My wife and I became new parents back in July, and we just had the extremely gratifying pleasure of experiencing little Penelope Louise's first Thanksgiving with her. She's too young for the turkey and stuffing, of course, but by all appearances, the tyke seemed to have a terrific time. What with everyone oohing and aahing over how adorable she is (which she is) and snapping photos of her like honorary members of the paparazzi, Penny Lou basically got the celebrity treatment from our friends.
Her mother and I, of course, wouldn't have it any other way.
Plans and provisions
Earlier this year, I wrote about some of the financial plans and provisions we're making for our daughter, and while we're the ones calling the shots right now, I look forward to talking with Penny in the future about the pros and cons of various kinds of investments. I'm the Fool's resident fund analyst, and so mutual funds will, of course, be at the top of the list. For long-term savers, I think well-chosen mutual funds -- such as those I write about each month in my Champion Funds newsletter service -- are just about the perfect investment vehicle. And when you're not quite five months old, you are indeed a long-term investor.
With that in mind -- and with wish-list season in full swing -- I want to make like one of Santa's helpers and offer just a wee bit of holiday shopping advice: Giving the gift of investing is convenient and smart. In addition to helping your children prepare for their financial future, a gift of mutual fund shares can be educational -- and fun. No, really. Once your child comes of financial age, combing through annual reports and prospectuses together en route to a solid fund that also has kid appeal can be a great way to spend a weekend -- or several.
Or maybe that's just me. If you're just looking for a no-muss, no-fuss way to get your kid started in fund investing, I'd consider wrapping up prospectuses for the following two funds and putting them under the tree next to Apple's (NASDAQ:AAPL) iPod or Microsoft's (NASDAQ:MSFT) Xbox.
Vanguard Total Stock Market
Few funds offer as much educational bang for the buck as Vanguard Total Stock Market (FUND:VTSMX). For starters, the fund's portfolio is a veritable who's who of corporate America, with the likes of Pfizer (NYSE:PFE), Citigroup (NYSE:C), Wal-Mart (NYSE:WMT), and Coca-Cola (NYSE:KO) among its top holdings. The fund also provides an opportunity to teach your young investor about the significance of expense ratios. Total Stock Market has beaten up on the vast majority of its competition over the years in large part because it comes with a built-in advantage: Its dirt-cheap price tag gives the fund a huge head start each year relative to pricier peers.
The downside with Total Stock Market -- as with any index fund, really -- is that folks who invest in 'em exclusively are destined to lose each year to the benchmarks their funds track by about the amount of their funds' expenses. For that reason, I think that owning both actively and passively managed funds is just another layer of intelligent asset allocation. Throughout the market's history, index investing has held sway at certain times while active management has fared best at others. (See the last five years of average fund returns for proof.)
I therefore never tire of asking this particular question: Why try to guess whose turn it is if you don't have to? Indeed, one of the underlying premises of Champion Funds is that active and passively managed funds can coexist peacefully and profitably in the same portfolio.
Which leads me, not so coincidentally, to our next stocking stuffer...
Royce TrustShares
This fund hails from one of the very best small-cap shops in the country, and the firm's namesake, Chuck Royce, manages it. Royce has been running small-cap money since back when polyester was a designer fabric, and he's been at Trustshares' helm ever since the fund's inception in December 1995.
During his tenure through the end of September 2004, the offering has notched an annualized gain of more than 18%, a mark that positively wallops that of the S&P 500 over the period. The fund has also beaten up on the Russell 2000 during that stretch of time.
Of those two victories, the latter is the more meaningful. The Russell 2000 benchmark is a good proxy for small-cap funds such as this one, and Trustshares' winning record against it provides compelling evidence that, far from just being at the right place at the right time (i.e., red-hot small-cap land), Royce has added considerable value through his stock-picking acumen.
Another layer of appeal here is the fund's investment structure. You can "gift" shares to your little one while defining the term of the trust yourself. So long as it's more than 10 years out, the gift giver determines when the proceeds will be disbursed.
In addition to giving the investor/gift giver more control over the account, the fund's minimum 10-year time frame means that Royce, as the fund's manager, is able to make long-term investment decisions without fearing that he'll have to meet unexpected redemptions. And as his track record indicates, Royce has made excellent use of the long leash the fund provides him.
On the other hand, the potential downside is of a piece with the fund's structural strength: Some investors may not be comfortable with locking up a chunk of change for such a long time. Not to worry. Royce has plenty of other fine small-cap funds without that provision. Indeed, I recommended another of my Royce favorites to Champion Funds subscribers a few months back, and it has shellacked the market ever since.
That fund's considerable outperformance notwithstanding, the pick is a gift that keeps on giving: I think it remains a compelling buy opportunity. A sneak peek at that recommendation (as well as the others I've made) is just a free trial away.
Shannon owns shares of Vanguard Total Stock Market. The Motley Fool has a disclosure policy .
