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.

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.

Fortune has an interesting story on 4 possible bubbles.  The four areas of concern, as they see them are: Gold, Oil, Treasuries and Stocks.

Gold – I have never been a fan of “investing” in gold.  It is a commodity and has very serious price fluctuations.  However, over long periods of time gold does hold its value.    You may have heard the catch phrase, “Gold is a hedge against inflation.”   That is to say, what you could buy with an ounce of gold in 1920 you can also buy with an ounce of gold in 2000.  You will not lose ground to inflation nor will you beat inflation.  As the price goes up companies can afford to get more gold out of the ground.  We could be looking at a bad combination of people chasing “what is hot” combined with new production hitting the market.  If some investors get spooked the price could fall quite a bit.  If you really, really want to put 5% of your money in gold – I could live with that, just don’t do it after the price has doubled in just a few years.  Even better, skip gold and do some real investing.

Oil – Some of the same logic applies here.  Remember,  oil was $150 a barrel about two years ago and predictions were that it will go to $200.  Well, it went to $50.  Now oil is back to $75.  Will it go up or down from here?  Who knows?  There is this old joke about oil,  “What price does OPEC want for oil each year? $100, $100, $25, $100.”  The occasional drop in prices keeps us addicted.  This is not for the faint of heart or the rational, in my opinion.

US Treasuries – This one should worry the average investor.  If you are looking for more stability and are ok with lower returns, treasuries can be a good place to go.  However, low interest rates (current FED funds rate is 0.25%) have made it easy for banks to borrow cheap money and buy treasuries.  The high demand pushes up prices and lowers the yield (current 10 year yield is around 3.6%).  Remember, bonds are a little tricky because as the price goes up the yield goes down. When the Fed starts to raise rates, treasuries will look less attractive and the bonds you already own could take a beating.  Keep an eye on how much of your portfolio is in bonds and shy away from long bonds (ten years or longer maturities).

Stock Market – While the market made a nice return in 2009 (S & P up 26.5% for 2009) it still has a long way to go to make up for the almost 40% loss in 2008.  I don’t expect any big returns in the next few years and I think the odds of a full blown double dip are very low.  The stock market is the best place to go for long term investments (10+ years).  If you planning on adding money to the market at this time, think about putting in 10% each month over the next 10 months.

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.

This is a story about Jack and Diane.  Two American kids that just graduated college.  The get the same exact job and the same exact pay.  They both decide to get a car.  Jack buys a really nice new car and will have to pay $500 per month for the next 5 years.  Diane gets a really nice used car and pays $200 per month for the next 5 years.  Diane takes the extra $300 per month and invests it in the US stock market and makes 10% per year.  After the first five years Jack and Diane always spend the same amount of money on cars and every other possible part of their lives. 

How much extra money will Diane have at retirement (age 65)?

For our calculation we are assuming that Diane Saves $3,600 per year and makes simple interest of 10% per year earned at the end of the year.  Diane will invest a total of $18,000 by the end of the 5th year. Diane starts saving her money at the age of 20.

Any guesses? 
The answer is below the fold.
read more »

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.

Historically the US market is around 70% large cap, 20% mid cap and 10% small cap.  The market can also be divided as 50% Growth and 50% Value.  Mid and Small caps tend to provide slightly higher returns over long periods of time. (As always, past performance is no guarantee of future results).  However, they also tend to have volatility that is even higher.  Investments in Mid Cap and Small cap segments above market norms should be reserved for investors with higher than average risk / volatility tolerance. 

Below is the historical performance 6 US market segments.  I divide the US market this way to try and decide where to invest money.

Data as of 9/30/09

This is only one source of information I generally think of it as a contrarian indicator.  That is to say, the better one of the segments has done and the longer it has exceeded the long term mean the less desirous it is.  As can be seen above all six US segments are down over the past 12 months.  Large Growth has the smallest loss of 2.69% and Large Value the largest 1 year loss of 7.23%.  At this time the 1,3 and 5 year averages do not show any significant variance from each other and all are far below the expected long term average return of 10-11% per year. 

The 10 year returns do seem to indicate under performance from large caps and growth investments and may indicate an opportunity.  On the other hand this could be a result of the dramatic losses suffered by these segments around 9 – 10 years ago after several years of dramatic and unsustainable growth.