The Answer Guy
(MONEY Magazine) – Q We want to give our niece and nephew financial gifts--not cash to spend now, but something that will grow until they're ready for college. Our funds are modest. Any suggestions? --Megan Leger, Wheaton, Ill.
A: You have two good alternatives. Just decide how many strings to attach to your present.
If you want this gift to pay for education, open a pair of 529 college savings plans for them in your name. The money is invested in mutual funds, gains aren't taxed, and withdrawals for school are tax-free (if Congress extends a break set to expire in 2010). Illinois' 529 plan also gives residents a state tax deduction on contributions of up to $20,000 a couple. Or open an account in Michigan, New York or Utah, which offer low-expense 529s.
Don't care whether the kids eventually spend the money on MIT or BMW? Then buy each a mutual fund in what's known as an UTMA or UGMA account. The money belongs to the child, but you or your choice of custodian oversees it until the child turns 18 or 21 (the age varies by state). Then your niece or nephew can claim control. Check out American Funds Amcap (AMCPX), a MONEY 50 large-cap growth fund that requires only a $250 minimum investment. The sales load is no worse than the sales tax on an iPod.
Q I have money in the Vanguard Target Retirement 2045 fund. My husband was going to roll over an $8,000 401(k) into the same fund. But should we put all our eggs in one basket? --Tami Jardinella, Nutley, N.J.
A: Don't worry. By putting money into that one fund, you are, in fact, spreading your bets.
The Vanguard 2045 fund (VTIVX) you're considering is known as a life-cycle fund, and it's designed to provide one-stop diversification based on your age. Diversification isn't about the number of funds you own--it's about owning classes of assets that don't rise or fall in lockstep. "You can own 20 funds, but if they're all large-cap growth funds, you're not diversified," says Larry Swedroe, author of The Only Guide to a Winning Investment Strategy You'll Ever Need.
The Vanguard fund you own is 70% invested in an index fund that holds 3,700-plus U.S. stocks of all sizes. Your fund also has nearly 18% of its holdings in international stocks and 12% in bonds. That's a sensible allocation if you're not going to retire for another 40 years.