The other day, I (Tony) got an email from a long lost friend of mine that I hadn’t chatted with in years. He knows I’m in the industry and he reached out to me with an email question that I thought our blog readers might find of interest. Turns out, he and his wife had a daughter about a year ago and they were thinking through what type of account would be the best way for them to save for her college education. Below is my abridged reply.
“It’s great to hear your desire of being a good steward of your family and finances. Unfortunately, your question isn’t as easy as one might think. We typically look at a variety of ‘first steps’ that we believe should be in place before beginning to fund a college goal. First, do you have a Will in place? A Will should be developed that would name an Executor of your Estate and your desired caretaker of your kids in the unfortunate event of you and your wife’s death. It would be a travesty to allow the courts to decide who would care for your daughter. You should have a Will fully executed before beginning to fund your college goal. These aren’t outrageously expensive, but they aren’t cheap either. You’ll need to seek and find a qualified attorney to draft a Will for you and your wife.
Next, you should have adequate life insurance in place. In the unfortunate circumstance of your death, you’ll want to leave your wife and daughter adequate income to survive. Future college costs can be worked in to the equation of adequate life insurance amount. Further, if you and your wife should both die at the same time, your chosen care-takers of your daughter will be grateful that money is available to help raise your daughter over the long term.
Third, you should establish and fully fund an Emergency Fund. We recommend 3-6 months of your living expenses to be set aside in this account to be used for emergencies. While saving for your daughter’s college is a noble cause, if you lose your job or some catastrophic event causes you to have a large outlay of cash, you’ll want to make sure your family’s needs are met first for the here and now…in which an Emergency Fund could be used. Once money is in a college savings type account, you will be unable to take the funds back out of it without penalty.
Fourth, it is to your advantage as well to ensure that you and your wife’s retirement is a primary consideration above college contributions. The main reason is that you may put your own retirement at risk by not funding it fully, only to find out your daughter receives a hefty scholarship or perhaps doesn’t even go to college for various reasons. I’ve dealt with too many clients who have put their own retirement in jeopardy to send their kids to college and are now living with regret and having to work for longer than they had ever anticipated.
Next, it is to your advantage to make sure you’ve dealt with any consumer debt that is outstanding. High interest rate student loans, auto loans or credit cards will kill you financially over time. It is recommended that you extinguish most, if not all, consumer debt (not mortgage) before considering funding a child’s college education.
Last, but not leastJ, if these other financial considerations are in order, you could consider college contributions. We typically steer clients to CollegeAmerica which is Virginia’s 529 Plan managed by American Funds. This Plan is only available through advisors. American Funds has a robust line-up of target date offerings and has had stellar performance.
For those living in Ohio and not working with an advisor, consider Ohio’s 529 Plan. www.collegeadvantage.com Choose the Do-It Yourself Direct Plan. You can sign up everything online and do your contributions via EFT from your bank account. Choose an age-based option that will vary in risk as the child gets older. The closer they get to college, the less risk the model will take. Also, Ohio’s plan allows for a small tax credit that many find helpful in tax planning considerations.
For more information of which I pretty much agree with, visit www.daveramsey.com He lays out many of the principles I’ve written above in book form. Also, a lot of times there are live classes in the area in which you can attend. You can search for those and you and your wife can learn more.”
Tony Hixon of Hixon Zuercher Capital Management leads our March 2014 video update. This month he will be talking about some of the major events that moved markets in February as well as what might affect us in the days and weeks ahead.
Don’t forget to register for our 2014 Tax Strategies Webinar, March 21 at 12pm EST.
It’s been said that a human is born with only 2 fears, the fear of falling and the fear of loud noises. Every other fear is acquired. Those 2 fears in babies were very present when our son was born and our oldest daughter was 5. She wanted to hold him so bad, but she didn’t quite know all the rules yet, and as she rocked him a little to much, he freaked out as he felt like he was falling on the down-stroke of her rocking him. She was also quick to pick up on his fear of loud noises and she’d be pleasantly talking to him and all of the sudden shout “BOO!”, followed by him practically jumping out of his skin and crying. (Please don’t call child protective services as we quickly disciplined this out of her and it no longer happens:)
So, other fear is acquired, mainly by our brains projecting a possible outcome that may or may not happen. As our brains mature, we humans have the ability to project future outcomes that range from legitimate, to downright silly. Case in point, I’m deathly afraid of spiders. Big ones, small ones, they all freak me out. I hate them and anyone who has a pet spider needs to have special counseling. So my brain projects that this tiny little thing can do some sort of egregious harm to me that more than likely will never happen.
So it goes in modern day markets. Fear and greed push markets up and down and our beloved financial media will always pound the side of fear. Striking fear in the minds of listeners drives viewership and hence, advertising dollars. So what are the current fears that are out there; up, down, sideways…it’s all bad all the time. Here’s a few points from Brian Wesbury of First Trust Portfolios that I attempt to summarize below:
Oil – Between September 2011 and March 2012, oil prices rose about 20%. This generated fear that consumers will now have less to spend. But recently, as oil prices headed down through May and June, did the fear go away? Nope. Media touted that falling oil is a bad sign, signaling weak global demand. Be afraid…be very afraid.
Interest Rates – The 10 year Treasury yield has hovered around 1.5% and many now argue that the low rates signal economic problems and the US is the new Japan. Then there are those who freak out about rising rates as they will hurt consumers, lead to less refinancing, and less business borrowing. No matter how you look at it, its bad.
Consumer Debt – It is currently trending up. This is bad because we Americans are on the verge of creating another panic of 2008. But if it was trending down, we’d hear all about how Americans are tightening their pocketbooks and spending less.
Consumer Savings – It is currently trending down. This is bad because we’re not saving enough for retirement and we’re all going to be screwed. But if it were trending up, well that’d be bad too because it takes money out of the economy. All bad, be afraid…do you sense a pattern here?
Foreclosures – Trending down. This is bad because now first time home-buyers can’t find any bargains. Unreal! But if it was trending up we’d never hear the end of it!
All bad, all the time. Be afraid, the sky is falling, be worried about everything. In the meantime, since the lows of March 2009, the market is up over 115%. Hence the reason why we are adamant about avoiding the noise, make carefully researched and educated decisions, and continue to consistently protect and increase our clients’ wealth. But are there legitimate fears out there that need to paid attention to? You bet. But there are also many compelling investment opportunities that being a perpetual pessimist will blind you to.
Apple’s iPhone business alone is now bigger than Microsoft. Not Windows. Not Office. Microsoft. Think about that. The iPhone did not exist five years ago. And now it’s bigger than a company that, 15 years ago, was dragged into court and threatened with forcible break-up because it had amassed an unassailable and unthinkably profitable monopoly… In the December quarter, Apple’s iPhone business generated $24.4 billion of revenue. Microsoft’s whole company, meanwhile, from Windows to Office to servers to XBox, generated $20.9 billion.
A quick look at a 5 year chart comparing the stock price of Apple (AAPL) vs. Microsoft (MSFT) reveals the tale of two techs. One going nowhere, the other shooting to the moon.
Now, some decry the fact that AAPL share price has been taking a beating lately, but it isn’t hard to discern that overall, the company has a solid brand, solid financial position, and a bright future ahead.
FULL DISCLOSURE: We are long AAPL at the time of this writing.
FULL PERSONAL DISCLOSURE: I recently purchased an iPad 3rd generation and am undergoing positive life-change as a result.
Driving into work this morning, I noticed a new billboard had gone up advertising the new Bud Light Platinum. The sign had a picture of the bottle with the words “Every Night Has Potential” plastered across it. I couldn’t help but think that when it comes to your investments, “Every Day Has Potential”. Pretty catchy huh.
Many investors will try to time the market and get in when things are heading up, and getting out when they’re going down. The problem with that idea is that trying to time the market will rarely work in your favor. The stock market is a compounding machine. Over the long-term, companies produce products which you buy and they derive a profit from so-doing. These profits are called “earnings” and are either passed to the stock-holder via dividends or they are reinvested into the business for it to decide to produce cooler and better products which you buy…and the process is repeated. Over time, stock prices rise, dividends compound, earnings accelerate, and your wealth increases.
A few years back, I went to a Due Diligence Conference hosted by Davis Advisors where they showed the following chart (updated through 2011).
As you can see, trying to time the market can be quite dangerous. If an investor, let’s call him Bud, would have stayed the course from 1992-2011, he would have experienced an 7.8% annualized gain. However, if he would have decided to try to time the market, and ended up missing the 10 best days during that timeframe, his return would have only been 4.1%. If Bud would have been even more scared (probably listening to too much CNBC I would imagine), withdrew all his money from the market, and missed the 90 best days in that 20 year span, he would have ended up with a -9.7% annualized loss.
Bottom line, stay the course. Every day has potential.
The other day I was listening to a leadership podcast where John Maxwell, a best selling author and influential leadership coach, was being interviewed. A portion of his interview that stuck out to me was his thoughts on our journey in life, business, parenting, or ________ (fill in the blank). He stated that most of us suffer from Destination Disease, always looking ahead to when we finally ‘arrive’. While its certainly not wrong to have future goals and strive for them, he cautioned us not to miss the Joy of the Journey. It’s stepping back, right now, where you are…and being thankful.
In today’s culture, it’s always about the next best thing, rising to the top, being the best. These are not bad items in and of themselves, they are what drive us forward, they’re what make businesses profit, they’re what excite us. However, if we strive so hard for the ‘arrival point’ that we miss the tremendous blessing of the journey to get there, we rob ourselves of the joy of life today, the joy of our business today, the joy of our children today…
Bottom line, don’t get caught with Destination Disease. Rather, step back and find the Joy of the Journey. For me, as a Partner of an Investment Management firm, it is easy to get caught up in the volitility of the markets and future goals for growth of our firm. But today, right now, I’m reminded of the joy it is to serve a loyal group of clients as we navigate the markets and journey together toward successfully managing their investments.