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 any of 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 /zigman2/quotes/208698388/composite IJS -1.78% and iShares Russell 2000 Value /zigman2/quotes/202341160/composite IWN -1.48% . 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 /zigman2/quotes/208370743/composite SLYV -1.73% , 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 /zigman2/quotes/202040203/composite RZV -1.84% 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 40% smaller than other small-cap-value ETFs, and the price-to-book ratio is about 30% lower.
But there's a major drawback: extreme volatility. According to Morningstar, RZV was among the very worst small-cap-value performers in 2007, 2008 and 2011 (bad years for this asset class). On the other hand it was No. 1 in the very good years of 2009 and 2013.
If you want to invest in RZV, I suggest you consider splitting your investment between RZV and SLYV.
Q. If I make a $50 million gift to my grandson, don't you think his parents will be envious and 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 if you follow my suggestion, you are not giving $50 million to anybody. You are giving your grandson $3,000 along with the theoretical opportunity to eventually turn it into $50 million.
Of that $50 million (if it ever grows to that amount), $49,997,000 will not come from you. It will be the result of the investments that you (and eventually your grandson) make with that money.
Even if it all works out as you hope, it won't be like winning the lottery. By the time your gift grows to be worth even $5 million, your grandson is likely to be well into his 60s.
If you are concerned about his parents' reaction, you could give them an equal amount and let them do whatever they want with $3,000.
Q. I worry that if I set up my granddaughter with a $50 million plan, she may become lazy or complacent while expecting a large inheritance. How can I prevent this from happening?