5 Things To Know About 529 College Savings Plans

Hi everyone,

In this week’s video, we highlight the top 5 things you should know about 529 college savings plans. Take a look:

To learn more, check out the video on our FAQ page of our site, where we expand on the things you should know about 529 plans. 

In The Market...

The S&P 500 was essentially flat last week. Let's look under the hood:

(price data via stockcharts.com)

Stocks looked poised for a nice rebound, rising nicely heading into Wednesday before giving back all of those gains by week’s end. Defensive sectors gained (Consumer Staples, Utilities) while growth-oriented sectors fell (Tech, Consumer Discretionary, Materials).

Normally we might see the bond market rally along with the more defensive sectors, but that was not the case. Why? Simply put, investor demand for long-term bonds has weakened. Weaker demand means falling bond values, which means higher interest rates.

Take a look at this chart I shared back in May, only now in current time. My fear today remains what it was then — short-term interest rates would rise too quickly and eventually eclipse longer-term rates, causing the “yield curve” to invert. This is still very much in play, when looking here at the 10-year Treasury rate (blue line) vs. the 2-year Treasury rate (orange line):

(created in stockcharts.com)

An inverted yield curve is abnormal and unintended. If you lend your money for 10 years you should expect to earn a higher annual interest rate than if you lend it for 2 years.

By my estimation, this is the result of two things working in conjunction. First, the Federal Reserve has accelerated its pace of raising short-term interest rates. Second, although investor demand for long-term bonds has weakened, it has not weakened enough. So while long-term interest rates have also increased over the past 2 years, short-term rates are simply rising quicker, and thus, closing the gap.

Okay, back to stocks…

For now it appears investors are selling any market rallies rather than buying any market dips. This is pretty typical in the days/weeks after a quick market drop like the one we just witnessed. We are remaining patient and being selective about reinvesting back into stocks.

Interestingly, recent market behavior resembles that of Oct. 2014, which also happened to be the last midterm election. In fact, many of today’s statistical measures align with that period of time. I will spare all of those details, but the important takeaway is that if the market continues to channel Oct. 2014 then we would expect the S&P 500 to rally roughly +10% over the next 6 weeks. Will it? Nobody knows for sure. But I thought it was worth highlighting.

Still though, upward price momentum has waned. The S&P 500 continues to hug its 200-day moving average, which is a line-in-the-sand that invites considerable buying/selling activity. We want to see more stock prices above their 200-day moving averages, not less.

Here is a look at the percent of stocks that are above their 200-day moving averages, collectively by sector. Josh tracks and logs this at each week-end. Notice how the percentages have slipped lower since the beginning of the year:

(data source: stockcharts.com)

If this percentage continues to decline, stock prices will likely fall further from here. Simply put, stocks need to hold their 200-day averages. It is a tricky market right now, no doubt.

In Our Portfolios...


Have a great week!

Brian E Betz, CFP®

A New Richest Person In The World And A New Law In Seattle

In The News...

There was a new sheriff in town, for a moment.

His name: Jeff Bezos.

Bezos, the CEO of Amazon, had supplanted Bill Gates as the world's richest person following Amazon's earnings release. Amazon's share price rose and Bezos' net worth climbed to $92 billion, narrowly edging the Microsoft founder.

But... by the end of the week, the stock price fell back and Bezos is again #2 in the world.

It is only a matter of time though. Perhaps more impressive than Bezos' meteoric rise is the fact that Gates has been the world's richest man in 18 of the past 23 years (per CNBC). Not only that, but the fact that the two-richest people in the world reside in Seattle (within blocks of each other) is mind-boggling.

Drop that device! Washington State passed a new law that went into effect last week, barring mobile device use while driving. The biggest change, which bolsters the existing law preventing drivers from texting or holding a phone to their ear, is that you cannot even hold your electronic device while driving. On top of that, you cannot eat or do your makeup while driving, either.

The law obviously aims to reduce injuries stemming from collisions. I approve it. Traffic has become horrendous in Seattle as the population has exploded in the absence of additional roads/infrastructure. The traffic is bad enough, but it worsens when people pull out their phones the second they hit a red light or bumper-to-bumper traffic. This legislation will hopefully curb what has been a self-perpetuating problem. Even if traffic does not dramatically improve, it should reduce the number of crashes and injuries.

In The Market...

The S&P 500 was flat this past week. Let's look under the hood...

(price data via Yahoo Finance)

Stocks: Role-reversal occurred last week, as previously weak sectors such as Energy and Consumer Staples led and stronger sectors (Health Care, Tech) declined. The last two times we saw the S&P 500 stall on a weekly basis like this (In June and March) the following few weeks were flat-to-down, before again chugging higher. We'll see if history repeats itself here, entering what is seasonally the worst month of the year for stocks.

Below in the Portfolios section you will notice that we bought Financials (XLF) and sold Real Estate (VNQ). This might seem funny considering my comments last week about patience. Sometimes things happen quick and conviction rises. That was the case here. Simply put, I believe Financials have a better technical outlook, led by the fact that Financials are knocking on the door of all-time-highs.

Bonds: A down week for conservative bonds (TLT, LQD), but not terribly unexpected given the yo-yo behavior the past few weeks. High-yield bonds were positive on the week, which bodes well for stocks, I believe.

In Our Opinion...

On Wednesday the Federal Reserve opted to leave short-term interest rates unchanged, keeping the federal funds rate at 1.00%. It was the 5th time the Fed has met this year. It would have been the 3rd rate increase this year, had that decision been made.

I always say to ignore the noise around the Fed. The below image typifies why. A lot of investors have grown so obsessed with finding clues within Fed statements and meeting minutes/notes that there are now side-by-side comparisons of current vs. previous Fed statements. Not just general comparisons of tone or major economic issues, but comparing Fed statements word-for-word. Take a look...

(source: Michael Sheetz, CNBC.com

The infatuation with the Fed baffles me. It has cooled a bit since the Fed began raising rates in late-2015, but nonetheless, the 24-hour news cycle and continuing narrative that the Fed dictates market returns attracts clicks.

My advice remains the same: Know what is going on but do not let speculation over the direction of short-term interest rates guide your investment decisions.

In Our Portfolios...

(Note: Each client's account is uniquely managed, based on account size and risk tolerance. Your account will only own some, not all, of the investments bought and sold over time.)

Q&A/Financial Planning...

I was asked to present to a group of new parents (myself included) this past week, on topics most relevant to financial planning for kids. After soliciting feedback on topics they were most interested in, my talk centered on 3 main areas:

  1. College savings
  2. Life insurance
  3. Estate planning

I realize most of you are not new parents, but many of the concepts within these categories may still apply. In no particular order, here were some takeaways I thought worth sharing...

  • Are you helping save toward your grandchild's college savings? If you use a 529 plan (the most popular option) make sure you understand how your eventual account withdrawals will impact, and potentially hurt, your grandchild's financial aid eligibility.
  • If you are already saving for college, have you run the math to know that you are saving the right amount to afford the type of school and number of years you want to accommodate? Most do not, which often starts with ignoring the fact that college costs increase 4-5% per-year.
  • Are you nearing retirement and in need of life insurance? Check to see what coverage you currently have with your employer, or what coverage you can obtain prior to leaving. It will likely be much more expensive to obtain a new life insurance policy in your 60s than it would to continue your existing policy held through work ("portability" feature).
  • If you own a permanent life insurance policy, does it still meet your needs? Do you need less coverage? More? How much cash value is there within the policy?
  • If you have a Last Will And Testament in place, how recently have you reviewed it? For example, if family dynamics have changed and you would prefer a different Executor to carry out your wishes post-death, you should update it.
  • Do you own a Living Trust? Among other things, a trust helps certain assets seamlessly pass to the intended heir, bypassing what can be a lengthy probate process. It also helps keep your personal/financial matters more private. A trust layers on top of your Will.
  • Are estate taxes a concern? The federal limit allows a married couple to pass roughly $10 million tax-free to their heirs, but you may still owe state estate taxes. Right now the WA State exemption is $2.1 million, a much lower threshold than the federal exemption.

What's New With Us?

There are a number of exciting things I have in the works. Sorry for being vague about it, but once I have more detail I will share it.

Have a great weekend!


Brian E Betz, CFP®

Accord-Cutting: Trump Withdraws U.S. From Paris Agreement

In The News...

I learned something new this past week.

I learned that there is an international pact called the Paris Agreement, in which member nations band together to promote climate change and combat global warming. I had never heard of this accord until a few days ago when President Trump made the controversial decision to withdraw the U.S. from it.

All in favor: As best I understand it, those who favor the Paris Agreement believe it reflects a necessary, joint commitment to fight the scientifically proven fact that ongoing pollution causes the Earth's temperature to gradually rise, threatening both global economic growth and the lives of future generations.

All opposed: Those who agree with Trump's decision to ditch the Paris Agreement believe it will help the U.S. economy by preserving domestic jobs in industries that produce fossil-fuel based energy, such as coal. In Trump's case, there is debate over whether this is more about him believing the Paris Agreement simply represents a "bad deal" that he will later renegotiate, versus a staunch disbelief/disregard of global warming.

I have never really taken time to research global warming. I have tapped a number of people on both sides and most seem to accept global warming due to scientific evidence. I plan to learn more about it, but in the meantime cannot offer much opinion until I do. My thoughts on how this topic relates to the work financial advisers do in the Opinion section below.

Seattle for the win: Seattle housing led the nation in price growth for yet another month, and the gap is widening. The latest S&P/Case-Shiller report shows Seattle homes were up +2.6% in March and +12.3% over the past year. That double-digit annual growth not only laps the rest of the nation, which grew +5.8%, but is +3.0% higher than the next-closest city (Portland).

Here is a complete city-by-city look at the 20 major housing markets:

Why Seattle? The Pacific Northwest, particularly Seattle, continues to benefit from a few factors.

  1. Housing prices became so hot in areas of California, namely the Silicon Valley, that businesses (and consequently their employees) have migrated north.
  2. Seattle was a hotbed for innovation before any Silicon Valley migration.
  3. Seattle is tech-heavy but not tech-dependent, which is something often overlooked. There is great commerce balance, considering non-tech giants like Starbucks and Boeing are based here.
  4. Globalization continues to "flatten" the world, so it is not as daunting for younger workers to move to an isolated area like the Pacific Northwest (stigmas and all).
  5. Finally... Amazon (enough said).

As I have said before, at some point Seattle will level off similar to San Francisco. But for now the housing wave remains strong for existing homeowners and becomes more challenging for first-time homebuyers.

In The Market...

The S&P 500 climbed +1.0% this past week. Let's look under the hood...

(source of price data: Yahoo Finance)

Stocks: Another strong week for stocks, as only Financials and Energy were in the red. Every other sector was up at least +1.0%, which is bullish. We continue to hold Utilities (XLU) across all client accounts. We also own either the Nasdaq-100 fund (QQQ) or S&P 500-index fund (IVV) as well, depending on account size. Real Estate (VNQ) is a fund that larger accounts or more aggressive accounts continue to own. We have yet to see the rally I had anticipated in that sector, but Real Estate was up like most sectors last week, which is positive.

Bonds: Another week where bonds were unshaken despite a stock rally. Most accounts continue to own Investment-Grade Corporate Bonds (LQD) as well as High-Yield Bonds (HYG or JNK). On Friday, Long-Term Treasuries (TLT) rallied more than +1.0%. Treasuries may be primed to rally further in the weeks ahead, as I have written at-length in the past few months. I have said I thought that interest rates would fall and so far they have. But conditions can change quickly, so no time to dwell on history.

Did investors "go away" in May? Not so much... The S&P 500, when including dividends, gained +1.4% in May while the Nasdaq-100 was up nearly triple that, rising +3.9%. I mention the Nasdaq-100 because it tends to be more reflective of "risk-on" investor behavior, meaning investors are showing greater risk appetite. The Nasdaq-100 is predominantly comprised of stocks in the Tech and Consumer Discretionary sectors, two areas that are more cyclical (meaning they rise more compared to the overall market during positive periods and fall more comparatively when the market is down).

2,400 and gone? Excluding dividends, the S&P 500 index surpassed 2,400 on its third attempt in late-May and appears poised to rally further. Take a look...

(chart created via stockcharts.com)

The dashed line reflects 2,400 on this daily chart (each candle on the big chart represents a day). I am interested to see whether this rally sustains into the summer months, especially into August, when volatility often picks up. Right now, stocks continue to look good based on our technical analysis.

In Our Opinion...

It is okay to say I don't know.

I do not give uneducated or inauthentic answers to questions relating to investing or financial planning. So when I am asked what impact leaving the Paris Agreement will have on the market or economy, I cannot give an answer.

As mentioned I have taken no time to learn about global warming, so I am not ashamed to admit I had no idea an international agreement even existed in the first place. In fact, I would still have no idea had headlines not erupted following Trump's decision to remove the U.S. from participating in it. Yet, in 2017 it seems we are supposed to have an immediate and steadfast opinion on matters like this.

Unfortunately, I don't. At least until I learn more. If someone says the agreement is bad "because it will kill jobs" without providing employment stats, or says it is good "because it's science" without detailed scientific evidence, I am not going to naively choose either side.

The same thing applies to investing and financial planning. For example, two questions I received just this past week that are difficult to answer:

  • I hear gold prices are going to skyrocket when the economy tanks. Should I sell and buy gold?
  • Snapchat just went public. Should I buy it?

The first question is tough to answer, although I know a lot about gold. It is tough because this specific question, which I get from time to time, often comes from a place of cynicism. The person is usually very pessimistic and believes the world is going to implode (gold prices usually rise when stock prices plunge, which is the logic here).

Part of my job is to assuage such fear. We would not be in this business if we felt the market was constantly on the verge of collapse. But some people simply believe each year will be 2008, despite any rationalization provided to the contrary. With that mindset being as strong as it often is, sometimes nothing can be said to overcome those concerns.

The second question, relating to Snapchat, is impossible to answer. Our investment approach relies on past price history and Snapchat, like any company that goes public, by definition has no price history. I get why people like IPOs -- the media attention makes them sexy to invest in. Plus, a lot of people think every tech company that goes public will be the next Google (a dangerous mentality to have). So while I could give an opinion on Snapchat, the responsible thing to do is say "I am not sure" when asked if it is a smart investment. As price trends develop over time, only then will I feel comfortable voicing my opinion.

So if you ask me a question that I am not educated on, I will likely research it and get back to you. It is okay to say I am not sure or I don't know.

In Our Portfolios...

Stocks: Purchased the Nasdaq-100 fund (QQQ) for accounts above $50,000 and the S&P 500 index fund (IVV) for accounts below $50,000. For accounts that own individual stocks (certain portfolios above $150,000), we sold Oracle.

Bonds: Purchased the Long-Term Treasuries fund (TLT) for certain accounts and will look to add this for additional accounts into next week.

Q&A/Financial Planning...

If you are a parent or grandparent to young kids, I thought I would share a decision that my wife and I personally made this past week. We opened a 529 college savings plan for our infant daughter, Brooklyn. We chose the Utah Educational Savings Plan (UESP) due to its low cost structure, strong Morningstar rating and flexibility for me to manage the account. (Most plans have a "set it and forget it" approach that automatically shifts from stocks to bonds as the child nears age 18, but our situation is obviously unique in that I am capable of managing the funds and desire to do so.)

529 plans provide two chief benefits when saving for college:

  1. Account earnings grow tax-free, meaning you are not taxed if used to fund future college expenses. If you start early enough and contribute a lot, earnings can comprise a big chunk of the eventual balance, which means big tax savings.
  2. Such plans provide a defined structure, which instills good savings discipline/behavior if proper financial planning is conducted at inception.

There is some flexibility too. For instance, if there are multiple children and the designated child does not go to college, you can change beneficiaries to another child that does go to college.

There are some distinct disadvantages, or at least pitfalls to know:

  • If funds are withdrawn for uses other than college expenses, all earnings are not only taxed as ordinary income but penalized 10% as well.
  • If you do not properly plan and save the right amount over time, you can quickly fall behind as your child ages. This means you diminish the tax advantages and the overall point of having the plan.
  • If structured incorrectly, particularly with grandparent-owned 529 plans, you could face adverse tax and financial aid consequences in the future (which I won't detail here, but contact me for more).

I generally recommend 529 plans, but only for motivated parents and grandparents who execute on the savings behavior required to achieve their goal. For us, we plan on saving to accommodate 3 years of college education for our daughter (while using other funds, potential scholarships or student debt to pay for the fourth year). Among the other mathematical factors that went into determining how much we need to save, I based it on a tuition cost of $25,000 per-year (in today's dollars), a 5% college inflation rate and an annual 7% investment growth rate over the next 18 years.

I am happy to share why this math is necessary. Let me know if you have any questions on 529 plans, or college savings in general.

What's New With Us?

For those of you who receive monthly performance summaries via Morningstar, please know that the May summaries will be delayed. Due to the migration from Scottrade to TD Ameritrade, I am working through a project to merge account histories within Morningstar. Once that project is complete I will send out May summaries. If you have not previously received a monthly performance summary and would like to begin receiving them, just ask.

Have a great remaining weekend!


Brian E Betz, CFP®