Most college funds fail to make the grade
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Dear Mr. Berko:
We have 6-year-old twins to send to college in 12 years. Our broker suggested a 529 plan and wants us to invest in American Funds Washington Mutual and American Funds Investment Co. of America. He said these two funds have been in business for more than 40 years and are the best conservative mutual funds in the industry. He believes both funds can provide an average annual return between 9 percent and 12 percent during the next dozen years. We’d like your thoughts. My wife and I work and we think we can save $100 a month for each child. It will be difficult, but we must start doing something to help our children pay for college.
W.O., Destin, Fla.
Dear W.O.:
Big deal. If you save $100 a month for a dozen years and your money doubles (very unlikely), you’ll have $28,000. That won’t be enough money in 2021 to pay for one kid’s freshman year.
I don’t like 529 plans in which you invest a certain amount of money (say $100) every month in a mutual fund then hope and pray that when the kid is ready to matriculate, there will be enough money to pay for beer, ganja, books, pizza, cable, cellphones and parties. Most 529 plans have been a bust, and the only profits earned from these things were earned by the broker — 5.75 percent for each periodic investment plus a 0.75 percent annual trail commission.
Honestly, American Funds Washington Mutual (AWSHX-$20.28) and American Funds Investment Co. of America (AIVSX-$21.33) are among the most respected names in the mutual fund industry. These funds are so popular that probably every major wire house and brokerage has a selling agreement with them. But, sadly, those funds are a bust. Read on.
Assume you opened a 529 plan in March 1999, investing $100 a month for your son in the American Funds Washington Mutual. After 10 years you would have invested $12,000. But today that $12,000 would have decreased, according to Lipper, to $9,750. In other words, your account would have lost $2,250. However, your broker would have earned a $690 sales commission plus almost $300 in trail commissions. And if on March 1999 you opened a 529 plan to buy American Funds Investment Co. of America for your other son, investing $100 a month, you would also have invested a total of $12,000 in 10 years. According to Lipper Analytical Services, your $12,000 of hard-earned money would have dropped to $10,166. You would have lost $1,844 while your broker still made out like a bandit.
If you figure the earnings you would have received on that money had it been in a certificate of deposit with an average 4 percent return, then you also would have lost an opportunity at the cost of $2,500.
I have never recommended 529 plans, because their success depends on principal growth rather than income growth. I can, if you hold my feet to the flame, give you a fairly accurate estimate of what dividend income will be in 10 years for Southern Co., Johnson & Johnson, Coca-Cola or Heinz. However, if you ask me what the 10-year market value will be on a $100 a month investment in each of those issues. I’d take a wild guess and say plus or minus 50 percent!
If you think you can invest $100 a month to pay the college costs for your twins, you have to be out of your mind. So I’m going to leave you a message: DON’T WASTE YOUR TIME OR MONEY. The probability of success is incalculable. Your broker’s suggestions are precisely what his firm tells him to recommend. But I do like your broker because he reminds me of when I was young and stupid and believed the Easter Bunny laid multicolored eggs.
The only plan worth consideration is a prepaid plan. It will cost you more than $100 a month, but it guarantees (if your state is solvent) that no matter how expensive tuition, room and board, books, etc. become, the state will pay the tab. At today’s exorbitant college costs (most colleges could reduce costs by at least 25 percent if they managed their resources efficiently), your kids would do better to attend a community college, live at home, get a part-time job, earn a two-year degree with good grades and then apply for a scholarship at a state school. Or they could join the armed services, take advantage of the new GI Bill and let the government pick up the cost. Or, best of all, teach your twins Spanish and send them to college in Mexico City.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.
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