For several holiday seasons, adoring parents and grandparents have given youngsters well-intentioned investment gifts that turned out to be coal in their stockings.
Returns of various college investment vehicles that seemed magical in the 1990s came crashing to earth.
Here are the three-year annualized declines of a few funds that make a point to target young people in their portfolio selections and informational materials: USAA First Start Growth Fund (UFSGX), down 19 percent; Columbia Young Investor Fund (SRYIX), down 14 percent; Monetta Fund (MONTX), down 10 percent.
Happily, each of those three funds is up more than 20 percent in the past 12 months as the recent stock market rally continues. But their previous results offered little in the way of a learning experience and certainly didn't enhance college nest eggs.
This uneven history underscores the fact that putting money in a child's investment vehicle, whether in the parents' name, a custodial account or a Section 529 college savings plan, doesn't ensure short-term success.
Overall quality and long-term performance of underlying investments is what counts. Results of even similar investments differ, and the overall market goes in cycles that can reward one year and punish the next.
Lately, there's the added question of trust. Some mutual fund families in which money for kids was invested have been hit by government charges of favoring big investors over small ones. For example, because Strong Funds is being investigated for possible improper trading, Nevada state officials recently removed it from its menu of 529 offerings.
You should nonetheless keep on investing, albeit carefully, and start early enough in a child's life so you can roll with any punches. Giving a financial gift during the holidays dramatizes that you take an active interest in the future well-being of those you love. Have the children monitor the investments with you.
The Section 529 college savings plan is popular because contributors gain state tax breaks, money can be used for any college in the United States, and there are tax-free distributions for qualified expenses. It's possible to deposit up to $55,000 into the plan in a single year without incurring the federal gift tax, so long as you don't make other gifts for five years.
"The problems with the 529 are that you're limited in terms of investment options, some of them have rather high fees, and some colleges are starting to ask about them when figuring financial aid formulas," said Kalman Chany, president of Campus Consultants in New York and author of "Paying for College Without Going Broke" (The Princeton Review: 2004).
There's also a sunset provision in the 529 law stating that in 2010 the money goes back to being taxed at the beneficiary's rate, Chany added. So while the plan may ultimately be continued, those with younger children have no absolute guarantee that money will be tax-free when taken out, he cautioned.
Keep in mind that 529 plans differ.
According to the FinAid (www.finaid.org) college funding site, the best 529 plans offered to a state's own residents when compared in terms of tax incentives, investment options and low cost are:
Arkansas, Hawaii, Illinois, Iowa, Louisiana, Nebraska, New Jersey, New York, Ohio, Texas, Utah and Virginia.
All state plans featuring the low-fee TIAA-CREF fund family, which includes California, Connecticut, Georgia, Idaho, Kentucky, Michigan, Minnesota, Mississippi, Oklahoma, Tennessee and Vermont.
Meanwhile, FinAid rates the following as the best 529 plans for non-residents of the state:
Hawaii, Illinois, Iowa, Nebraska and Utah.
All plans featuring the TIAA-CREF fund family listed in the second point above, excluding Kentucky because its plan isn't open to non-residents of that state.
Another popular vehicle is a custodial account set up on behalf of a minor under the Uniform Transfers to Minors Act. Only amounts in excess of $11,000 per person are subject to gift tax. The child takes control at the age of majority (18 or 21).
A number of advisers such as Chany instead suggest that money earmarked for college be kept in the parents' name because it means they'll retain greater control and the money won't be weighed as heavily in the formulas of college financial aid offices.
Consider other alternatives, such as Coverdell Education Savings Accounts with brokers or fund companies. Total contributions to them can't exceed $2,000 a year per beneficiary.
Whatever way you decide to invest this holiday season, here are some recommended financial gifts.
Stock of Marvel Enterprises (MVL) and Walt Disney (DIS), besides its investment potential, is frequently given as a gift to children because the certificates are attractive, noted Sean Sebold, certified financial planner with Sebold Capital Management in Naperville, Ill.
Interesting companies such as Harley-Davidson (HDI), Yahoo (YHOO) and Wendy's International (WEN) offer dividend reinvestment plans through which you can regularly buy stock, said Charles Carlson, editor of the DRIP Investor newsletter (www.dripinvestor.com) in Hammond, Ind.
Ariel Fund (ARGFX), and Harbor Bond Fund (HABDX), with three-year annualized returns of 13 percent and 9 percent, respectively, are among the fund favorites of Russel Kinnel, director of fund analysis for Morningstar Inc. in Chicago. He especially likes their low $1,000 initial investment requirements.
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.