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529 Performance Risk
What if the Next Decade is as Bad as "The Lost Decade?"
What if There Were a Way to Avoid a Decade of Frustration and Loss Like The 2000s?
Aren't you glad you were not able to invest in 529 Plans in 2000? Or 2001? Or for the most part, 2002 and 2003? This was, recall, the "tech bubble" bursting and avoiding those principal-destroying few years was a good thing. Unfortunately, Wall Street bonuses were way down over those few years, too, and CEOs tasked their financial product engineers to come up with something about which their sales force could "smile and dial." And they did: 529 Plans.
A mutual fund by any definition but one that attained mystical, if not mythical, status when marketers came up with the idea that these were "for the children," "the students' money" and that monthly additions were not - like they would be in a regular mutual fund account - "investments" but rather, "contributions." And then, after a lot of K Street politico wining-and-dining, and millions and millions of campaign contributions, voila: Favorable tax treatment (though not nearly as favorable as Wall Street purports).
Thus was the cynical start of an oversold, hyped-up Wall Street product. How do we know it was the early-2000s Market crash that prompted 529 Plan creation and not newfound altruism on the part of Wall Street? Because Section 529 of the Internal Revenue Code was inserted in 1996. In 1996, brokers couldn't write mutual fund (and managed-money and variable annuities and all the other products designed to separate investors from some of their wealth) sales orders fast enough. No need for a mutual fund disguised as something better. But we digress.
What if, you had a student heading off to college in the Fall of 2003? And what if you'd "fronted" the 529 Plan, as your commission-based salesperson suggested, with $100,000 at the end of 2000? Your $100,000 College Savings Account grew to... wait for it... $76,000. (Is this any way to save for college?) And that Flaw of Averages raised its ugly head again: The Market was down .59% for the decade but investors' CASH was down 24%.
The Dow Jones Average is currently (August 2012) over 13,000. What if instead of being at the dawn of a new "tech bubble" like January of 1995, we are actually - given that we're at record high levels - at the start of another 2001-2002-2003? (Or 1929 to 1932, when the Dow went from 381 to 41.)
Can you afford to take that chance? Is your son or daughter okay with you gambling with their college education?
What if you didn't have to gamble? What if there were a way to share in the market's potential upside but not the downside? There is.