OWN THE COMPANY THAT MAKES AND SELLS THE TOYS – PART TWO OF THREE: HOLIDAY GIFTS FOR THE KIDS; BUY THE TOY COMPANY, NOT THE TOYS – GUEST AUTHOR: George Wong
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
OWN THE COMPANY THAT MAKES AND SELLS THE TOYS – PART TWO OF THREE: HOLIDAY GIFTS FOR THE KIDS; BUY THE TOY COMPANY, NOT THE TOYS – GUEST AUTHOR: George Wong
2005 HOLIDAYS – STARTING THE KIDS’ INVESTMENT PORTFOLIO
So here we were at Christmas 2005. The stock market was into the next bull (up) market that started in 2003. From 2000 to 2003, there was a bear (down) market because of the “dot com bust.” The Standard & Poor’s 500 Index (S & P Index) was at approximately 1270.
My wife and I funded each of five accounts with $200 each. We got the kids’ grandmother and one uncle to up the total cash gift to $550 each year through 2020. The $550 turned out to be a convenient number as it was an easy proxy and repeatable theme of investing $10 a week.
To custodian the holdings, we opened accounts for each child at TD Ameritrade. Because they were minors and not allowed to have financial accounts on their own, we opened an UGMA (Uniform Gift to Minors Act) account for each child. (TIP: In situations like this, it is sometimes advantageous to have multiple accounts at one brokerage house so that one has pricing leverage if the brokerage firm imposes maintenance or transactional fees on accounts.)
On Christmas Day 2005, and before our Christmas luncheon, we gathered the five nephews and nieces, then ages 8 to 15, to explain their gifts. We told them that it was about owing companies, not toys. We asked them to consider companies they are familiar with – like Nike, Mattel, Coca Cola, Bank of America, etc. and get back to us in January so that we can purchase the stocks and seed their portfolios. We talked about dividends and how dividends can be reinvested to buy more stock. We discussed the magic of compounding and how portfolios can grow tremendously via compounding. Two of the older kids understood. The others looked dazed and disappointed that we did not give them toys.
My oldest son, their cousin, sat with me at the table to answer questions for two reasons. (1) He was a buy-side equity analyst at the top investment banking firm, providing recommendations to institutional investors. (2) It was vital for them to see a cousin and peer who was financially literate, was already advising investors, and was able to manage his own modest wealth. We discussed the companies the kids were familiar with. All came back with their buy suggestions in January. (Tip: In those days, all equity trades were $9.95 each, so we had to be creative to minimize the commissions when buying odd (small) lots. One trick we used was for me to purchase small blocks of a stock in my own account; then, I sprinkle the stocks into the kids’ accounts. For instance, if four kids each wanted stock four shares of stock XYZ at $25, I might buy 16 shares of XYZ for $400, eat the trade $9.95 fee, and use an internal transfer at TD Ameritrade to the deposit four shares of XYZ into each account. This beat having each child buy four shares inside their own accounts and paying a separate $9.95 {an effective 9.95%} fee separately. Consider this trick if brokerage houses return to transaction fees.)
WHAT THE KIDS LEARNED – 2005 THROUGH 2020
We had statements sent to the kids directly, with my receiving an “interested party” copy to monitor their portfolios. The goal was to have their parents open the statements and share how the portfolios were performing. This did not work, as the parents lacked the knowledge to provide meaningful guidance and discussion. So, each Christmas, I had to prepare a simple statement manually. It showed the January 1 and December 31 stock positions for each portfolio to show how each portfolio changed.
As the years went by, the kids seemed to have lost interest in selecting their own stocks at Christmas time. We started to buy mutual funds for them instead of individual stocks. We suggested that they remember an excellent default stock investment via shares in the VTI (Total Market) or SPY (S&P 500) exchange-traded funds. One year, we talked about the three risks when investing in individual stocks: market risk, sector risk, and individual company risk. We showed how the VTI and SPY shares get rid of two of the risks, with only market risk remaining. In the years the kids were too lazy to pick their own stocks, we invested the holiday cash gift in the VTI.
One year discussed owning fixed-income funds to reduce portfolio value volatility. We bought them fixed-income funds in only two years, as they were very young. The long-term horizon was likely to increase their wealth dramatically, with portfolios weighted in favor of equity over fixed-income issues. One year, we discussed spending money on buying “expenses” versus buying assets that produce income. In another year, we talked about the importance of having dividend-paying stocks in the portfolio. In the later years, as the children started working, we explained that they should use these portfolios over a period of years to fund their Individual Retirement Accounts (IRA) and enjoy the compounding of assets tax-free. Lastly, the kids learned about owning a company.
THREE KEY DATES DURING THE 16-YEAR JOURNEY
As one can imagine, a 16-year investment period can cover many events that impact valuations, introduce risk, and present opportunities. Let’s look at some dates of interest in retrospect.
December 24, 2005: S & P Index at about 1270. The nieces and nephews receive the first of 16 portfolio gifts.
December 24, 2008: S & P Index at about 896, about -30% since the five portfolios were started. This is in the middle of the great recession that ran from December 2007 through June 2009. At that point, $1,325 had been gifted cumulatively to each child. On that date, the best-performing portfolio was down 25%. The remaining four portfolios were clustered at -34% to -37%. For the involved parents, the silence was deadly, and I could hear their muttering,” Toys would have been better.”
December 25, 2020: S & P Index at about 3700, ~ +191% since the five portfolios were started. This was the day after the final gift of $550 was given to each child. Inclusive of the last gift, each child was given a cumulative $8,475 to invest. Here is how their portfolios turned out.
Nephew 1 $104,000 see explanation
Nephew 2 $ 15,894 gain of 87%
Niece 1 $ 19,807 gain of 133%
Nephew 3 $ 25,253 gain of 197%
Niece 2 $ 17,358 gain of 104%
S & P Index gain of 191%
After Nephew 1 started work as an engineer, we released the UTMA account to manage himself. He invested an unknown amount of his funds, TRADED frequently, including stock options. His $104,000 portfolio balance represents the $8,475 he received as Christmas gifts, additional monies he invested, and net gains earned over 16 years.
The youngest child is now 24, and the oldest is 31. Earlier this year, we converted the UGMA account to individual accounts in the name of each child.
BIO George Wong – Senior Advisor at Shark Wheel LLC and Senior Advisor at Intex Industries (Xiamen) Co., Ltd
George Wong is semi-retired and continues to work as senior advisor to two companies, owner-manager of the family’s commercial, and multifamily real estate, board member in two non-profit educational organizations, and manager of several stock and bond portfolios for extended family. His professional career included stints at Price WaterhouseCoopers as a management consultant, a commercial real estate firm as developer/portfolio manager, a commercial printing company as COO, a legal document management systems start-up as V.P. Operations, RR Donnelley Financial Print as Plant Manager, Coldwell Banker Residential Brokerage as Finance Manager, Intex Plastics Division as Senior Advisor, and Shark Wheel Inc as co-founder-CFO-Senior Advisor. Out of college, he was a middle school teacher at Inglewood Unified Schools, and he worked for two federally-funded organizations advising minority-owned businesses. His previous community involvement included the turnaround of a Pasadena unit of the National Urban Coalition, board membership in the Pasadena chapter of the Urban League, and advisor to the California Senate Select Committee on Small Business Enterprises. George was raised in South Central Los Angeles, where his entire education from elementary school through graduate school was obtained within a three-mile stretch on one street. He remains active in south Los Angeles as a board member at a state-funded child-care center for low-income parents that he helped found 40+ years ago and working with the tenants at the family’s commercial buildings to keep the tenants (all people of color and immigrants) in business. He is married 40+ years and has two highly successful sons in business, following degrees at two ivy-league schools and the University of Michigan. George has degrees in Aerospace Engineering, Education, and the MBA, all from the University of Southern California. George still competes in the 50 Meter and 100 Meter Dashes. He is a very proud to say that his understanding of the business world and finance comes from reading the Wall Street Journal every day since he was 15.
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference in helping others improve their financial literacy and achieve financial freedom. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
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