Dear Santa Claus, my name is Virginia, and I am eight years old. Some of my friends say you are goin...
Dear Santa Claus, my name is Virginia, and I am eight years old. Some of my friends say you are going to give us mutual fund shares this year instead of toys. Papa says, "If you see it on Bloomberg News, it is so.'' Please tell me the truth, am I going to find a fund statement in my stocking in place of a stuffed animal or a video game?
Dear Virginia, your little friends have only part of the story. They have been affected by the euphoria of a long period of financial expansion. They have forgotten that there is more to life than the stock market and money management.
Yes, Virginia, a large number of fortunate parents and grandparents in these prosperous times are planning to open mutual fund accounts as gifts for their little loved ones. They are wise to think of this, and in 10 or 20 years you will most likely thank them.
Rest assured, though, that I don't intend to make this the only gift you find in your stocking. How dreary would be the world if we thought of nothing but money? It would be as dreary as if there were no Virginias.
Why in the world does anybody think of giving an adult gift like a mutual fund to one so young? Why can't they keep this adult business in the adult world? Well, Virginia, all minds, whether they be adults' or children's, are little. None are littler than the minds of those who make tax laws.
According to those laws, Virginia, your grandpa and grandma, and maybe your papa and mama too, have reason to give you a certain amount of money each year for the purpose of what they call estate planning. Also, as the money they have given you grows, it will probably be taxed less severely than if they kept it in their own names.
I cannot explain why this must be so. You can take apart a baby's rattle and see what makes the noise inside, but not even the strongest adult in the world can tear apart the tax system and make sense of it.
Any child can see how easily generosity is spoiled when you mix it up with cleverness and calculation.
I've noticed, Virginia, as you probably have too, that there is a strange trend in the world for children to be treated more and more like adults, and for adults to act more and more like children. There will certainly be much giving of adult playthings this holiday season. Just the other day, as I was passing your neighbourhood home-electronics store, I heard a man saying into his cell phone, "Big toys for big boys!''
In the world of children, I've seen how people act at baseball games and I've heard the talk on your school bus. I read in Time magazine a few weeks ago about girls reaching puberty before they're 10. At the age of eight, Virginia, you're too young to become an adult investor. But amid all this confusion, it is still an excellent thing for the adults in your life to begin now to prepare for your future.
One of the wonders of the mathematical world is the power of compounding. It happens too slowly at first to be seen by the human eye. But with time it does the work of many people. In a simple example, Virginia, if your parents give you $5,000 each year for the next 10 years and invest it at 8%, it will grow by the time you are 18 to more than $69,000 even after your taxes are paid.
This can help make possible a college education that will expose you to poetry, love, and faith the things that make tolerable this existence.
Or let us suppose your mama and papa put $10,000 aside now for you at 8%, apart from your college fund. Each year it will grow by more than it did the year before. In 10 years, when you are 18 years old, it will have increased to $21,589. In 20 years, when you are aged 28, $46,610. In 30 years, when you are 38, more than $100,000.
Compounding is not a human contrivance. It is a natural force, and once you harness it you need exert no further effort to keep it working on your behalf. So yes, Virginia, there is a Santa Claus.
Chet Currier via the New York Bloomberg newsroom
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