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The Flaw of Averages
Should you Ignore the Advice of the World's Wealthiest Man?
Well, really, nothing "went wrong" - stock market related funds go up and down, and occasionally, they go down by 35% like this fund did in 2008. In its straight mutual fund form (identical in every way to the 529 version, except for the 529 Plan hype and misinformation), this fund is one of the most popular among stockbrokers, advisors and security salespeople.
And if your investment time horizon is 30 years, perhaps the time until you retire, an investing mistake, or a few bear markets, can be overcome. But if your investment time horizon is the two years you have until your child begins college, you'd better follow Buffett Rule Number 1 (Never Lose Money).
Another piece of sage advice: "I am more concerned with the return OF my money than I am the return ON my money." While the source of this quote is disputed - it was either Mark Twain or Will Rogers - its wisdom is not. If your child's 529 Plan loses 35% the year before college starts, it may not have been the best "College Savings Plan" choice.
Wall Street salespeople always want to talk about "average annual return" because such focus hides the fact that Wall Street's products don't always live up to their hype. This is particularly true of 529 Plans. Let's examine how a 529 Plan that AVERAGED 5% annually over the last ten years did for a hypothetical family.
[by the way, if your child has only a year or two left until college, should you start a Plan "contribution" being DOWN about 6%?!]; and the management company's fees are about five or six times what the State skims from the Plan. So a lot of people are very happy with 529s. Just not usually parents.
Warren Buffett has interesting thoughts on Wall Street salespeople that may be of interest:
"[Famed Value Investor] Ben Graham's 'Mr. Market' allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'?"
We would summarize this as follows: College planning, funding and finance is too high-stakes a game to use a jack-of-all-trades stockbroker. Choose a specialist with over ten years of college laser-focus (and another 20 years of investment advisory expertise): Choose Us.
Concept Two: "The Flaw of Averages" (continued)
Let's say you invested $31,846 five years ago, hoping to keep pace with college inflation that has averaged between 6% and 8% annually, for the last 30 years. $31,846 is Kiplinger Magazine's average "Best Value" private and public college cost. How did you do, had you invested in one of the very largest 529 funds?
The chart below shows that you came up a bit short; you averaged 1.5% annually while college zoomed ahead at 6-8% annually. Worse, your "1% average annual gain" left you DOWN $3,000+ for a loss of over 10% in your college savings. As we've said before, is this any way to save for college?! So what went wrong?
Annual Performance, Biggest 529
At left is this same fund, over a ten-year period. Once again, the Flaw of Averages is in play. The fund's average annual percentage return was 5.19% but the compound annual return was less, 3.48%. Perhaps more importantly, using this fund as the main college savings device - with $100,000 of the family' hard-earned money - was a strategy that failed to keep pace with 8% college inflation by75,000 DOLLARS!
Did anyone make out well in this game? You bet! The State makes $33 Million a year off 529 Plan parents; the 529 salesperson gets part of the 5.75% front-end load as commission