The following questions were generated in response to my recent article describing how to turn $3,000 (or alternatively $365 a year) into $50 million.
Q. I'm excited to read your plan for turning $365 a year into $50 million for a newborn child. I've got a new granddaughter, and all I can put away is $100 a year. Where can I invest that amount in a small-cap-value fund?
A. For starters, I assume you know you won't get the same result from $100 a year as from $365 a year. But the results over a lifetime can still be impressive.
You can invest any amount, no matter how small, in more than 100 commission-free ETFs offered by TD Ameritrade.
These include two good small-cap-value candidates: iShares S&P Small-Cap 600 Value and iShares Russell 2000 Value. I would choose IWN because of its lower price-to-book ratio.
For investors with $1,000 or more to start, my choice would be the SPDR S&P 600 Small-Cap Value ETF, available commission-free at Schwab. I like it for its relatively low expenses, its low average company size, and its low price-to-book ratio.
Q. What do you think of the Guggenheim S&P SmallCap 600 Pure Value (RZV) ETF? It holds smaller companies at a substantially lower price-to-book ratio. Is this worth considering despite its higher expenses?
A. In a word, yes.
The Guggenheim ETF is available commission-free at Schwab, though it's not on their Select List. I think this ETF will be a long-term winner. Its average holding is about 40% smaller than other small-cap-value ETFs, and its price-to-book ratio is roughly 30% lower.
But there is a major drawback: extreme volatility. According to Morningstar, RZV was among the very worst small-cap-value performers in 2007, 2008, and 2011 — all bad years for this asset class. On the other hand, it was No. 1 in the strong years of 2009 and 2013.
If you want to invest in RZV, I suggest considering a split between RZV and SLYV.
Q. If I make a $50 million gift to my grandson, won't his parents be envious or resentful unless I do the same thing for them?
A. If you were actually giving $50 million to your grandson and nothing to his parents, they would have reasonable cause to be upset.
But that’s not what’s happening here. You are giving your grandson $3,000 and the theoretical opportunity to turn it into $50 million.
If that amount ever materializes, $49,997,000 will not come from you. It will come from decades of disciplined investing.
Even in the best-case scenario, this will not resemble winning the lottery. By the time the account reaches even $5 million, your grandson is likely to be well into his 60s.
If you are concerned about family dynamics, you could give the parents an equal amount and let them decide how to use it.
Q. I worry that setting up this plan might make my granddaughter lazy or complacent. How can I prevent that?
A. Ultimately, you cannot control the attitudes or behavior of your heirs.
As noted above, your granddaughter is unlikely to have access to significant wealth for many decades. Even with a 12% return, her IRA would be worth about $668,000 (in 2015 dollars) at age 65.
Perhaps the most important message is the intention behind your gift. The best way to convey that is through conversation when she is old enough to understand.
Q. What about adding international and emerging-market small-cap value?
A. Greater diversification may improve returns, but there is no guarantee.
Over the past 15 years, U.S. and international small-cap value both compounded at 11.1%, while emerging markets small-cap value compounded at 12.1%. Over the same period, the S&P 500 compounded at about 5%.
Q. My children are 4 and 6. How much would I need to invest now to reach $50 million?
A. Assuming the money compounds at 12% until age 65, followed by 5% annual withdrawals until age 95, the answers can be found in a table available on my website.
In your case, you would need to invest $4,721 now for your 4-year-old and $5,921 now for your 6-year-old.
Q. How can I keep my child from cashing out the account?
A. This is more a relationship issue than an investment issue.
While you are alive, you could choose not to disclose the account. However, that would eliminate the valuable teaching opportunities this plan provides.
After your death, the only guaranteed solution would be a Crummey trust with strict rules. This would be expensive and would require a variable annuity rather than a tax-efficient Roth IRA.
Q. Will this reduce my grandson’s eligibility for college financial aid?
A. It could.
Assets owned by the student are typically considered available for education expenses. Assets owned by parents are treated similarly, though often at a lower rate.
If the account remains in your name, it may be invisible to financial aid calculations. That can be a strong argument for delaying the transfer.
Q. Where can I learn more?
A. I’ve recorded a podcast titled How to turn $3,000 into $50 million , which walks through the full strategy for parents and grandparents.
Richard Buck contributed to this article.