Lessons from a 12-Year Investment

In 2010 our granddaughter’s money was featured in this column. It was her Uniform Gifts to Minors Act (UGMA) investment account that my husband and I gave to her in the early 2000s.

When I wrote the earlier column, the money was languishing — virtually the same amount as it had been roughly a decade earlier. This, of course, was due to our 2003 and 2008 fiascos when many accounts lost 30% to 50%. Her account did, too, in part because it had no bonds to anchor it (often 20% bonds are recommended for a portfolio, even for young people). Her distribution was 60% in the Vanguard Total Stock Market Index (VTSMX) fund, a broad U.S. market mutual fund, and 40% in the Vanguard Total International Stock (VGTSX) fund. Each has low expenses and turnover compared to the industry.

What a difference three years makes. Between 2010 and today, our granddaughter’s portfolio looks considerably healthier. It is now up nearly 70% since inception. This is all due to time and the upswing in our market since 2009.

“A rising tide lifts all boats.”

From Yahoo.com: The original 40% international portion of the portfolio is VGTSX in blue. The original 60% is Vanguard Total Stock Market Index (VTSMX) is in green.

This story demonstrates two principals of investing. One is that in the short term, money can be lost. “The market giveth and the market taketh away.” But, in the long term, stock market investments accrue to a higher value. This is especially true if the portfolio has some stability (i.e. so-called safe stocks and/or bonds that fluctuate less) and thereby loses less during market downturns.

An important feature of our granddaughter’s portfolio is that in the intervening three years since 2010, it has changed in character due to its gains. The increase in its two components is not the same. The Vanguard Total Stock Market Index (VTSMX) is up about 66% while the Vanguard Total International Stock (VGTSX) is up slightly greater than 50%. This brings up another principal of investing, rebalancing a portfolio when it is not in line with the objectives. Some might say that rebalancing this portfolio now is appropriate as my original purchase was 60% total U.S. stock market and 40% international stock market.

Now, however, I want to anchor this portfolio with some safety even though our granddaughter is still young. A 10% drop in the market occurs every 13 years, a 15% dive every 50 years.

So, to rebalance I will sell some of the more appreciated VGTSX and place it in bonds or high-quality dividend-paying stocks/funds making her portfolio better prepared if another dip should occur. High dividend-paying stocks tend to fall less when there is a market drop because their rich yield is looked upon favorably by investors.

In summary, 12 years after investing in two diversified funds for our granddaughter, her portfolio has had its ups and downs, which is typical for the stock market. Now, it is in an up phase. But, as 2003 and 2008 demonstrated to us, this can change. Therefore, an anchor is prudent for every portfolio, even for those that are young.