Stocks for college planning?

nj2011mom
Tue, 04 Oct 2011 12:24:24 +0000

From a portfolio management perspective, one should never ‘bet’ on just one stock, as you are betting. Betting it will outperform the market, never have bad company-specific news (the investment term is ‘Idiosyncratic Risk’) or be in an un-loved sector. The theory of mutual funds is that through diversification you eliminate this Idiosyncratic Risk and if you are benchmarking to a broad market index you eliminate sector risk and therefore perform like the market.

Ok - so now I’ve sold you on why you want a fund…now you have to make the difficult decision of Asset Allocation. What’s your time horizon and risk tolerance? Do you need the money in 3 years for college tuition and you can’t lose any? Is this for college in 15 years and you will like have earnings you can apply in the event the markets go down?

For retirement funds, a rule of thumb was your age is the % you should have in Fixed Income/Bonds. With the 10 year treasury yielding 1.82%, there’s not much upside or return for the risk you will lose principal. (right now for every 1%/100 basis point increase in rates, the price of the bond will decline 9% - not a great risk/reward).

I don’t have great answers. Personally I have much of my money in balanced funds or income-focused funds. I do own a few stocks individually as part of my portfolio, but they are boring consumer products companies such as Pepsi with a 3.3% dividend yield.