Although I do not have children, I am considering starting to save for college. With the cost of tuition rising well above levels of inflation, the sooner I get started, even before any children exist, the higher the chance my child or children will be able to go to school without an insurmountable pile of debt. Unfortunately, most college savings plans are complicated. They are tax efficient, but only if some conditions are met. If you need to withdraw money from the funds for purposes other than education, you can face penalties. There are a number of variables to consider, least of all is the idea that I may not have children at all.
Kiplinger’s Personal Finance has named its top five 529 college-savings plans to help parents or possible future parents like me decide which options to pursue. None of these options sound perfect, however. I do not like the sound of any of these top five, either due to flexibility or fees. In addition to fees by the dollar, all plans charge a management expense, fees as a percentage of assets, in addition to the underlying funds’ management expense.
Illinois Bright Start College Savings Program. Pros: Low fees. Cons: Low fees only apply to actively-managed funds (poor performers). If you choose Vanguard funds you must pay $10 per fund.
Alaska’s T. Rowe Price College Savings Plan. Pros: Good investment options. Cons: $25 yearly fee for some accounts.
Michigan Education Savings Program. Pros: Plan includes a guaranteed return option. Cons: The plan is run by TIAA-Cref.
College Savings Plan of Nebraska. Pros: Investors can choose from a wide variety of mutual funds. Cons: Every account has a $20 annual maintenance fee.
Virginia CollegeAmerica. Pros: Kiplinger’s counts the fact that this plan is sold by financial advisers as a pro. Cons: The plan includes only funds from American Funds, which are expensive and underperform.
Kiplinger’s also includes a state-by-state guide to 529 plans. Use this guide to determine whether your state offers its own plan with tax benefits. The benefits may compensate for the other drawbacks of the plan. I live in New Jersey, which does not offer any 529 plans with tax benefits, but I could invest with another state’s plan. While I live in New Jersey, I would not be able to benefit in the other state’s tax advantages.
Best 529 College-Savings Plans, Thomas M. Anderson, Kiplinger’s Personal Finance, June 26, 2009
There is some speculation that Coca-Cola, General Electric, and Wal-Mart are seeking to raise capital by offering stock… in China. The companies have not responded to these rumors, but China seems open to allowing western companies to participate in the country’s stock exchanges once trading resumes.
If American companies want to be on the Shanghai Stock Exchange, American investors might want to be there, too. The way things stand now, it is difficult for foreign investors to participate in the Shanghai Stock Exchange. Any individual investor outside of China must be aligned with a Qualified Foreign Institutional Investor in order to trade companies listed on this exchange.
A more accessible way to access the China stock market may be through mutual funds offered domestically. The Fidelity China Region Fund (FHKCX) is a strong choice despite the 1.11% expense ratio. (Expense ratios will tend to be higher for international funds.) Vanguard does not have a comparable fund, and FHKCX is up 31.25% so far this year.
Funds like FHKCX invest in Chinese companies, and it’s unlikely, if western companies begin trading on the Shanghai Stock Exchange, that these funds will include shares of these western companies in their portfolios. So this doesn’t solve the problem of accessing the shares of these companies that would theoretically be traded in China.
Regardless, if companies see China as an opportunity for growth and capital, it might not hurt to follow them by investing overseas.
Photo credit: SmokingPermitted
Coca-Cola, GE, Wal-Mart May Seek China IPO, UBS Says, Allen Wan and Veronica Navarro Espinosa, Bloomberg, June 17, 2009
Shanghai Stock Exchange, Wikipedia, June 17, 2009
Well, I sold my first stock. I agonized over when would be the right time, but then I just pulled the trigger, anyway.
Earlier this year, I started using the “free money” I was getting from this credit card to buy some stocks.
In March, we paid our tax bill of over $3,300 using that card, so the 2% rewards were higher than normal. I asked a friend of mine who knows a lot more about the stock market than me what stocks were catching her eye, and on her unofficial recommendation I bought 60 shares of CAR, the Avis car rental people.
That was April 17th. The stock price was $1.50. With a $9.95 commission at Sharebuilder, I ended up “spending” a total of $99.95.
And then I watched as the stock price just rose and rose and rose.
On about May 20th I started wondering if I should sell my proceeds. We’ve had rather more pet problems than usual and I was a little worried that our upcoming vacation might suffer as a result. The “overall return” on that investment, according to Google Finance, was hovering around 200%, which is a heck of a lot more than the 7 to 9% we’re taught to expect from long-term investments.
So I sold it on May 27th. I was a bit alarmed to see that there was yet another commission of $9.95. To me, that’s like paying a toll over a bridge going in each direction.
Stock proceeds: $282.24
Minus original investment of $99.95: $182.29
Now, if I’m reading this Capital Gains Tax table correctly, we’re going to be hit with a 25% of the “cost basis” come next April. If the cost basis is the amount I spent on the investment, that’d be the $99.95 number again, which means a tax of about $25.
Profit minus upcoming tax: $157.29
So I spent $99.95 and got $157.29, a real profit of 157%. Not the nearly 200% that Google Finance was teasing me with, but not shabby, either.
The other way to look at it is that since the $99.95 was free money in the first place, I made a profit of infinity dollars.
More importantly, when we take our vacation next month, we’ll have $157 that we otherwise wouldn’t have had. That’s one fancy dinner with some very good wine. I’m looking forward to it.
March 9, 2009 was a bad day to retire. On that day, the Dow Jones Industrial Average hit its bottom of 6,547, a low not seen since 1997. If you followed mass-market retirement investing advice, you may have entered retirement with a portfolio 100% invested in a stock market index, like the S&P 500, whose pattern is similar to the Dow.
If you began formally planning a year in advance on March 9, 2008 with a portfolio worth $1,000,000, by the time you retired one year later, that portfolio may have only been worth $600,000. This market drop has left investors feeling betrayed by the long-term promises of a diversified portfolio stocks, usually touting an eight to twelve percent return over long periods of time, depending on whom you ask.
This is no consolation to new retirees who lost 40% or more of their portfolio and have had to change their plans. Unless you cash out your entire investment portfolio on the day you retire, the market drop won’t have a permanent effect on your finances. If you are healthy, you can expect to live several decades in retirement. Your portfolio must be aggressive enough, even in retirement, to last as long as you need it. Stocks might still be an important part of your portfolio in order to achieve the growth necessary for your income from investments to last at least as long as you continue live.
The recent downturn has forced people re-evaluate the level of risk they are willing to accept in their portfolios. When the market experiences a multi-year rally, investors are more likely to say they are willing to accept risk if it will increase the chances of long-term growth, while economic recessions frighten investors away from the riskier choices. While these are human instincts, the more you can separate your emotions from your finances, the better you will be off in the long run.
This is a difficult task thanks to the exabytes of information we can access about our own money with the click of a button. We receive quarterly statements from our investment accounts in the mail explaining in plain text how much money we have lost on paper, and these statements do not apologize nor do they include just one frowning emoticon to make us feel better.
While stocks are the best bet for long-term growth, a balanced portfolio should include some bonds to cover retirement funds you may need within ten years. On the date you retire, you should know how much money you’ll need to draw from your investments each year. Your bonds should cover that amount, leaving room for some growth. But that needs to be balanced by your long-term needs in retirement. Having too much invested in bonds runs the risk that your investments will not last throughout the remainder of your life. If your nest egg is small, keeping ten years’ worth of income in bonds may not leave enough of your portfolio left for stocks, if any.
This difficulty is one of the primary reasons people often choose annuities for retirement. You can take a part of your retirement nest egg and buy an insurance product that “promises” a certain absolute return for a set period of time or the remainder of your life. Buying an annuity when you’ve all ready lost 40% of your account value can result in a smaller benefit than you were planning to live on, and that could be a problem.
There is no easy solution to this problem. Even if you don’t retire on the day the stock market hits its lowest point, chances are good the stock market will be significantly down during some point during the next few decades. Here is what I plan on doing:
- Approaching retirement with an investment allocation among stocks and bonds that matches by true level of risk tolerance. It’s best to measure your risk tolerance during a period in which you are experiencing neither high or low returns on your investments to keep emotions and short-term memory out of the equation.
- Rebalancing my portfolio periodically to ensure I’m not more exposed to any investment type. As stocks experience a boom, it’s natural to keep money in stocks to ride the wave. Avoid a crash by keeping an eye on the percentages and move money around when the portfolio is unbalanced.
- Adjusting my asset allocation using the lowest risk investments that will provide the needed returns. Suze Orman, with a portfolio value of $25 million, keeps $24 million invested in bonds. These investments results likely approach $1 million each year. She also investments another $1 million in stocks, an amount she can afford to lose. If annual needs are provided for by an investment offering a lower but more stable return, stick with the lower-risk investments rather than accepting unneeded risks.
What will your portfolio look like when you entire retirement?
Photo credit: Scubabix
It is human nature to search for Truths that describe the world we live in. This is one reason why personal finance gurus are so popular amongst a group of individuals that listens. Many of the more popular authors, seminar leaders, and cult favorites stick by their mantras, Grand Unifying Theories, such as “credit cards are evil,” “invest in stock index funds for the long term,” and “always buy a used car.”
Any individual who has been able to build a following, cult or otherwise, within the subject of personal finance would do well not to let others peek inside the leader’s own. The advice doles out to the public is usually for a specific intended audience, and it is rare for a guru to fit within the audience he or she is addressing.
In her book, Women and Money, Suze Orman explains that everyone should be invested 100% in stock index funds until close to retirement. This is solid, definitive advice for Suze’s audience, and in this case, men as well. There are some instances where this statement may cause trouble, such as the recent stock market collapse. The book was published in February 2007, as the stock market was reaching a recent peak.
Yet, the average person entering retirement will still have several decades to live, several decades in which the nest egg must last even when being drawn upon. The best way to do this is with a stock index fund. But if we look at Suze Orman’s own portfolio, she doesn’t follow her own advice. As of last year, Orman had $1 million invested in the stock market, a lot of money but only 4% of her own portfolio. The rest was mostly invested in municipal bonds which are very safe but earn less over time. In an interview, she stated she only invests in the stock market what she can afford to lose.
The rules, defined and proliferated by Suze Orman do not apply to her. And they shouldn’t. Why would someone with assets of $25 million follow the same advice as Suze’s audience, in which members might have a net worth anywhere from several hundred thousand dollars below zero, in debt, to several hundred thousand dollars above zero?
The mathematics don’t magically change when you are rich, but the only chance for average individuals to survive through retirement is to take relatively risky bets on the stock market. While the stock market has failed to disappoint in the long term if you look at the numbers, real performance doesn’t always match the statistics thanks to timing. Wealthy individuals, like Suze, can afford to accept less risk. A bond return of 4% on $24 million invested results in an income of $960,000 a year — and that doesn’t include speaking engagements, royalties and television deals. Suze, who is quite comfortable at this stage in her life and career, should not be required to live by the same philosophies she preaches for her callers.
Should you stop following her advice? Suze Orman has helped many people come to terms with their financial condition. But unless you’ve spoken to her about your specific situation, take her mass-market advice with a grain of salt. Yes, her nuggets of wisdom are in many cases helpful, but not everyone falls neatly into the same category.
While researching companies for possible career moves — an occasional hobby of mine before all of my extracurricular time was spent working on Consumerism Commentary — it has been difficult to find reliable information about one of the biggest benefits companies can offer, the 401(k) retirement plan. As an outsider to the company, you cannot access juicy benefits information. You can find out whether a company offers a 401(k), but some plans are decidedly worse than others.
The information I’d like to see available includes a list of available investment options. If my 401(k) contributions are locked into only expensive managed mutual funds, I would prefer to know this before applying for a position. No company match? That’s a deal-breaker. If the company requires an excessive portion of the contributions to be invested in company stock without a reasonable choice to sell, I would have doubts about the company’s future.
The 401(k) may not be the biggest driver in the decision to apply for or accept a position at a company, but this is an example where more information results in more informed applicants and a better chance of finding a mutually-beneficial employment match.
BrightScope is one website that approaches the kind of functionality I am searching for. It allows each visitor to provide limited information about his or her company’s 401(k) plan in order to develop a variety of ratings. Thanks to other employees who have uploaded plan information, BrightScope was able to evaluate my employer. The company I work for scores a 72 overall out of 100, better than average for my industry and only a few points away from the highest score.
In addition to the overall rating, BrightScope evaluates plan cost (like expense ratios and fees), company generosity (quality of the employer match), and investment menu quality.
How does your company’s 401(k) plan stack up against the competition?
A recent question-and-answer article from Money Magazine illustrates the problem with timing the market. While making money in the stock market is as “simple” as buying low and selling high, emotional reactions to the market often prevent that from being a feasible strategy. The question comes from an individual close to retirement, Heidi. She lost several thousand dollars of value in her 401(k) and reacted by selling her equities and keeping the cash in her retirement account.
By the time you lose a good portion of your investment — Heidi doesn’t specify the percentage of loss she experienced — it’s too late. It’s common and expected to sell in a panic, scared to lose more value. A market downturn and quarterly statement after quarterly statement with decreasing bottom lines turn someone who thought they were immune to market swings, a risk taken to increase the chance of higher returns, into a conservative investor. And the reaction comes at the long time.
Invariably, people now scared of the stock market will wait for “positive signs” before diving back into the pool. One such positive sign is a sustained market rebound. But once again, if you wait and react to the positive rebound, you’ve missed the chance to earn the best returns — the kind that drive the statistics that claim the stock market retuns 8% over the very long term. If you are not in the stock market when the market rebounds, and wait until the rest of the world starts buying stocks again, you won’t experience the increase that makes the stock market famous.
With this in mind, it’s better not to try to time the market and react to short-term market conditions. Stay invested, but maintain (and rebalance) an asset allocation that makes sense for your future financial needs. If you need your money to last another three decades, even if you’re starting retiremement and expect to live longer, you may need the boost that the stock market can provide over those 30 years, but it doesn’t hurt to keep a portion of your portfolio — what you will need in the first ten years of retirement, for example — in something less risky.
I’m not a financial adviser, and these thoughts are just based on my observations.
The trouble with market timing, Walter Updegrave, Money Magazine, May 7, 2009.
Here is some good news for investors. Schwab, competing for investment business with other low-cost mutual fund operations like Vanguard, Fidelity, and TIAA-Cref, has lowered the expenses on a number of their mutual funds.
The Schwab S&P 500 Index Fund (SWPIX), which competes directly with the Vanguard S&P 500 Index Funds (VFINX), now sports a net expense ratio of 0.09%, compared with Vanguard’s 0.16% (or 0.15% or 0.18%, depending on who you ask). Additionally, the minimum investment at Schwab is only $100. You will need $3,000 to open an account at Vanguard. Schwab’s Total Stock Market Index Fund (SWTSX) has also been reduced to 0.09%, which is lower than Vanguard’s expense ratio for the equivalent VTSMX of 0.16%.
Theoretically, the performance of an index fund “managed” by one company before fees should be identical to the returns provided by an equivalent fund “managed” elsewhere. With index funds, the fees matter because everything else is theoretically equal; lower expenses could save you many thousands of dollars over long stretches of time. With this news, I may consider at least investing new money with Schwab, and I will possibly consider moving some funds from Vanguard to Schwab.
I should point out that if you qualify for Vanguard’s Admiral Shares, your expense ratios will be lower than Schwab’s new rates. You need to have $100,000 in one mutual fund (or $50,000 in one fund and a ten-year history with that fund) to qualify.
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