My neighbor's son is going into his second year of college. She told me that the best way they saved up for tuition [was] by concentrating on a single stock or sector. Do you think that's the right way to go? Or should I build a diverse portfolio with a stock/bond mix?
Robin,
Vermont
Dear Robin,
Your neighbor is dispensing some pretty lousy advice. If you had a neighbor who didn't save for their son's college tuition, but had a very lucky weekend in Las Vegas (where they parlayed $1,000 into room and board for a four-year private college), would you listen to them if they said the best way to save up for college was to get lucky at gambling?
While you have a shot at bigger winnings the more concentrated your investment — one stock being at the far extreme of concentrated portfolios — you have an equally good shot of having no money at all for school.
While Warren Buffet, the great investor, pokes fun at diversification, the drag of diversification also leads to more predictable returns.
Imagine having to tell your son (when all his friends are applying to college), “Unfortunately our hot Ethanol stock crashed when gas plummeted back below $2.00 a gallon. But look on the bright side — people are driving more and there are many jobs at gas stations!”
Build a more diverse portfolio and plan on saving aggressively to reach your goals — don't gamble with a smaller account.
A good way to go is a low-fee, diversified “fund of funds” that ages with your son. Such a mutual fund is made up of other stock and bond funds and is a complete diversified portfolio in one stop. Some of these funds are know as “lifestyle” or “target” funds because they get more conservative as time goes by (more cash and bonds, less stocks) as opposed to an ordinary balanced fund (which owns bonds and stocks) in about the same ratio.
Normally such funds are used to save for retirement, but from a financial planning point of view, your son is “retiring” when he goes off to college in the sense that you need to access the portfolio to pay for school. You can't handle a 50% hit right before the tuition is due, so a portfolio that gets conservative at that point is a good move.
Vanguard has a series of funds called “Target Retirement,” each one with a year associated with when you expect to retire. If your son is going to college in about 10 years, go with the Vanguard Target Retirement 2015 (VTXVX). There are Target 2010, 2015, 2020 an on all the way up to 2050 (stepping up by 5 years between funds). These funds are dirt cheap, you can invest with $3,000, and make small contributions along the way — even set up an automatic investing plan. Check out vanguard.com or call 800-997-2798. Other companies like T. Rowe Price (T. Rowe Price Retirement 2015) and Fidelity (Fidelity Freedom 2015) have similar fund lineups, but the low fees at Vanguard help with asset allocation type funds.
Thank for the question.
MAX
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Ask MAX: Should I Listen to my Neighbor?
Dear MAX,
My neighbor's son is going into his second year of college. She told me that the best way they saved up for tuition [was] by concentrating on a single stock or sector. Do you think that's the right way to go? Or should I build a diverse portfolio with a stock/bond mix?
Robin,
Vermont
Dear Robin,
Your neighbor is dispensing some pretty lousy advice. If you had a neighbor who didn't save for their son's college tuition, but had a very lucky weekend in Las Vegas (where they parlayed $1,000 into room and board for a four-year private college), would you listen to them if they said the best way to save up for college was to get lucky at gambling?
While you have a shot at bigger winnings the more concentrated your investment — one stock being at the far extreme of concentrated portfolios — you have an equally good shot of having no money at all for school.
While Warren Buffet, the great investor, pokes fun at diversification, the drag of diversification also leads to more predictable returns.
Imagine having to tell your son (when all his friends are applying to college), “Unfortunately our hot Ethanol stock crashed when gas plummeted back below $2.00 a gallon. But look on the bright side — people are driving more and there are many jobs at gas stations!”
Build a more diverse portfolio and plan on saving aggressively to reach your goals — don't gamble with a smaller account.
A good way to go is a low-fee, diversified “fund of funds” that ages with your son. Such a mutual fund is made up of other stock and bond funds and is a complete diversified portfolio in one stop. Some of these funds are know as “lifestyle” or “target” funds because they get more conservative as time goes by (more cash and bonds, less stocks) as opposed to an ordinary balanced fund (which owns bonds and stocks) in about the same ratio.
Normally such funds are used to save for retirement, but from a financial planning point of view, your son is “retiring” when he goes off to college in the sense that you need to access the portfolio to pay for school. You can't handle a 50% hit right before the tuition is due, so a portfolio that gets conservative at that point is a good move.
Vanguard has a series of funds called “Target Retirement,” each one with a year associated with when you expect to retire. If your son is going to college in about 10 years, go with the Vanguard Target Retirement 2015 (VTXVX). There are Target 2010, 2015, 2020 an on all the way up to 2050 (stepping up by 5 years between funds). These funds are dirt cheap, you can invest with $3,000, and make small contributions along the way — even set up an automatic investing plan. Check out vanguard.com or call 800-997-2798. Other companies like T. Rowe Price (T. Rowe Price Retirement 2015) and Fidelity (Fidelity Freedom 2015) have similar fund lineups, but the low fees at Vanguard help with asset allocation type funds.
Thank for the question.
MAX
Want to ask MAX a question of your own? Send him an email by clicking here. Please include your name and where you live.