Market Commentary – December 10, 2018

by | Dec 10, 2018 | Weekly Stock Market Commentary

We’re off to a slow start.
December is usually the best month of the year for the stock market. It has been since 1950, according to Randall Forsyth of Barron’s, but not so far this year.

Two issues made investors particularly uncomfortable last week which helped trigger a sell-off that pushed major U.S. stock indices lower.

  1. Fading optimism about an easing of trade tensions with China. It looked like the relationship between the United States and China might thaw, and Americans were feeling pretty optimistic about a trade truce. In fact, markets moved higher Monday in anticipation.

Unfortunately, on the same day that Presidents Trump and Xi Jinping shared a cordial dinner, the chief financial officer of a major Chinese telecommunications firm was arrested at the request of the United States. The Economist reported, “[The company] is a pillar of the Chinese economy – and Ms. Meng is the founder’s daughter. The fate of the trade talks could hinge on her encounter with the law.”

  1. A section of the yield curve inverted. Normally, Treasury yields are higher for longer maturities of bonds than for shorter maturities of bonds. Last week, yields on three-year and five-year bonds inverted, meaning yields for three-year bonds were higher than those for five-year bonds. Ben Levisohn of Barron’s explained:

“Usually when people talk about an inversion, they’re talking about the difference between two-year and 10-year Treasuries, or three-month and 10-year Treasuries, which have been useful, though not perfect, predictors of recessions and bear markets. Last week, though, everyone was talking about the three-year and the five-year Treasury inverting – something that usually doesn’t get much notice…And for good reason.”

Historically, these maturities have inverted seven times. In one instance, the country was already in recession. On the other six occasions, recession didn’t occur for more than two years. Barron’s reported the Standard & Poor’s 500 Index gained an average of 20 percent over the 24-month periods following these inversions.

Investors’ negative response to last week’s news may have been overdone. Financial Times reported European and Asian markets firmed up a bit Friday “…as buyers stepped back in after some savage falls on Thursday.”

About time and money.
Elizabeth Dunn, associate psychology professor at the University of British Columbia in Vancouver, Canada, and Michael Norton, associate marketing professor at Harvard Business School, have been studying whether people should spend money differently. Their goal is to figure out how to get the most happiness for the dollars spent. In Happy Money: The Science of Happier Spending, they explained their experiments:  “…We started doling out money to strangers. But there was a catch: rather than letting them spend it however they wanted, we made them spend it how we wanted…changing the way people spent their money altered their happiness over the course of the day. And we saw this effect even when people spent as little as $5…Shifting from buying stuff to buying experiences, and from spending on yourself to spending on others, can have a dramatic impact on happiness.”

In addition, buying time can improve happiness. How do you buy time? By paying someone else to do tasks you don’t like to do – cleaning, grocery shopping, home maintenance, and other tasks. This can relieve time pressure and free up time to do what you really want to do – and that can make you happier.

The authors suggest individuals ask a simple question before making any purchase: How will this purchase change the way I use my time? Make sure the answer aligns with the goal of having an abundance of time.

Weekly Focus – Think About It
“Happiness is when what you think, what you say, and what you do are in harmony.”
–Mahatma Gandhi, Leader of Indian independence movement

Best regards,
John F. Reutemann, Jr., CLU, CFP®

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

 

Sources:
https://www.barrons.com/articles/the-latest-jobs-report-will-tie-the-feds-hands-next-year-1544208693?mod=hp_DAY_1 (
https://www.economist.com/finance-and-economics/2018/12/08/a-trade-truce-between-america-and-china-is-over-as-soon-as-it-began
https://www.barrons.com/articles/dow-drops-4-5-but-the-market-is-probably-overreacting-1544234320?mod=hp_DAY_6
https://www.ft.com/content/2cda1c8a-f9be-11e8-8b7c-6fa24bd5409c
https://www.simonandschuster.com/books/Happy-Money/Elizabeth-Dunn/9781451665079
https://www.brainyquote.com/quotes/mahatma_gandhi_105593

How rising interest rates are affecting the markets

by | Oct 11, 2018 | Learning

It’s October, which means autumn is upon us. But this year, it’s not just the leaves that are falling. The markets have been falling, too. On Wednesday, October 10, the Dow slid more than 800 points. The S&P 500 fell for the fifth straight day. And the tech-heavy NASDAQ was hit hardest of all, dropping more than 4%.1 Both the Dow and the S&P continued sliding on Thursday, too.2

It sounds dramatic, but it’s not necessarily cause for alarm. Still, whenever market volatility rears its head, it’s useful to understand why. That’s because the more we understand the why, the less cause we have to fear it.

Before I delve into why, however, let me ask you a question. Do you remember the Greek myth of Theseus and the Minotaur? In the story, Theseus descends into a bewildering labyrinth to fight the half-man, half-bull Minotaur. But to find his way back, Theseus first ties one end of a ball of string to the entrance. Then, after slaying the beast, he follows the unwound string all the way back to the surface.

The reason I mention this story is because sometimes, navigating the markets can feel like wandering through an impenetrable labyrinth. There are so many headlines and narratives, each with their own twists and turns. The good news is that it’s possible to pick up a thread and follow it all the way back to its source, just like Theseus.

A ten-year journey
In this case, follow the thread back to the end of 2008. Seems like a long time ago, doesn’t it? Barack Obama had just been elected president. The academic paper that would lead to the creation of bitcoin had just been published. And people were just beginning to realize how bad the Great Recession would become.
To combat this, the Federal Reserve lowered the federal funds rate to almost zero.3 This is the interest rate that banks pay each other for overnight loans. Their reasoning was simple. By reducing the federal funds rate, banks could afford to lower their own interest rates to customers. Lower interest rates, of course, make it cheaper for businesses and individuals to borrow money, which spurs more investing and spending. This, in turn, could help revive America’s slumping economy. And with millions of jobs lost during the Great Recession, the economy needed all the help it could get.

Rates remained in the basement for years afterwards as the economy embarked on a long, slow healing process. In fact, it wasn’t until 2015 that the Fed finally raised rates at all.4

Now follow the string forward to 2018
The Fed has started lifting interest rates at a slightly faster pace in 2018. Recently, on September 26, the central bank announced they would raise the federal funds rate to a new range of 2.0 to 2.25%.5 Officials also suggested they might boost rates once more before the end of the year. It’s the third increase in 2018, and the eighth overall since 2015.

Why are interest rates going up? Because the economy is in a much stronger place!
Unfortunately, with that strength comes the risk of inflation. Inflation is the rate at which prices rise and purchasing power falls. For example, if the rate of inflation is 3%, then a candy bar that costs a dollar one year will cost $1.03 the next. It’s essentially the measure of how valuable your money is. And if inflation goes too high, it can make even basic living costs very expensive.

Historically, inflation goes up when interest rates are low. The Federal Reserve takes the risk of inflation very seriously. In fact, stabilizing inflation is one of the reasons the Fed was created in the first place. So, to prevent the economy from “overheating”, the Fed has slowly raised interest rates. This makes borrowing costlier and reduces spending, forcing the economy – and inflation – to grow at a slower rate.

Whew! Got all that? If so, congratulations! You’ve followed the string all the way back to the surface. We’ve finally reached the present day.

How higher interest rates affects the markets
There’s really no direct link between interest rates and the markets. The effect is more of the “ripple” variety. Despite this, higher interest rates tend to spook investors.
Remember, when the federal funds rate goes up, it costs more for banks to loan each other money. In response, banks raise their own interest rates. This makes borrowing more expensive for businesses and individuals, prompting them to cut back on spending. Less spending for businesses means less investment, less expansion – and less growth. And when investors think a company isn’t growing, they tend not to invest in that company. On the individual side, higher rates can also mean less disposable income for people to spend or invest.

There are other reasons why the markets are struggling. Falling bond prices (which are directly correlated with rising interest rates). Trade tensions between the U.S. and China. Like I said, the markets can be positively labyrinthine. But interest rates are one of the main drivers behind this sudden surge in volatility.
And now you know why.

So where do we go from here?
As important as interest rates are, they’re still just one thread. There are plenty of others that could cause the markets to rise or fall. For instance, a fresh bit of good economic news could transform this week’s fears into last week’s memories. And with the economy as strong as it is, would that really be a surprise?

This is why we don’t overreact whenever the markets lurch one way or the other. You see, when it comes to working toward your goals, we do everything possible not to fall into a labyrinth of twists, turns, and changes in direction. Instead, it’s better to keep things simple. To stay above ground. To follow our own path, not headlines or individual economic indicators.

In the story of Theseus and the Minotaur, Theseus was advised to “go forwards, always down, and never left or right” to reach his goal. The road to your goals isn’t quite so cut-and-dry. But the point is, Theseus had a plan. A strategy. And with the help of ball of string, he never deviated from it.

We also have a strategy: To diversify across a range of asset classes, choose fundamentally sound investments, and invest for the long term, not the short. And while you don’t have a ball of string, you have something even better: A team of experienced professionals dedicated to holding your hand while you work toward your goals.

It’s October. It’s a time for falling leaves, trick or treating, and an endless array of pumpkin flavored beverages. It’s not a time for stressing about the markets. So enjoy the season, remembering that here at Research Financial Strategies, we’ll keep watching Washington, Wall Street, and your portfolio. Every day, every week, every month, and every year. As always, please let us know if you have any questions or concerns. We’re always happy to talk to you! In the meantime, have a great month!

P.S. If you have any friends or family who are concerned about the markets, or don’t have a financial advisor to help them, please feel free to share this letter. Thanks!

Sources:
1 “Dow falls 832 points in third-worst day by points ever,” CNN Business, October 10, 2018. https://www.cnn.com/2018/10/10/investing/stock-market-today-techs-falling/index.html
2 “U.S. Stocks Seek Stability on Heels of Wednesday Rout,” The Wall Street Journal, October 11, 2018. https://www.wsj.com/articles/markets-tumble-across-asia-led-by-tech-as-growth-worries-dominate1539225820?mod=article_inline?mod=hp_lead_pos1
3 “Fed Cuts Key Rate to a Record Low,” The New York Times, December 16, 2008. https://www.nytimes.com/2008/12/17/business/economy/17fed.html
4 “Federal Reserve raises interest rates for second time in a decade,” The Washington Post, December 14, 2016. https://www.washingtonpost.com/news/wonk/wp/2016/12/14/federal-reserve-expected-to-announce-higher-interest-ratestoday/?noredirect=on&utm_term=.af1a4b1da520
5 “Fed Raises Interest Rates, Signals One More Increase This Year,” The Wall Street Journal, September 26, 2018. https://www.wsj.com/articles/fed-raises-interest-rates-signals-one-more-increase-this-year-1537984955

Weekly Market Commentary – December 5, 2016

by | Dec 5, 2016 | Weekly Stock Market Commentary

The Markets

Flirting with higher interest rates.

Last week, yields on 10-year Treasury bonds rose to a 17-month high of 2.44 percent, reported The Wall Street Journal, before retreating to finish the week at about 2.4 percent.

As we’ve mentioned previously, some experts suspect the bull market in bonds, which has persisted for more than 30 years, may be headed into bear territory. In part, this is because the U.S. Federal Reserve is expected to increase the fed funds rate in December. Last week, CME’s FedWatch Tool indicated there was almost a 99 percent chance the Fed would raise rates in December. Bond yields often reflect the actions of the Fed. If interest rates rise, bond prices move lower, resulting in a higher bond yields.

Another issue affecting interest rates is inflation. For several years, low inflation has supported the “trend within markets…to invest in rate-sensitive investments like bonds, which benefit from low inflation, and their equity surrogates which benefit from falling bond yields,” wrote Schroders.

In recent weeks, the bond market has been influenced by inflation prospects. The Wall Street Journal explained:

Worries about higher inflation have been a main factor fueling one of the biggest bond market selloffs since the crisis over the past weeks. The selloff had accelerated after the U.S. election in early November. Investors then had bet that the prospect of expansive fiscal and economy policy from the new U.S. administration would lead to stronger growth and higher inflation.

Last week, a measure of wage inflation moved slightly lower. This appears to have assuaged some investors’ concerns about inflation as bond yields moved lower on Friday.

Data as of 12/02/2016

1-Week

 YTD 1-Year 3-Year 5-Year

10-Year
Standard & Poor’s (Domestic Stocks)

-1.0%

 7.2% 5.6% 6.8% 12.0%

4.5%
Dow Jones Global ex-US

-0.1

 -0.7 -3.0 -3.8 1.9

-1.3
10-Year Treasury Note (Yield Only)

2.4

 N/A 2.2 2.8 2.0

4.4
Gold (per ounce)

-1.2

 10.5 11.2 -1.5 -7.7

6.2
Bloomberg Commodity Index 2.4 10.8 8.3 -11.1 -9.9 -6.6
DJ Equity All REIT Total Return Index -0.6 3.7 5.8 11.4 12.1 4.3

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

Growth, Growth, Where’s The Growth?

It’s that time of the year again: The time when pundits and analysts assess the present and forecast the future. Here are a few predictions from The World in 2017, which is published by The Economist:

  • Forecasts suggest the United States will not be among the fastest growing economies in the world during 2017. The top ten countries for economic growth are expected to be: 1) Yemen, 2) Myanmar, 3) Côte d’Ivoire, 4) Mongolia, 5) Laos, 6) Ghana, 6) India, 8) Cambodia, 9) Bhutan, and 10) Djibouti.  
  • One country’s cinema box office gross may surpass that of the United States. Fifteen cinema screens are being added every day in China. During 2017, the box office revenue in the country is estimated to be $10.3 billion, higher than that of the United States.
  • Automobile companies are revving their engines. Did you know there are just 21 cars per 1,000 people in India? In China, the ratio is about 120 per 1,000. That means there is a lot of room for growth – or alternative forms of transportation.
  • Artificial intelligence (AI) may create new ethical dilemmas. “Look at ‘medtech.’ Fans claim AI will remake health care, using algorithms to do the grunt work of diagnostics. Yet, could a virtual doctor explain its thinking so patients can make informed decisions?”
  • The sharing economy grows to encompass jets and yachts. Apparently, a bunch of Asian millionaires are interested in private aircraft. Some in the tourism industry are hoping they’ll be willing to share.

We hope 2017 will be filled with pleasing discoveries, stimulating events, and thrilling innovation.

Weekly Focus – Think About It

Happiness is having a large, loving, caring, close-knit family in another city. –George Burns, American comedian

 

Weekly Market Commentary – November 28, 2016

by | Nov 28, 2016 | Weekly Stock Market Commentary

 The Markets

It’s a myth!

According to WebMD, the amino acid L-Tryptophan is not responsible for Americans’ post-Thanksgiving food coma. The real culprit is overeating. So, last week’s post-feast sleepiness can be blamed on big appetites.

Investors also indulged their appetite for risk last week. Barron’s reported:

…the stock market sent all four major U.S. benchmarks – the Standard & Poor’s 500, the Dow industrials, the NASDAQ Composite, and the Russell 2000 – to record highs last week, on the same day. Lest you think that’s an easy feat, we haven’t seen such a gathering at the summit since December 31, 1999, back when we had juvenile waistlines and Napster accounts. Then, for emphasis and encore, the market did it again a day later, a back-to-back fete the likes of which we haven’t seen since the positively Pleistocene era…of 1998. The buying binge continued on Friday, after Thanksgiving’s regrettable interruption, propelling the indexes to – you guessed it – more record highs.

U.S. stock markets are doing well and so are some overseas markets. Barron’s reported Canada’s national index is up 14.3 percent for the year, Thailand’s is up 14.4 percent, Indonesia’s is up 12.6 percent, and the United Kingdom’s is up 8.5 percent.

It’s quite gratifying to watch the value of stocks rise. However, U.S. shareholders may want to ask, “Is this congregation of indexes at record highs a sign that our seven-year-old bull market is finding a second wind – or is it a signal that the party has peaked?”

Data as of 11/25/2016

1-Week

 YTD 1-Year 3-Year 5-Year

10-Year
Standard & Poor’s (Domestic Stocks)

1.4%

 8.3% 6.0% 7.1% 13.8%

4.8%
Dow Jones Global ex-US

1.1

 -0.5 -3.0 -3.8 3.7

-1.0
10-Year Treasury Note (Yield Only)

2.4

 N/A 2.2 2.7 2.0

4.5
Gold (per ounce)

-1.9

 11.8 11.2 -1.5 -7.0

6.4
Bloomberg Commodity Index 2.4 8.2 3.4 -11.8 -9.7 -6.8
DJ Equity All REIT Total Return Index 1.7 4.4 5.9 11.3 13.6 4.7

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

How much wealth is there in the world?

In 2016, the Earth’s inhabitants were worth about $256 trillion, according to the Global Wealth Report by Credit Suisse Research Institute. Population has grown along with wealth.

  1. North America, which has more than 5 percent of the world’s population, is the wealthiest region with about $92 trillion of the world’s wealth.
  2. Europe, which accounts for about 12 percent of the world’s population, is next with about $73 trillion.
  3. The Asia-Pacific region, excluding China and India, encompasses almost 25 percent of the world’s population, and is worth a bit more than $53 trillion.
  4. China has more than 20 percent of the world’s population and comes in just above $23 trillion.
  5. Latin America has less than 10 percent of the world’s people and accounts for about $7.5 trillion of the world’s wealth.
  6. India, with more than 15 percent of earth’s inhabitants, has almost $3.1 trillion.
  7. Africa has more than 10 percent of the world’s population and about $2.5 trillion of its wealth.

The Economist reported:

If you had only $2,220 to your name (adding together your bank deposits, financial investments, and property holdings, and subtracting your debts) you might not think yourself terribly fortunate. But you would be wealthier than half the world’s population… If you had $71,560 or more, you would be in the top tenth. If you were lucky enough to own over $744,400 you could count yourself a member of the global 1% that voters everywhere are rebelling against.

Of course, where a person lives factors into how wealthy they feel. For instance, last week, Expatison.com reported living in New York was 15 percent more expensive than living in London, and London was 30 percent more expensive than living in Toronto. Living in Toronto was 115 percent more expensive than living in Belgrade. Belgrade was 60 percent less expensive than Singapore, and Singapore was 139 percent more expensive than Mumbai.

Weekly Focus – Think About It

You don’t learn to walk by following rules. You learn by doing, and by falling over. –Richard Branson, British businessman and entrepreneur

Weekly Market Commentary – November 21, 2016

by | Nov 21, 2016 | Weekly Stock Market Commentary

The Markets

This time it’s the end. Really. Possibly.

It seems like experts have been forecasting the end of the bull market in bonds for years – and they have been doing so. In July 2010, bond guru Bill Gross predicted the 28-year bull market in bonds was near an end and, as interest rates moved higher, bond values would move lower. The Federal Reserve’s first round of quantitative easing had ended in March 2010, and he couldn’t know a second round, which would keep interest rates low, would begin in November 2010.

Since the U.S. election, investors have begun to favor stocks over bonds. Barron’s explained:

BofA ML [Bank of America Merrill Lynch] said the weekly influx was the biggest into equities since December 2014. The outflows from bonds, meanwhile, was the largest since the taper tantrum of June 2013…The flight from bonds made for the biggest two-week loss in more than a quarter-century in the Bloomberg Barclays Global Aggregate Index, which fell some 4 percent, Bloomberg reports. The outflows from municipal and emerging market bond funds were especially acute, about $3 billion and $6.6 billion, respectively.

The Wall Street Journal reported the yield on 10-year U.S. Treasuries finished last week at a 12-month high, after recording the biggest two-week gain in 15 years.

Will investors’ enthusiasm for U.S. stocks persist? Will this prove to be the end of the 35-year bull market in bonds? Stay tuned.

Data as of 11/18/2016

1-Week

 YTD 1-Year 3-Year 5-Year

10-Year
Standard & Poor’s (Domestic Stocks)

0.8%

 6.8% 4.7% 6.8% 12.4%

4.5%
Dow Jones Global ex-US

-1.0

 -1.7 -3.1 -4.4 2.2

-1.0
10-Year Treasury Note (Yield Only)

2.3

 N/A 2.3 2.7 2.0

4.6
Gold (per ounce)

-2.1

 14.0 13.4 -1.9 -6.8

6.8
Bloomberg Commodity Index -0.4 5.7 1.8 -12.1 -10.5 -6.8
DJ Equity All REIT Total Return Index 0.7 2.7 5.7 10.0 11.9 4.5

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

LOOKING FOR A GREAT GIFT?

If you have friends or relations with young children, consider starting or contributing to a 529 College Savings Plan. It’s a great way to fund a future education and, let’s face it, really young children often enjoy the box and wrapping more than the gift.

So, if you want to give a child something they’ll always remember, starting a college fund may fit the bill. It’s a gift that may also benefit the parents. The College Board reported the average cost of tuition, fees, room, and board for in-state students attending a public four-year university is expected to be about $20,000 for the 2016-17 school year. At that rate, the average cost for four years of college would be about $80,000. Since two-thirds of students received financial aid during the 2014-15 school year, the following example estimates out-of-pocket college costs at $60,000.

Consider the cost of each option for this fictional family:

  • Borrowing to pay for college: The Smiths borrow $60,000 to pay for 18-year-old Joe Smith’s college tuition. The interest owed is 5 percent per year. Over the next 10 years, they repay the principal, plus about $16,400 in interest. By the time Joe is 28, and the loan is repaid, his undergraduate degree will have cost about $76,400.
  • Saving to pay for college: Alternatively, the Smiths could open a 529 Plan account for Joe Smith when he was born. If his family contributed $2,100 a year to the account and earned 5 percent each year, at age 18, Joe would have about $62,000 for college. His family would have contributed about $37,800 and earnings in the account would have contributed about $24,200.

The difference in the amount this fictional family would spend on college is about $38,600.

529 plans offer other advantages, too. Any earnings plan accounts grow federally tax-free, and distributions are tax-free as long as the money is used for qualified college expenses. Many states offer tax deductions or tax credits for 529 plan contributions, as well.

Any adult can open a 529 plan and fund it on behalf of a child. Once the account has been established, parents, grandparents, relatives, and friends can contribute. If you would like to learn more, contact your financial professional.

Weekly Focus – Think About It

Every great dream begins with a dreamer. Always remember, you have within you the strength, the patience, and the passion to reach for the stars to change the world. –Harriet Tubman, Civil rights activist

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