Unusual Investments in Your Child’s Future
Jeff Fleming appreciates the need for getting an early start with college planning. Four months ago, the Aliso Viejo resident established college accounts for his three nieces--two 3-year-old twins and a 2-year-old.
But rather than choosing a conservative bank product, Fleming opted for the Twentieth Century Giftrust, a volatile small-stock portfolio in Kansas City, Mo., that ranks as one of the best mutual-fund performers of the past decade.
“I figured that this fund, even though it’s volatile, should do better over the long haul than a regular savings account,” Fleming says. He kicked in $1,000 for each niece to start and plans to add $50 every two or three months.
This example notwithstanding, mutual funds probably aren’t the first things that come to mind when parents, grandparents, uncles or other relatives consider socking away cash for a child’s college education.
In a 1994 survey conducted by the Investment Company Institute in Washington, 11% of first-time fund buyers cited education as the primary reason for investing. Retirement planning, by contrast, was cited as the top priority by 53% of the respondents.
Even Twentieth Century Giftrust, a fund specially designed for gifts, has attracted only about $450 million in assets after 12 years--hardly a huge profile for a top-notch mutual fund these days.
As college-planning vehicles, mutual funds generally don’t offer the tax savings you can find in certain competing investments, nor the performance predictability of others. But pound for pound, funds nevertheless make good choices for college financing--superior, in fact, to most alternatives.
Probably the two investments most closely associated with college planning are Series EE U.S. Savings Bonds and zero-coupon bonds.
Savings bonds couple low risk with convenience, as buyers can make purchases for as little as $25. Better yet, investors can defer and might be able to completely avoid federal taxes on the yields paid by savings bonds, depending on the person’s income level and provided the proceeds are used for higher education.
Zeros might or might not be tax-free, depending on whether the underlying bond is a taxable Treasury or tax-exempt municipal. Either way, zeros make sense for many cash-strapped parents because the bonds sell at a discount to their ultimate maturity price, with the size of markdown varying with interest rates and the amount of time remaining.
“Zeros are good in the sense that you can buy at a deep discount and know in advance what the lump sum will be,” says Kathryn Hopkins, executive vice president at Fidelity Investments in Boston.
But what savings bonds, zeros, conventional bonds and other fixed-income instruments lack is growth potential. This can be a serious limitation considering that a college education already has become quite expensive in some places, with costs in general rising faster than the overall inflation rate.
“In most cases, fixed-income investments won’t keep pace with college inflation,” says Kalman Chany, a New York financial-aid consultant and author of “The Princeton Review Student Access Guide to Paying for College” ($16; Random House).
Parents with a reasonably long-time horizon can afford to take more risks by focusing on stock market investments, assuming they can stomach the volatility.
Individual stocks might make a decent choice for college savers with a sufficiently large portfolio. Brett N. Sizemore, a broker and certified financial planner at Piper Jaffray in Phoenix, recommends stock funds for parents who can sock away only a few hundred dollars a month or less.
“But if you can put aside about $7,000 a year or more, I’d suggest an individual-stock portfolio,” he says. “You could buy 100 shares of a couple of stocks each year, compiling 10 to 20 companies after several years.”
Individual stocks do offer a tax advantage over most stock mutual funds, which pass along taxable capital-gains distributions to shareholders from time to time. The exceptions here are index funds, which rarely sell off holdings and thus generate little in the way of capital-gains distributions. Gains on individual stocks can be deferred until the shares are sold.
Yet mutual funds offer much wider diversification than individual stocks, especially in less-accessible areas such as foreign markets. Funds also provide other advantages, including professional management, ease of switching, low minimum investments and economies of scale.
“Even a mutual fund with a 4% load is cheap when you consider the transaction costs of buying many individual stocks,” says Dan Droeg, a certified financial planner at SunAmerica Securities in Tempe, Ariz.
Many funds, of course, levy no sales charges or loads.
Michael Stolper, publisher of the Mutual Fund Monthly newsletter in San Diego, considers equity funds a much more sensible choice for college planning than individual stocks.
His “Harvard 2010” portfolio consists of equal stakes in four funds--Nicholas II, Pasadena Growth, Strong Discovery and Templeton Foreign. This mix is designed to finance a child’s education 10 or 15 years hence. Once a youngster reaches the teen-age years, Stolper suggests a gradual shift into bond funds.
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Fidelity Investments of Boston has unveiled a toll-free telephone service for Spanish-speaking customers, joining San Francisco-based Charles Schwab and a handful of other fund companies in providing bilingual service. Investors can request a Fidelity fund prospectus, receive stock quotes, place trades and more by calling (800) 544-5670. The service operates weekdays from 8 a.m. to 5:30 p.m. EST.
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Oppenheimer Management Corp. of New York has reached an agreement to acquire the 12 funds in the Quest for Value family. The purchase price will hinge on the amount of assets at the time the deal closes but will approximate $38 million, based on asset levels as of July 31. Quest for Value, also of New York, counts $1.25 billion in six stock funds and $330 million in a half-dozen bond portfolios.
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The five Capstone Funds of Houston have gone no-load, scrapping their old 4.75% sales charges. Capstone’s funds include portfolios that invest in Japanese and New Zealand companies, as well as medical stocks. The family counts about $100 million in combined assets.
