Re-balance Cycle Reminder

The next re-balance time will be on next MondayDecember 24, 2012. You can also find the re-balance calendar of 2012 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

New Feature: Asset Trends & Correlations

We released this feature in the weekend. Our newsletter on this new feature has drawn some considerable interests. We will have a follow up newsletter to discuss more on this. For now, please give us your feadback on our community forum or make comments on the page itself. 

Investing In College Savings (529) Plan

Some Pros and Cons

For many parents and grand parents, college savings 529 plans offer some compelling tax benefits. In addition to the main tax free benefit (if you spend the money on qualified education expenses, they are tax free but if you withdraw it for other purposes (so called ‘non-qualified withdrawal’, you’ll need to pay for income tax and 10% penalty), they have two other advantages: 

  • Lax rule on transferable: the money can be transferred to any qualified member of the beneficiary’s family without tax penalty. A qualified member can be as far as the first cousin or his/her grand children. Furthermore, a 529 account is not counted as part of the donor’s gross estate for estate tax purposes. Thus, a 529 account can be maintained for a long time for future family members’ education expenses. It gives a strong incentive to use a 529 plan for family member’s long term education purpose. 
  • For some states such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, they don’t have state income tax for your 529 contributions. For some other states, they offer some kinds of tax credits or deduction for your 529 contributions. These include Kansas, Maryland and many others. A few financially strapped states such as California and New Jersey do not have any state income tax break for the contributions. See this complete list

However, there are several noticeable disadvantages for a 529 account: 

  • High expenses: these include some direct sold plans such as California Scholastic plan that charges on average 1% or so in investment funds offered by Fidelity. Many states also offer advisor sold plans that are managed by advisors. These plans add additional expenses to the existing fund expenses. 
  • Extremely limited investment options: similar to 401k plans, 529 plans in general are even more limited in offering investments that cover major asset classes. Many plans have only very limited fixed income choices, some US stock choices and one or few international stock funds. 
  • The infamous only once per year re-balance rule: this rule makes any tactical allocation strategy practically impossible. Notice that a recent legislation introduced in the U.S. House of Representatives in 2011 by Congresswoman Lynn Jenkins, (R-KS) and Congressman Ron Kind, (D-WI) would allow up to four annual investment direction changes. We urge you to follow this development more closely if you are interested in investing in a 529 plan. 
You can also invest in a 529 plan offered by other states, although you would need to check whether that will eliminate any state income breaks (if any). 
Our basic attitude towards investing in a 529 plan is more due diligence. One should understand the 529 specifics such as those mentioned above before jumping into these plans. Since these plans are mostly regulated by states, some of them are excellent and many of them are mediocre at best. 

529 Portfolio Management

If, after good due deligence, you still decide to invest in a 529 plan or you have already had some 529 accounts for your children or grand children, the next step is to decide how to invest. 

In general, because of the once per year re-balance limitation, we do not recommend using tactical asset allocation.  Strategic asset allocation is the only feasible tool to manage these portfolios. Furthermore, because of such a limitation and its specific tax benefit, we believe 529 should be either managed as a very conservative portfolio or as a very long term portfolio (i.e. can withstand some substantial loss along the time. The reasons are

  • For a short term purpose, you can invest in a prepaid 529 plan or put all or most of your money into a very conservative portfolio (up to 30% in stocks). Moreover,  as we stated in a previous newsletter (see October 22, 2012: Income And Conservative Portfolio Review), very conservative (but not necessarily 100% in fixed income) portfolios actually offer the lowest risk for a long term investor while still capturing some reasonable gains). 
  • For a long term purpose, a diversified portfolio with proper risk tolerance that does not require frequent re-balance is a viable option to achieve an  investment goal. But this portfolio might be subject to substantial loss along the way. For example, after the 2008-2009 financial crisis and before the current runup, most 529 SAA (Strategic Asset Allocation) portfolios with moderate risk allocation either lost money or barely made a gain annually in the trailing 10 year time frame. This can be very detrimental to those who need the money in those periods. 

MyPlanIQ maintains many 529 plans. The following are the perfromance comparison for some model portfolios: 

Portfolio Performance Comparison (as of 11/23/2012)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Alabama 529 Plan Strategic Asset Allocation – Equal Weight Moderate 2.1% 10.4% 15.8% 187.5% 8.1% 65.5% 4.5% 26.3% 8.2% 56.3%
Alabama 529 Plan Strategic Asset Allocation – Optimal Moderate 2.3% 10.7% 15.9% 168.7% 8.8% 71.5% 3.6% 20.4% 8.5% 57.6%
Alabama 529 Plan Tactical Asset Allocation Moderate 1.7% 10.6% 16.0% 210.6% 8.4% 79.7% 5.6% 53.9% 9.7% 91.5%
MARYLAND COLLEGE INVESTMENT PLAN Strategic Asset Allocation – Equal Weight Moderate 1.6% 8.4% 12.5% 159.9% 5.0% 55.9% 2.6% 23.8% 5.0% 49.0%
MARYLAND COLLEGE INVESTMENT PLAN Strategic Asset Allocation – Optimal Moderate 2.7% 9.4% 14.1% 145.8% 7.1% 56.5% 2.4% 14.1% 6.1% 41.3%
MARYLAND COLLEGE INVESTMENT PLAN Tactical Asset Allocation Moderate 2.6% 4.9% 6.3% 133.5% 2.6% 52.1% 3.4% 65.5% 4.6% 73.4%
Ohio CollegeAdvantage 529 Savings Plan Strategic Asset Allocation – Equal Weight Moderate 1.8% 10.4% 12.7% 190.1% 6.2% 72.6% 1.9% 16.8% 6.8% 65.2%
Ohio CollegeAdvantage 529 Savings Plan Strategic Asset Allocation – Optimal Moderate 2.3% 11.8% 16.8% 183.7% 7.8% 62.7% 2.8% 16.2% 7.6% 52.7%
Ohio CollegeAdvantage 529 Savings Plan Tactical Asset Allocation Moderate -0.1% 8.3% 11.4% 202.0% 0.5% 4.1% 0.8% 5.4% 4.6% 41.6%
The Vanguard Nevada 529 College Savings Plan Strategic Asset Allocation – Equal Weight Moderate 1.4% 8.0% 10.2% 163.6% 6.1% 73.3% 3.5% 30.8% 6.8% 68.2%
The Vanguard Nevada 529 College Savings Plan Strategic Asset Allocation – Optimal Moderate 2.3% 10.6% 14.8% 155.9% 8.1% 64.7% 2.7% 16.4% 7.2% 50.8%
The Vanguard Nevada 529 College Savings Plan Tactical Asset Allocation Moderate 1.5% 4.4% 4.5% 91.4% 7.1% 94.9% 5.3% 71.8% 6.3% 72.5%
Utah Educational Savings Plan (UESP) Strategic Asset Allocation – Equal Weight Moderate 2.3% 8.7% 12.2% 131.3% 5.5% 46.5% 0.7% 3.1% 5.9% 41.0%
Utah Educational Savings Plan (UESP) Strategic Asset Allocation – Optimal Moderate 2.6% 9.9% 15.1% 155.4% 7.7% 59.0% 2.0% 10.9% 6.3% 40.9%
Utah Educational Savings Plan (UESP) Tactical Asset Allocation Moderate 1.6% 4.0% 4.7% 85.6% 6.3% 59.0% 2.6% 22.4% 7.6% 69.5%

*: NOT annualized

**YTD: Year to Date

See the up to date comparison >>

From the above, one can see that current stock market strength has lifted most 529 plan portfolios’ performance. However, given the likely uneven and anemic economic development ahead, we believe that only the conservative and very long term portfolios are suitable for a 529 plan. 

Market Overview

Last week, major assets entered a uniform risk on mode: international stocks, emerging market stocks are ranked higher than U.S. stocks while all major risk asset classes are now on top of the U.S. bonds. This happened in a shortened holiday week. It is consistent with the general stock market seasonality: stocks are usually in favor from Thanksgivings to Christmas holiday season. Whether this trend can be sustained or not, we will follow the major asset trend table on 360° Market Overview

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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