A friend's college age daughter is coming into $25,000 in a couple of months and my friend asked me to give him a very simple allocation that would give the money a chance to grow and help get his daughter interested in investing, writes Roger Nusbaum.
I wanted to share what I came up with, the reasoning behind the five picks and maybe a substitute or two.
I suggested $8000 go into iShares Select Dividend (DVY). I have had some of this for a while and a couple of clients have it too. It gives large cap exposure, solid yield and low volatility.
Next was $6000 into iShares S&P SmallCap 600 Growth (IJT). Obviously it is small cap and I think growth will outperform value as the yield curve flattens. Neither I or any other clients own this.
$5000 is earmarked for Western Asset/Claymore TIP Fund (WIA). This is a neat CEF that is 80% TIPs and 20% corporate bonds. It yields 5.75% and trades at a small discount. Neither I nor clients own this one.
$3000 into iShares Emerging Markets ETF (EEM) . A lot of the countries in the fund have interesting things going on financially and socially (speaking to her being interested). It captures the effect well. There are several other emerging market ETFs that could substitute for EEM. We have no holding in EEM.
The last $3000 went into a tech stock that I and clients own that doesn't need to be named. The point is its a stock that she probably knows which again might create interest on her part and give a chance for some growth. There are probably 25 different tech stocks that could work in this slot.
This account probably won't double in year and probably won't cut in half either. I think it covers most of the bases. She can check on it with out having to worry a whole lot if the market trades weakly.
We could easily make substitutes for each of the holdings. I might substitute Rydex Equal Weight S+P 500 (RSP) for DVY. They have very similar returns but RSP does not have much of a dividend. There are numerous small cap ETFs that could replace IJT. There are plenty of innovative income funds that could replace WIA. And I already mentioned the interchangeability of the last two holdings.
One thing that might be missing is a more direct exposure to gold or other natural resources. I have written many times about why and how I have gold exposure. If gold does something really dramatic most of the names should have a fairly similar move (not an endorsement for a research shortcut though).
My friend will also get a call from me if/when I get defensive in client accounts so he can make changes for his daughter. I give a lot of help like this to friends of friends that don't necessarily have the assets to hire me but have $20,000, $40,000, $60,000 and need a little help. It is a lot of fun and people seem genuinely grateful. Good all the way around.
I recently instituted a two week trading policy pertaining to things I mention on this blog. Since this won't be a client I'm not sure if it is relevant when these trades get placed but my friend said she won't get this money for a couple of months.