There are a variety of types of investment available to the average ‘retail’ investor building a Child Millionaire portfolio. These include government bonds (called US Treasury bills or T-bills in the US, gilts in the UK, bonds in Canada), corporate bonds issued by companies, mortgage-backed securities, precious metals, growth stocks or dividend paying shares issued by companies and traded on the various stock exchanges.
All of these asset classes perform differently under various macro-economic conditions. However they all require, with the exception of one, a mixture of careful watching of various economic indicators and the ability to interpret what is going to happen next in the large-scale economic picture. Yet, as we know, the future is unpredictable.
Bonds, for example, are vulnerable to government interest rate changes, and although they can perform well under certain conditions they require you to keep an eye on the direction of interest rates and other headline economic data. Likewise, precious metals perform well in certain conditions, particularly in low-interest-rate environments and in the exceptional cases of currency debasement through ‘quantitative easing,’ but they are highly volatile and speculative. Mortgage-backed instruments are constrained by interest rates and lack the ability for rapid growth. As the ongoing housing meltdown in the US makes clear, they are also not nearly as secure as their sales proponents would suggest.
None of this will do for the hands-off Child Millionaire portfolio. So what will work then?
Shares that Pay Dividends
As we now know, an investor is an owner of a company and so we want the Child Millionaire portfolio to be a vehicle for company ownership. So where does a would-be owner with only $1,000 (or $100 a month to invest) go to buy into a high-quality business cheaply and without needing to know which way the economy is headed? Going back to the story of our 1980 Johnson & Johnson portfolio, the answer is the stock market. The only asset class that gives us what we want for the Child Millionaire portfolio – ownership, high compound growth and hands-off management, all without needing or caring to know where the economy is headed – is shares in companies. But not just any old share in any old company.
The Child Millionaire portfolio is going to be composed entirely of one type of investment: high-quality dividend-paying shares in companies that increase their dividends year after year. Such companies, as I’ll explain in later posts, are sometimes called ‘dividend aristocrats.’
My personal investment portfolio is packed with these sorts of companies and so will Mia’s Portfolio in due course.