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Lessons Learned from Investing Under the UGMA


Nearly two decades ago, Shirley Mueller and her husband invested in their granddaughter's future under the Uniform Gift to Minors Act (UGMA). The physician turned financial advisor assesses the present and future outlook of the contribution.

When my now 18-year-old granddaughter was one year old, my husband and I gave her a monetary gift under the Uniform Gifts to Minors Act (UGMA). This way, the money could grow tax-free up to a threshold and then go toward our granddaughter’s education.

Thanks to her small dividends and income, our granddaughter has never had to pay taxes on this gift. The level of earned income at which she would have to pay taxes in 1999 was $1,900.00 up to age 24.

Economic improvement uplifts all boats

We invested the money in Vanguard funds with low expense and turnover, including the Vanguard Total Stock Market Index (VTSMX), the Vanguard Total International Stock (VGTSX) and the Vanguard Short Term Bond Index (VBISX). This investment, along with others, are doing fabulously for the time being. But in once 2003 and once 2009, our gift for our grandchild lost close to half its value. Things are looking up right now, but we also have a continual rise in the indexes that we just can’t shake.

Rise and fall

As the old saying goes, what goes up must eventually come down. The market is due for this same phenomenon, according to American Superior Company. American Superior classifies a market correction as a drop of 10 percent or more, and it occurs twice every three years. A bear market, according to Superior, is a drop of 20 percent or more, which occurs every five years.

Food for thought

The ups and downs of this UGMA demonstrate several principals of investing.

  • Short term: Money can be lost. Retirees without a cushion other than invested monies, look out!
  • Long term: Stock market assets accrue to a higher value. Younger people can rest easy knowing they have time ahead of them.

An important feature of our granddaughter’s portfolio, or any similar investment, is that in the intervening seven years since 2010, it has changed in character.

The Vanguard Total Stock Market Index (VTSMX) has increased considerably more than the Vanguard Total International Stock (VGTSX), while the Short -Term Bond (VBISX) remained stable.

This brings up another principle of investing: rebalancing a portfolio when it is not in line with the objectives. In the case of our granddaughter’s UGMA, VGTSX AND VBISX should be brought back to their original percentages.

This column incorporates segments from two earlier columns I wrote about our granddaughter’s UGMA in 2010 and 2013.

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