Grandchildren and 401(k) Contributions


In December 2007, I started investment accounts for our grandchildren.  On the first business day of each month, they get dollar-cost-averaging contributions, no matter what is happening in the markets.  The accounts will eventually be a financial resource in their lives.  But, there is something more important I want them to realize from this exercise – experience.  On that Christmas morning the oldest was 5.  I told them the first contribution could buy a bicycle and related gear.  It was exciting.  Then, we talked about eventually having enough to buy a car.  His mother was more in favor of college, but that idea didn’t get much attention.  The younger two sat patiently.  I will need to catch up with them later.
I watched these account returns with anticipation of sharing the lesson from this real life dollar-cost-averaging commitment.  A purpose of this newsletter is to give the stress that seemed strongest in November 2008 and February 2009 perspective.  This is more important than the money in these grandchildren’s accounts.  There is more to money than money.®  

Through 2008, I knew Christmas 2008 would not show the results we think we need from early investment experience.  Nevertheless, those purchases should be an opportunity for learning – at least for the grandchild who was now 6.  The amount contributed during twelve months sparked elation.  Then there was a deflated look over the difference between the contributions and the recent value – about 3.5 bicycles.  That shift in emotion, and the many that can follow from watching these accounts, should be the most important part of this exercise.  I was reassuring.  These shifts are part of life, and particularly investing.

The younger two were still not so interested.  This is not discouraging.  There is plenty of time for the bulls and bears to teach.  The bulls and bears are never far away, shifting their stance with every new piece of information.

I am not saying the bear market is dead.  I have been around too long to believe I can make that prediction with any certainty.  I do not want my grandchildren to believe I think I can.  I want them, and the people around me, to understand that keeping a “steady hand” appears to be important – again.

So, how have they done with their dollar-cost-averaging into one well known and actively managed mutual fund?

For twelve months, through May 31, 2009, their return was -29.97%.  In dollars this loss is about a bicycle and a half.  It is far better than 3.5 bicycles for their twelve month report last Christmas.  The fund itself, without dollar-cost-averaging, had a return of -31.42% for twelve months through May.  Dollar-cost-averaging alone explains this 1.45 percentage point improvement.  Over a lifetime of work and contributing to a 401(k), this difference can be huge.  My goal is to teach these kids this lesson by the time they are ready to build their own wealth.  There is more to money than money

Too many people stopped their 401(k) contributions – or worse, moved to cash with a belief they could come back when things improved.  All of the grandchildren’s purchases from November 3, 2008 through May 1, 2009 had gained between 6% and 35% on May 31.  Anyone who bought this mutual fund on any of these dates would have gained at least 6% by the end of May.  The March 2 purchase gained 35%.  These were the months when people felt the strongest urges to stop 401(k) contributions and sell the portfolios.  The cases we saw were very painful for us, particularly now.  So far, it looks like people sold when they should have bought – again.  A while from now, we will know if this is still true this time around.

Who had courage to move into the market during those months?  Except for automatic dollar-cost-averaging, we do not know many.  When the Founder of Davis Investment Discipline, Shelby Cullom Davis, said “You make most of your money in a bear market; you just don’t realize it at the time” his lesson came from the experience that teaches us to be steady investors.  Maybe my grandchildren will learn something from the experiences of seeing their good and bad results as regularly as I can get their attention.  For more on Resource Advisory Services Investment Philosophy click here.

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