strongly suggest holding the money in the fund at least until your nephew reaches college, and if possible longer. This $1,000 investment could easily provide a major downpayment on a house when your nephew is in his late twenties or early thirties. Think of the present that is! The secret is patience, time is on you and your nephew's side.
I hope this helps! Please do not hesitate to follow with me if I can be of any further service!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com