There are going to be some kids, somewhere, born in 2042 that are going to have a great head start in life by getting a free education because of the very intelligent decisions of a man and his wife in 2014.
A reader of this site who told me has been visiting the site since I started it last May told me that he had finally gotten around to putting aside a decent-sized cash egg that he intends to use as an education fund for his grandchildren (at present, he has three daughters under the age of ten).
Because of the low account value for the account right now, he is starting off with a $50,000 in a S&P 500 Index because it was the most straightforward way he could get diversification and low fees all in one (self-directed investments that, say, focused on holding specific blocks of Exxon and Coca-Cola stock for a long time would eat up significantly more in fees, making it imprudent to pursue individual stock selection when additional costs are considered).
My note: Generally, self-directed investments within a trust start becoming economically feasible at the $500,000 mark, although I’m currently studying smaller do-it-yourself outfits that charge much lower to do so. The concern there is that a lot of people that think about super long-term compounding tend to prefer well-established financial institutions with deep pockets that have stood the test of time, and would rather pay the large fees for that, than deal with the uncertainty that comes with the startup firms in the trust world.
But when someone is doing something this awesome, we shouldn’t get bogged down in the details: this guy is going to let $50,000 compound entirely undisturbed for at least thirty years (my assumption there is this: if his eldest daughter is near 10, and if she had a kid at 22, you’d get those 12 years plus another 18 before the grandkid would attend college. There’s a few scenarios where my assumption there could be too generous, but a lot more where my estimates could prove too conservative. That comes with the territory of planning decades into the future, and you get comfortable with the uncertainty once you recognize you’re doing the best you can with the information you have available at the time).
What happens when you let a $50,000 investment compound continuously for thirty years? If the past thirty years of VFINX, the Vanguard S&P 500 Index Fund, are any indication, you could be looking at something in the ballpark of this: From June 1984-June 2014, the Vanguard S&P 500 Index Fund compounded at 10.72% annually, and would turn a $50,000 investment into $1,064,764. That figure includes dividends paid out, but not reinvested.
Absent a lot of grandchildren or extraordinarily expensive school selection, that’s almost self-propelling territory. Even though the S&P 500 only yields a puny 1.83%, that’s $19,400 being organically generated from such a portfolio. And in average years, you could probably take out nearly $100,000 without the account value being significantly harmed. The only way a trust like this gets depleted quickly is if it has to write a few $50,000 tuition checks in a year like 2009, and that’s okay, too, the money exists to be spent for this purpose.
Sure, there are things that could go wrong. Sure, the stock market have a much worse future than its past. Heck, the guy who wrote me may not even have grandchildren. You can find a downside to anything, but intelligent behavior is not about finding certainty and then acting, but rather, taking actions based on high probabilities (or relying on your own grit and force of personality to shake things up when you don’t like what the probabilities reveal). Here, we have the great formula of deliberate action (setting aside $50,000 today ) + high probability (using the S&P 500 Index Fund as the long-term wealth creation vehicle) = good expected result (grandchildren that will be able to start out the early years of their adulthood without the debt burdens that are actively limiting the lifetime potential of many young Americans today).
The Chinese had a proverb about this. The average man thinks nothing of tomorrow. A good man plants seeds today that he may lay underneath tomorrow. And the truly great man plants the seeds for a tree whose shade he will never enjoy. Taking concrete action to benefit others—who don’t even exist yet!—decades from now starts bringing you significantly close to “great man” or “great woman” territory.
Originally posted 2014-07-07 08:00:36.