Ed.'s note: This story was originally published on Dec. 7. At readers' request, we're republishing it here.
How important is this
Uniform Gift to Minors
stuff? Important enough that I am willing to break my vow against doing personal finance stories for
to talk about it. Important enough that I had to lecture a television executive and a partner at a law firm the other day about how embarrassed I was that they haven't set them up for their kids.
I don't like doing personal finance stuff, in part because the regular biz journalists, the guys who couldn't trade their way out of a ripped paper bag, do a pretty great job on this topic. So I want to leave it to them. But also because it is a bit thankless. Each year you have to write the same set of stories in the same time frame. In April we do tax stories. In September we do tuition stories. In December it's tax-loss and contribution/charity time. In January it's hot mutual funds. It got to the point for me where I could write that stuff in my sleep. It certainly wasn't interesting or compelling even if it were right.
But I break that stance for UGMA, in part because I know it's a terrific tax break but also because my wife takes it so seriously. She handles it; she makes sure we have made our contributions -- see Jamie Heller's excellent
article on the ins and outs of this break -- and she executes.
In fact, at the moment that I stood in front of the steps of the Federal Theatre for
Good Morning America
after the down-500-point wipeout back in October (and had to listen to
advocate panic in the United States at Dow 6900 but a plunge into Korea, no less, 30% ago) my wife was frantically trying to get through to our mutual fund company to make a contribution to our kids' accounts to take advantage of the decline. (Good and bad news for
here: It was
Fidelity Blue Chip
but it took forever to get through!!!)
That's why what I am about to say will appear a bit contrary to what I do but still is extremely important. I want to break ranks with the perceived wisdom of what to do with UGMA and instead recommend a staged contribution plan depending upon age rates of your children.
Normally I would never tell you to do something I wouldn't do. But I have a clause in my partnership agreement that forbids me or my family from owning individual stocks. I am a huge believer that a manager should spend all of his stock picking time picking stocks for his fund, not for his personal account. I also don't want to get in ethical trouble over who gets what trade. (You don't want family members competing for a good day trade, so you just have no personal accounts and away go dilemmas down the drain.)
So, I can't buy individual stocks for my UGMA contributions. But if I could, I would use the ages 1 to 5 to pick just one stock I loved and put it into my kids' accounts. That is your one and only chance to hit a home run without worrying about the consequences of wipeout, because if you pick a dog, you have plenty of years to make it up!!!
In previous years I would have picked stocks like
, and just purchased those. What magnificent leverage to just choose one stock you believe in. I know that flies in the face of the theories of diversification, but at the earliest stages you can forgo the risk aversion of diversification.
From the ages of 5 to 10 I would pick the most aggressive fund to augment that one stock.
From the ages of 11 to 15 I would then use more traditional vehicles like growth mutual funds and index funds. After that age I would consult with your children directly about what investment decision would be right. Again, let them have a shot at picking something. They have plenty of time left in life to make it back if they blow it. Now is the time to learn the pain of a bad investment, not in the 40s or 50s or later.
I am rarely jealous of the at-home investor. I have every tool in the world and all of the information that is legally available at my fingertips. But I can't find that next Microsoft for my kids' account. You can. What are you waiting for? The bell just rang. Go to it.
James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. At the time this story was originally published, his fund was long Microsoft, Cisco and Disney. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Mr. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he welcomes your feedback, emailed to