tip to One good move.

There is a growing set of funds called “Faith based mutual funds”

These funds usually choose things to avoid.   Let me give you a few examples.

The Timothy Plan (Investing with Biblical Principles)

The Timothy Plan® family of funds employs specific moral screening criteria designed to avoid investing shareholders’ money in any company that has a pattern of contributing to the cultural degradation of our society. As a result, the Timothy Plan’s screens prohibit investing in companies involved in abortion and/or pörnography, non-married lifestyles, as well as companies involved in the production of alcohol, tobacco or gambling.

Who decides which biblical priciples?  Is it ok to invest with slave traders?

However, you may purchase male or female slaves from among the foreigners who live among you.  You may also purchase the children of such resident foreigners, including those who have been born in your land.  You may treat them as your property, passing them on to your children as a permanent inheritance.  You may treat your slaves like this, but the people of Israel, your relatives, must never be treated this way.  (Leviticus 25:44-46 NLT)

Here are some of the types of companies they wont invest in Alcohol, I guess they wont invest in companies that provide wine for churches.  Whoa… that will blow your mind.  And no Tobacco, Gambling or  Pornography companies.

They promote a long list of virtues but I think my favorite is “Piety”.

Piety gives us a sense of duty to uphold the moral standards upon which our great nation was founded.

It appears that sucking up your money is a christian value.  The “A” class of shares start off by taking 5.5% of your money as a front end load.  That is followed up with above market expense ratios.  The Timothy Plan Large/Mid Cap Growtha “A” fund has an annual expense ratio of  1.56% and the average growth fund is about 1.39% and a nice no load index fund is about ) 0.20%.   This fund has a total five year return of about -5% while large cap funds have returned 10% and Mid-Cap funds have returned 17%.  So you have a net performance of -27% when compared to the average mid cap fund and -40% when compared to the Vanguard Mid-Cap Index fund – Ouch!

NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you think it is OK to make investment decisions based on a blog post, then for the love of the FSM – Stop reading my blog.

Below is a description of an investment product.  This is based on real and available products but does not represent any specific product.  Numbers below are estimates and are only intended to show how this product works.

The Pitch.

There is a new product it is a combination of the best of bonds and the stock market.  It is a guaranteed mutual fund.  Part of the money is invested in an index fund and some is invested in Zero-coupon bonds issued by the US Government – AAA Grade.  You get the benefit of the stocks and bonds.  The best part of all is that in the next 10 years, you are guaranteed a 40% return.  That’s like getting 4% each and every year.  That’s right you will make at least 40% return on your investment and you have the unlimited potential to make more if the stock market goes up.  Just sign here and give me $100!

The Reality.

Now for all of the details that the sales person did not tell you about.  The odd thing is that they did not need to tell you verbally because all of the details are in the prospectus – 72 pages of 6 point font written in the best legalese.  You signed a form that said you read it.  Now they can do almost anything to you.  You thought if you invested $100 you would have $140 in 10 years.  Now we will get the details.

10 years – You will want to keep this investment for 10 years because if you sell it early you have to pay a 10% penalty.  Whoops… did we forget to tell you that.

4% per year - Actually it is closer to 3.3% per year compounded but hey it’s only money.

The Load - oh…  did we forget to tell you there is an 8% load.  A load is a sales fee that is collected from you and paid to the sales person.  8% is on the high side for mutual funds but, this is a really good investment so it is a small fee to pay.  The $140 after 10 years was based on an investment of $100 you only invested $92 ($8 covers the load).  You do not make $40 but $37 (remember you only invested $92).  So when it’s all done you have $129 – still really good.

Annual expense ratio – We told you the 40% return is guaranteed – and it is.  So is the annual expense ratio.  This is to cover the cost to the company that manages you money – and they deserve it for getting you such a great product.  The fee is just 1.8% per year.  Just above the industry average but your worth it.  Total cost is just $18 over ten years.  Your total return is still $111 that’s great.

Insurance – Your money is guaranteed, it’s a kind of insurance.  You pay for auto and home insurance – of course you have to pay a little something for this insurance.  The cost is just 1.5% per year.  Total over 10 years is about $15.  Your total return is $96 – isn’t this, a wonderful investment.

Taxes – The IRS does not want to wait and tax you on all the money you are going to make with the Zero Coupon Bonds.   So they created a thing called imputed interest.  They collect tax on the money you are going to get.  Don’t think that you lost money.  You did not!  You made money but agreed to a lot of high expenses.  That’s your problem not the IRS’s.  So…. ya gotta pay the tax.  I will call it $6.  So now your awesome investment of $100 after ten years is now worth around $90.

Who wants to buy now?

NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you think it is OK to make investment decisions based on a blog post, then for the love of the FSM – Stop reading my blog.

Thanks to Friendly Atheist for the story idea and Image below.

One of his readers received this from his bank.  Clearly ”pray for money” is a bad strategy but, so are some of the others listed below.

Here are a couple of different ways you can save for college.

Save for college with cash, savings account or money market funds.
Current savings account rates are less than 1% and most money market rates are also below 1%.  However, there is a chance that a Money Market account could yield 2-4% in the near future.  These are safe investments but they bring very little return.  So if your child is now 9 years old and you need the money at age of 19, your 2% per year compounded yearly would have a total return of just22%.  So unless you start very early you will have to save the vast majority of what you will need to spend on college. 

Saving for college with bonds
You can get a better return (with a little more risk) by choosing something like the Vanguard Total Bond Market Index fund.  The 10 year average historical return was about 6% per year.  Just to be safe I would only plan on making an average of 5% per year over the next 10 years.  However, your compound return over the next ten years would be about 63%.  Clearly quite a bit more than the 22% you would get in a good Money Market fund. 

Saving for college with the stock market
If you invest in the stock market (s&P 500) you could make 10% a year.  This is the long term average.  However over short time frames (less than 20 years) anything can happen.  The last 10 years the market was down a total of 20% (loss of about 2% per year – yikes).  The previous 10 years the market went up over 300%.  If you get the average of 10% a year you would make a compounded return of 160%.  The problem is, there is no way to know in advance if the market will go up or down.

Saving for college – a hybrid method!
My favorite way to save for college for your kids is to take care of your retirement investing first.  Max out your 401(k) your IRA, save and invest in your own accounts and act like a long term investor.  When your child is 0-8 years old keep investing like it is for your personal retirement.  During this time you may get lucky and make the long term market average of 10% per year.

When your child reaches the age of 9, start to move about 10% of the amount you expect to contribute to their education to a more stable option like the Total Bond Market Index Fund mentioned above.  Of course you should try to keep saving more money during this time.  If at any time the stock market takes a big hit you can postpone moving funds for a year or two.  If you have a really good year in the stock market, feel free to move 20%-30% over to the stable position.  This will allow you to lock in returns of the really good years and give you some time to recover from the bad years.  When your child is around age 19 you should have most or all of the money you expect to use for college in the more stable position.  This strategy allows you to maximize your gains in the market and provides extra protection as college age approaches.  In the dream world of assumptions you will get around 10% per year from the market at the start and 5% per year when it is time to pay the bills.  Assuming that your returns would go down from 10% to 5% at the decreasing rate of .5% a year (this is a lot of assuming) your total return for the last 10 years would be around 110%.  This is a large percentage of the 160% you could have had if you stayed just in the stock market but a lot less risk.