New York Times - Can you spell Fiduciary

Today's post comes right from the prestigious New Your Times. They ask the question, "Can your financial Advisors spell Fiduciary." A fiduciary looks out for your best interest. You need to make sure you are not being sold products with commissions as this creates a conflict of interest for the advisor. Your investments and retirement are important. Trust them to a Fiduciary.

Here is the New York Times Article in all it's glory:

fiduciary investment advisors

LIKE many people, especially in these financially unsettling times, I long for someone to look at our portfolio — such as it is — and tell us how to manage everything so that we can send both our children to the college of their choice, retire at 65 and be able to send postcards from exotic locations to our future grandchildren.

I also do not want anyone to tell me that I am living in a dream world or that just to build our savings, we will have to cut down on expenses like eating out, the occasional shopping spree and tennis lessons.

I want a magician. Or a liar.

But a financial planner would probably be a good start. We do have a stockbroker who assists us in investing our retirement fund. But analyzing where we are financially and where we should be going isn’t a bad idea. What I learned, though, is that while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.

“This is a person giving you advice over some of the most important decisions in your life,” said Sheryl Garrett, author of “Personal Finance Workbook for Dummies” (John Wiley & Sons, 2007) and founder of Garrett Planning Network.

The trouble is, pretty much anyone can hire themselves out as a financial adviser, so you very much have to do due diligence. According to a 2005 survey by the Securities Investor Protection Corporation, four out of five who took the survey failed it — meaning they did not understand how certain investments worked and they did not do rudimentary checks of their planners. The corporation was established by Congress to protect investors in the case of a bankrupt or financially troubled brokerage house.

Just one of every five people surveyed said they read their financial prospectuses, regularly reviewed account statements, checked out the disciplinary background of their stockbrokers or financial planners, and had a financial plan in place.

Yikes. Time to do some homework.

I set about learning the terminology. According to the nonprofit Investment Adviser Association, there are three broad and overlapping categories: investment advisers, stockbrokers and financial planners.

An investment adviser — also known as asset manager, wealth manager or portfolio manager — is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.

A stockbroker is also a legal term that refers to people who buy and sell securities on behalf of customers, and can also offer a broader range of investment planning. They can work for themselves or for brokerage firms and must take a test given by the Financial Industry Regulatory Authority, a nongovernmental body that oversees securities firms.

A financial planner or consultant, on the other hand, is not a legal definition. It generally refers to providers who develop and possibly carry out comprehensive financial plans for customers based on long-term goals. Planners can deal with such topics as estate and tax planning, insurance needs and debt management as well as help plan college savings or retirement funds.

You may want an investment adviser to provide oversight and management of your portfolio, a stockbroker to help you with the mechanics of buying and selling securities, or a financial planner to look at your entire financial picture and come up with a long-term comprehensive plan, the Investment Adviser Association states on its helpful Web site (www.investmentadviser.org)

So, what do I want to look for (and avoid) when finding someone to help us? One word kept arising over and over — no, not money. It was fiduciary.

Someone who legally has a fiduciary duty will “have to work in the best interests of their client,” said Robert J. Glovsky, president of Mintz Levin Financial Advisors. That means they have to put your interests ahead of theirs at all times by providing advice on investments that will serve you — not them — best.

Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, “Are you a fiduciary?”

“If an adviser doesn’t know what you’re talking about or can’t say ‘yes’ with conviction, then that’s your answer,” Ms. Garrett said. And you should walk. Even if they do say “yes,” ask for this and other terms you agree to in writing.

The other big question to ask potential advisers is how they get paid. Commissions on investments they sell to a client? Fee-only, meaning paid by the project or an hourly rate? A percentage of assets? Or a combination of these?

Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.

Ms. Garrett, whose network links financial planners and advisers who work for an hourly fee, advocates fee-only. She said the average cost is $100 to $300 an hour, depending on location and experience.

Mr. Glovsky, who is also director of Boston University’s program for financial planners, said that you want to make sure the method of payment is reasonable, and know what the planner’s bias might be.

Taking a percentage of assets offers an incentive, he noted. “If they grow, their income grows; if they shrink, their income shrinks.”

Ms. Garrett said, however, that such a system can be expensive, a typical half a percent to 1 percent on, say, a $500,000 portfolio will run up to $5,000.

“If you need care on an ongoing basis, it might be appropriate,” she said. “It’s like the difference between an hourly babysitter versus a live-in nanny. There is nothing inherently wrong with a nanny, but it’s costly and most of us don’t need it.”

Find out what experience and education your planner has. A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty. By going to www.cfp.net, the Web site of the Certified Financial Planners Board of Standards, you can learn how to find a consultant with such a degree, as well as how to check for any disciplinary action against him or her.

What should raise red flags? If a planner is solely pushing investments put out by his brokerage firm. If she is advocating buying annuities, particularly variable annuities, for your 401(k) or I.R.A. rollover.

“You’re putting tax-deferred annuities in a tax-deferred account,” Mr. Glovsky said. It’s unnecessary and costly, but may bring your planner a nice fee.

And be wary if all your planner wants to do is talk about investments and is not looking at your overall situation, like whether you are near retirement, are trying to save for a new house or for college.

“They should not be doing investment in a vacuum,” he said.

I thought I had it all under control. Until I looked at the Financial Planning Association’s Web site (www.fpanet.org). It offers a recommended list of 23 documents to gather — from bank statements to check registers to insurance policies to stock options — once you’ve hired your planner.

Why Fee-Only is the only way to go

Today's post is from local financial planning company Phillip James Financial.  Fee-only financial advisors and investment adivisors charge a % on the assets they manage. This removes the conflict of interest with investing.  They wrote an excellent article about why Fee-Only is not the same as fee-based. Check it out below.

Fee-Only Versus Fee-Based – Conflicts Of Interest And The Fiduciary Standard

Fiduciary Portfolio Mangement

Financial planners can be paid in multiple ways, hourly fees, on-going management fees, or through commissions earned by selling products.  Fee-only planning has gained in popularity in the last few years because of its transparent compensation structure and because it removes the conflict of interest associated with selling a commission based product.  This means more clients are switching to these types of planners.  In response, many commission based advisors have attempted to get their share of the market back by offering fee-based planning in addition their commission based practice. 

So let’s take a look at what “Fee-Only” financial planners are and why it is so important.  First off, they are never paid a commission.  An advisor compensated through commissions inherently faces a conflict of interest between the interests of the client and that of the financial professional.  These commissions provide an incentive to sell products with the highest payout to the advisor (e.g. loaded mutual funds, variable annuities, whole life insurance) regardless of whether or not this is the best option for the client.  “Fee-only” advisors are paid based on a percentage of the assets they manage.  This aligns the planner’s goals with those of the client, which is to grow a client’s wealth.  But the real difference comes from the Fiduciary Standard.  Fee-only financial registered investment advisors are held to this standard, which means by law, they must have their clients’ best interest at heart.  Therefore, fee-only planners will recommend the best investments for a client not the ones with the highest payout.

Because of the obvious popularity of this model, commission based advisors have started adding “Fee-Based” as an option to their clients.  Do not be confused.  This means that some of their compensation comes directly from their clients as fees, but not all. They still sell financial products to their clients for commissions or accept referral fees to refer their clients to other professionals.

With these conflicts of interest in place a financial plan becomes just another “sales pitch”.  After analyzing a person’s cash flows an advisor will “show” the client how they need more insurance, which they can conveniently sell to them.

Also, an advisor who earns commissions by selling products has the incentive to sell more products.  Therefore, if the advisor has to meet their sales goals for the month, all they need to do is come up with a reason to sell one fund and then purchase a new one generating more commissions.  This does not mean that all commission based advisors would act in this manner, but the conflict of interest and incentives are still present.

For more information about Fee-Only planning check out NAPFA.org.  They are the best resource for Fee-Only planning and the Fiduciary Standard.

Conclusion: A Case for Index Fund Portfolios

What you have all been waiting for - the conclusion to the Case for Indexing Whitepaper.  Take a look and feel free to reach out with questions or if you want to get started with your own Zero Commission Portfolio.

Conclusion

final investment article

Mutual fund portfolios holding only index funds have performance advantages over comparable portfolios that hold only actively managed funds. These advantages were quantified by running several scenarios that measured and compared strategy performance over time, both 
nominally and risk-adjusted. 

During this analysis, three Passive Portfolio Multipliers (PPMs) were isolated that enhanced the probability of outperformance by all index fund portfolios. These multipliers illustrate how the chance of index fund portfolio outperformance increases as funds are combined in a portfolio, as the holding period increases, and as the number of actively managed funds in each 
asset class increases. 

This study has important strategy implications for investors. Those currently holding actively managed fund portfolios can increase the probability of meeting their investment goals by switching to an all index fund portfolio. Those who own two or more actively managed 
funds in each asset class category would benefit significantly by switching to index funds in each asset class category. 

A diversified portfolio holding only index funds in all asset classes is difficult to beat in the short-term and becomes more difficult to beat over time. An investor increases their probability of meeting their investment goals with a diversified all index fund portfolio held for the long term.

A Case for Index Fund Portfolio - Part II

Back from the holidays and feeling great! Here is part two of the whitepaper that we started looking at in December. Now I present the Summary of Findings. Well worth the read!

SUMMARY OF FINDINGS 

Vintage Science of Investing 2.jpg

Mutual funds and exchange-traded funds (collectively, “funds”) can be divided into two broad categories: passively managed index funds that attempt to track the performance of a market or market sector less a small expense, and actively managed funds that attempt to outperform a market or market sector net of expenses. 

Investors have a wide choice of funds today. Index fund providers and actively managed mutual fund companies have redundant funds that span the global markets. All the major asset classes are well covered.

Studies referenced in this paper show that index funds have outperformed a majority of active funds in their respective investment categories. These studies, conducted over decades, have shown that index funds have outperformed the average actively managed fund in all equity and fixed income markets, both in the US and abroad. 

It’s natural to expect that a portfolio holding only index funds would outperform a comparable portfolio that holds only actively managed funds. Surprisingly little research has been done to test this hypothesis. There are only a handful of studies on mutual fund portfolio performance, and only one that has measured actual index fund portfolio performance relative to actual actively managed fund portfolio performance. 

The index fund portfolios used in this study are composed of index funds that existed over the entire period. These funds were available to all individual investors at all times. These index fund portfolios were compared to randomly selected actively managed fund portfolios chosen from a universe of funds that were also available to all investors over the same period. 

Several decisions were made about the mutual fund data used in this study. Sales loads and redemption fees were excluded from actively managed fund performance because the fees would have impeded portfolio performance. The index fund share class with the highest 
expense ratio was selected when two or more share classes of the fund existed. Pre-tax performance was used even though index funds tend to have better tax efficiency Mutual funds and exchange-traded funds (collectively, “funds”) can be divided into two broad categories: passively managed index funds that attempt to track the performance of a market or market sector less a small expense, and actively managed funds that attempt to outperform a market or market sector net of expenses. 

Investors have a wide choice of funds today. Index fund providers and actively managed mutual fund companies have redundant funds that span the global markets. All the major asset classes are well covered. Studies referenced in this paper show that index funds have outperformed a majority of active funds in their respective investment categories. These studies, conducted over 
decades, have shown that index funds have outperformed the average actively managed fund in all equity and fixed income markets, both in the US and abroad. 

It’s natural to expect that a portfolio holding only index funds would outperform a comparable portfolio that holds only actively managed funds. Surprisingly little research has been done to test this hypothesis. There are only a handful of studies on mutual fund portfolio performance, 
and only one that has measured actual index fund portfolio performance relative to actual actively managed fund portfolio performance.

The index fund portfolios used in this study are composed of index funds that existed over the entire period. These funds were available to all individual investors at all times. 

These index fund portfolios were compared to randomly selected actively managed fund portfolios chosen from a universe of funds that were also available to all investors 
over the same period. 

Several decisions were made about the mutual fund data used in this study. Sales loads and redemption fees were excluded from actively managed fund performance because the fees would have impeded portfolio performance. The index fund share class with the highest 
expense ratio was selected when two or more share classes of the fund existed. Pre-tax performance was used even though index funds tend to have better tax efficiency

White Paper: A case for index fund portfolios

Whose looking for hard data related to index fund investing and their super-performance compared to actively manged counterparts? You? If so check out the whitepaper I found below containing the facts about index funds and why they are superior to other investment strategies. If you don't want to read the entire paper, just check in with Zero Commission Portfolios we will help you get started.

Read the Executive Summary Below:

minnesota fianancial investment manager

The success of index investing in individual asset class categories has been widely documented. However, surprisingly little research is available that compares the performance of diversified portfolios of index funds with portfolios of actively managed funds. The analysis has been hindered by the relatively short length of time index funds have been available in most asset classes and a survivorship bias that existed in most commercially available mutual fund databases. 

A prudent mutual fund selection strategy is important to an investor’s wealth accumulation. Two distinct strategies are compared in this report: one that selects low-cost 
market-tracking index funds exclusively and a second that selects from actively managed funds that attempt to outperform the markets. Overwhelming evidence is found in support of an all index fund strategy. 

The research is unique in that the actual performance of index funds and actively managed funds are used throughout the study. Each portfolio was formed using the CRSP Survivor-Bias-Free US Mutual Fund Database, which includes funds that have failed or merged over the 
years. This robust database enabled the replication of the real-world experience of investors who could not forecast which funds would survive at the time they made their investment decisions.

The outcome of this study favors an all index fund strategy. The probability of outperformance using the simplest index fund portfolio started in the 80th percentile and increased over time. A broader portfolio holding multiple low-cost index funds nudged this number close to the 90th percentile. These results have significant and practical implications for investors seeking a strategy that can give them the highest chance of reaching their investment goals.

Calamity is the result of chasing performance

Vintage Car Chase - dont chase returns.jpg

Today's article comes from Insurance News Net and is all about Chasing Performance. This happens all the time in investing - One Mutual Fund is a "Hot" investment. Everyone realizes it and jumps in hoping for a repeat performance. This then causes the mutual fund to under perform in subsequent year because the manage cannot handle the large influx of capital. Don't think you can beat the herd, you can't. And don't think fund managers are smarter then the market. They are competing against the best minds in the industry.  And they need to charge outrageous fees to do so. Stick with Index Investing and you will find your self better off in the long run, and with less stress overall.

Here is the text of the Article:

Chasing performance.  It’s a really bad idea, but investors often do it.

One of the persistent challenges faced by advisors is managing the “regret” of clients – specifically the regret of not being invested in last year’s best asset class. This type of regret obviously suggests that advisors should have known which of the many asset classes (e.g., mutual funds) in the marketplace would be the star performer in the coming year. Seriously? If people had that sort of perfect knowledge, why in the world would they be financial advisors?  Those people would be sitting on their own island somewhere.

Nevertheless, let’s examine how performance chasing would have played out over the past 15 years (from Jan. 1, 1999, to Dec. 31, 2013).

Performance Chasing

This investing behavior is like returning to a bad habit – we know we shouldn’t but we do it anyway.  One version of performance chasing would consist of moving all of the portfolio assets into last year’s best-performing asset class. This is performance chasing at its “finest” (aka worst). 

In this analysis, there were 12 asset classes to monitor and “chase”. Here’s how this works: In 1998, the best-performing asset class among the 12 was large-cap U.S. stock. Thus, at the start of 1999, the entire portfolio was shifted to large-cap U.S. stock. The return of large-cap U.S. stock in 1999 was 20.37 percent – a great outcome. But this approach collapsed the following year. The best-performing asset class in 1999 was emerging non-U.S. stock – so the entire portfolio was shifted into emerging stock at the start of 2000. Bummer. In 2000, emerging stock got rocked with a -27.45 percent return. 

Understandably, this version of performance chasing may represent the extreme  – but extremes happen far too often. 

The outcome of this “momentum investing” approach over the past 15 years was an annualized return of 0.66 percent and a standard deviation of return of 23 percent. A $10,000 initial investment on Jan. 1, 1999, was worth only $11,043 by the end of 2013. It’s possible that there might be some time frames in which performance chasing seemingly works out (such as the period from 2003 to 2006).  That’s why bad ideas don’t completely disappear – sometimes they work out. But a person’s investment portfolio needs to work out for decades – not just a few years.

Dogs of the Dow

Here’s another wacky idea: How about investing completely in last year’s worst-performing asset class?  This bold approach actually performed better than chasing last year’s winner. By investing completely at the start of each new year in last year’s worst-performing asset class (among the 12), the 15-year annualized return was 5.98 percent and produced an ending account balance of $23,895. Not a super-impressive outcome, but a lot better than chasing last year’s winner.

Spread the Wealth: Broad Diversification

What if an advisor simply built a broadly diversified portfolio that invested equally in 12 asset classes and rebalanced them annually? While broad-based diversification may not be very exciting, this approach produced a 15-year annualized return of 8.44 percent with a standard deviation of 12.6 percent. 

As boring as it is, simple broad-based diversification is very hard to beat over time. If clients want to bet the farm on wild cards, tell them to play the lottery. When it comes to their investment portfolio, boring is best.

Zero Commission Investing can hep you build a "boring" but successful portfolio by utilizing asset allocation and low-cost index funds. Just let us know when you want to get started with your own Zero Commission Portfolio.

Lessons in Index Investing - A Five Year Look back

Today's post is from About Money.  I read a wonderful article about how you would have done very well by investing index funds by sticking to your long-term plan using index funds and a dollar cost averaging strategy. You can read it in all its glory below.

The S&P 500 recently closed at an all-time high, driven up by record earnings and dividends.  In fact, though it may not have seemed like it following the panic that was the Great Recession, the past five years have resulted in one of the most lucrative stock market booms of all time.  Every $100,000 invested on January 1st, 2009 when proverbial blood was running in the streets and mass panic was unfolding is now worth just shy of $231,000.

 What about those who invested before the bubble burst and saw huge losses?  Imagine that you decided to put $100,000 into the S&P 500 on the morning of October 9th, 2007.  It was the highest opening of all time recorded up until that point.  You opt for the Vanguard 500 index fund, going with the admiral share class (ticker symbol VFIAX) for its super low mutual fund expense ratio.  You pay $144.23, giving you 693.337 shares.

By March 9th, 2009, you would have watched your shares fall to $62.66 each, plus you would have received $3.371 per share in dividends, giving your portfolio a value of $45,781, of which $43,444 came from market value and $2,337 was sitting in cash from dividends.  You would have sat by while $54,219, or 54.22% of your wealth, seemingly disappeared.

Today, it's a different story.  From the depths of the panic, your shares have recovered to $177.97 each and you've received $16.821 in dividends.  Your portfolio would be worth $135,056, of which $123,393 came from market value and $11,663 was sitting in cash from dividends.  And that assumes you didn't reinvest those dividends during the crash.  If you'd have done that, you'd have made a lot more money.

What about the flip side of the coin?  What if you had been lucky enough to make a $100,000 investment at the bottom?  You'd have bought yourself 1,595.91 shares of the S&P 500 index fund on March 9th, 2009.  Today, you'd be sitting on $304,621, of which $284,024 came from market value and $20,597 was sitting in cash from dividends.  Again, that assumes you didn't reinvest those dividends during the crash.  Had you done that, you'd have ended up with quite a bit more profit.

What Investors Can Learn from This Case Study of the S&P 500

There are several lessons investors can learn from examining these figures.

  1.  Long-term investors win.  As long as the businesses that make up the stock market indices - Exxon Mobil, Apple, Microsoft, Procter & Gamble, IBM, General Electric, Chevron, Johnson & Johnson, Coca-Cola, Google, Pfizer, Wal-mart, PepsiCo, Abbott Laboratories, McDonald's, Berkshire Hathaway, Walt Disney, American Express, Kraft Foods, Home Depot, Boeing, etc. - are making money, time does the rest.  You can never know what a stock market investment will do tomorrow or six months from now, but you can be fairly certain it will be higher 25 years from now.
  2. If you don't know what you are doing, the best formula is to combine dollar-cost averaging with a low-cost index fund.  That way, you smooth out the market highs with the market lows, getting a good price, get widespread diversification, pay negligible fees, and enjoy low turnover for tax efficiency.   I repeat this at least a dozen times a year, but it never gets old, it never fails to be true, and a lot of people continue to ignore it.  Do so at your own peril.
  3. You cannot be emotional when it comes to your investment portfolio.  If you start investing today, and watch 50% of your holdings disappear tomorrow, as long as your underlying investments are good, diversified, and intelligently structured, this should cause you no great distress.  There has never been a single 25-year period in the United States over the past couple of centuries where an investor has not made money by sticking to the basic plan outlined in the earlier point.  Stocks represent ownership in businesses.  If the businesses are making money net of inflation and taxes, it has historically found its way into the hands of the owners.

 If you struggle with this intelligent approach, which has proven itself through the generations, one solution is to introduce additional asset classes that have no quoted market value.  For example, if you were to construct or acquire an apartment building in your home town, you are going to measure your progress by the cash rents you are collecting relative to your investment and cash flow requirements, not some arbitrary value assigned to your property every five seconds.  It's a lot easier to make it through stock market crashes if your entire net worth is not in the stock market.  Having other holdings pumping out money can not only provide peace of mind, it can reload you with dry powder to buy more shares of great companies when they are trading for rock-bottom prices.

 Zero Commission Investing wants to make sure you invest the right way. The low-cost way. We can design beautifully diversified portfolios without commissions that will give you the best chances of achieving your goals.

Is it actually possible to invest in an Index?


Index Investing is the Best - NYSE

First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing a particular market or a portion of it. When most people talk about how well the market is doing, they are actually referring to an index. In the U.S., some popular indexes are theStandard & Poor's 500 Index (S&P 500), the Nasdaq composite and the Dow Jones Industrial Average (DJIA). (You can read more about different indexes in the article A Market by Any Other Name.)

While you cannot actually buy indexes (which are just benchmarks), there are three ways for you to mirror their performance:

 

  1. Indexing - You can create a portfolio of securities that best represents an index, such as the S&P 500. The stocks and the weightings of your allocations would be the same as in the actual index. Adjustments would have to be made periodically to reflect changes in the index. This method can be quite costly, since it requires an investor to create a large portfolio and make hundreds of transactions a year.
     
  2. Buy index funds - These are a cheap way to mimic the marketplace. While index funds do charge management fees, they are usually lower than those charged by the typical mutual fund. There are a variety of index fund companies and types to choose from, including international index funds and bond index funds. To learn more about the variety of indexes and the calculations involved, check out our Index Investing tutorial. (To read more about fees and index funds, see You Can't Judge an Index Fund by Its Cover.)
     
  3. Exchange-traded fund (ETF) - This is a security that tracks an index and, like an index fund, represents a basket of stocks but, like a stock, trades on an exchange. You can buy and sell ETFs just as you would trade any other security. The price of an ETF reflects its net asset value(NAV), which takes into account all the underlying securities in the fund. (Read more about ETFs in the article Spiders, Diamonds and Investing?)

Because index funds and ETFs are designed to mimic the marketplace or a sector of the economy, they require very little management. The beauty of these financial instruments is that they offer the diversification of a mutual fund at a much lower cost.

Savings for College or Saving for Retirement...What to do?

Don't rob Peter to pay Paul. 

Most people start saving for college soon after their kids are born without regard to their retirement. Today's post is reblogged from the Scottrade. It provides some great insight into this topic. While Zero can help with both college and retirement savings this article might help put things in perspective.

From Scottrade:

With college tuition prices rising faster than inflation, education savings is becoming an increasing priority for parents, kids and even grandparents in some cases. But how do you save enough for college tuition bills without putting a dent in your retirement savings? Here are a few guidelines for finding a financial mix that can help you do both.
 

How to Save for College without Neglecting Retirement

People tend to think and plan in chronological order and, following that order, most people put their kids through college before they retire. And, while it may seem natural to focus on your nearer-term goals first, the truth is it's important to think about both goals simultaneously. A smart financial plan understands that college savings and retirement savings need to complement each other rather than be treated as completely separate entities.

Loans, Grants and Scholarships

While there aren't loans, grants or scholarships designed specifically for retirees, college students are able to apply for all three. In a lot of cases, students who don't receive full-ride scholarships can secure loans that come with a lower interest rate than standard loans to cover their tuition expenses.

If using loans to cover the full cost of a college degree doesn't sound like an option you want your kids to consider, remember there can be a middle ground. Let's say you start saving for education early, but you have three kids. By the time your oldest child graduates high school, you have enough saved to cover two college degrees. Instead of putting the full burden of student loans on your youngest child, you can pay for two-thirds of each child's college education and substantially decrease the amount your children have to borrow.

The Pay-as-You-Go Strategy

Some parents choose to pay college tuition bills as they come in rather than saving for them in advance. While not saving for tuition expenses may seem counterintuitive to parents, you should think about how the pay-as-you-go strategy affects your retirement savings strategy. Compound interest on your retirement funds is a strong argument for contributing more money earlier rather than later. If you're planning to scale back your retirement contributions to make room for college tuition bills, the pay-as-you-go strategy gives you the opportunity to compound interest on the early contributions to your retirement account before you scale back later in life. (Keep in mind that, if the value of your investments declines, you may not see positive returns or the results of compounding.).

Saving Small, Consistent Amounts toward Both Goals

Another option is to contribute a consistent dollar amount or percentage of your income each month to both a retirement fund and an education savings plan. Using this strategy, you would estimate the lump sum required, save enough money to help you reach your lump sum and invest the money you save according to an asset allocation that can help you achieve your goals. For retirement, your lump sum is the amount you'll need to live comfortable after you stop working. For education, your lump sum is the total cost of four years of college tuition.

In addition to the standard retirement accounts, you may want to consider an Education Savings Account (ESAs). ESAs allow you to grow assets tax-free while you're saving for higher education expenses. Using this type of account, investors are able to contribute up to $2,000 per year per child until the child turns 18 and invest their savings in any combination of equities, funds and bonds. When you're ready to withdraw funds from an ESA, your withdrawals are tax-free as long as you're applying the funds to qualified educational expenses.

On the graces of Indexing with a Value Tilt

You would do yourself a favor by adopting an indexing strategy for your portfolio. The research supports this time and again. Fools are swayed by the likes of CNBC and other media outlets. They are nothing but doomsayers and drama kings. Stay true to the markets and they will reward you.

Look to the research I say. Value stocks come with a low price tag, higher risk, but also higher reward. Invest in value stocks using a diversified strategy and you should receive a premium from the market

There are other market premia to be had as well. We can get into those more later. Right not focus on Value Stocks. Do not bet but tilt. That is the way of emperors and kings.

 

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