Investing just a few grand for a child at or around their time of birth could amount to a profound sum by the time they’re ready to go off to college. Undoubtedly, it’s easy to overlook the power that comes with compounding in the first 20 years of life.
Not only can one take advantage of two valuable decades to build wealth, but one can afford to take on more risks with aggressive growth stocks. Indeed, if you’ve got an investment horizon of many, many decades, you can afford to take risks.
It also helps that a child poised to inherit the investment won’t have any idea of the economic news that’s startling most other retail investors to sell at a potential loss while they’re feeling fearful. Indeed, I’d encourage all new parents, if they’re able, to put aside a four-figure sum to keep invested. Such a small amount could grow to be sizable enough to pay off tuition in 20 years or perhaps even more.
From $3,000 to $500,000. That’s the power of compounding over many decades in a nutshell.
In this piece, we’ll have a glance at the case of a Reddit user whose grandfather invested $3,000 in a stock when they were a child. The individual is “very old now,” citing Social Security age (I’ll take they’re in their mid-60s). And the sum has grown to a six-figure fortune close to $500,000 — that’s sizeable enough to help finance their comfortable retirement.
Indeed, I just love hearing stories about this. While we can’t go back in time and tell our parents to do the same thing, we can repeat the favor for our own children or grandchildren. Indeed, it’s something that will surely be appreciated, whether one is surprised at college age or close to retirement age as is the case with the Reddit user.
For many, compounding, especially tax-free compounding for those taking advantage of tax-advantaged accounts like Roth IRAs or 401(k) plans, over the span of multile decades or closer to half a century for the case of our fortunate Social Security-aged Reddit user, is both profound and very difficult to fathom.
By letting a stock grow over the many decades (even without adding to a position), it can be mind-blowing just how much it can grow. The longer you allow it to grow, the more the investment stands to gain.
Could it finally be time to hit the sell button?
Though I’d contact a tax-planning pro before hitting the sell button on a multi-decade-old position, given the potential tax burden the capital gains would entail, I do think it can make sense to offload part of the position as one winds down for retirement.
Of course, if one has a sizeable enough nest egg, I’m definitely not against letting the position continue to run. Who knows?
Perhaps they could transfer it to their own grandchild. Additionally, selling the stock and diversifying into a Vanguard S&P 500 ETF (NYSEARCA:VOO | VOO Price Prediction) could be a smart way to go in an effort to eliminate the single-stock risk — it’s a shrewd move, provided one seeks greater diversification and doesn’t mind realizing the potential capital gains tax hit.
If anyone’s fortunate enough to be in a similar situation, I’d lean towards selling the position after one’s fully retired and putting the proceeds into an S&P 500 index fund for growth-seeking retirees or a diversifed portfolio of passive income-producing assets (think high-yield or REIT ETFs to bolster one’s retirement cash flows).
As always, the correct answer will differ for everyone depending on their needs, so hiring a trusted and high-rated financial advisor is key to taking the path of least regret.
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