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“Put Down the Piggy Bank and Back Away Slowly”

piggy-bank.jpgOne of my clients was blessed early in 2008 with two new grandchildren. As he had done for his previous three grandkids, he opened 529 college savings accounts for the two newest family members, with initial deposits of $500.

At the end of the year each new account was valued at $336.36. He told me, “They would have been better off if I had bought them each a piggy bank and put five hundred-dollar bills in it.” He was right, at least for this year.

Each January, this man adds $500 to each grandchild’s 529 account. This year, he’s hesitating to send in the new deposits. He can’t help but wonder if it would be wiser, just this once, to put the money into CD’s at his local credit union instead. True, the return isn’t much—only three percent—but at least it would be a gain instead of a loss. He’s questioning whether it might be a good idea to get that three percent gain, and then put the money back into the 529 plans a year from now. By then, he hopes, the accounts will have started to recover.

On the other hand, he knows there are some advantages to putting more money into the college funds while college-savings.jpgthe values are down. My suggestion to him is to focus on those advantages. It can be hard to keep making contributions to 529 plans, IRAs, and 401(k) plans when they have lost value and you’re afraid they may decline even further. It may feel as if you’re throwing good money after bad.

In fact, investing now could be the opportunity of a lifetime to buy financial assets at bargain prices. Think of it this way: today you can buy prime American companies at the same prices you would have paid ten years ago. Investing now means you are buying assets at 50% off of their recent highs.

Does that mean they won’t become even cheaper in the next few weeks or months? No. Obviously, the best investment would be to buy in when values are at their lowest. The only problem with that approach is that no one can accurately predict just what that lowest point will be. Buying at 50% off is still a bargain, even if there’s a chance that you might be able to buy at 60% off next month.

Stock prices may go even lower in the coming year. Yet the chances that they will still be lower eight years from now are somewhere between nil and improbable. This man’s oldest grandchild is ten, which means it will be eight years before any of the 529 funds will be needed. That’s ample time for the accounts to recover their value.

If he puts this year’s college fund contributions in a “safe” money market account, and that account earns three percent for the next eight years, his initial contribution will grow 27%. Some forecasters estimate that stocks will generate returns of 12% annually over the next ten years. Based on that projection, money put into the 529 plans would add 159% to the initial investment. Even at half that rate, an annual return of six percent, the account would grow an additional 82%.

economic-recovery.jpgWe can’t know how long this recession will last or predict the precise path that recovery will take. Based on economic history, however—including times as difficult as the Great Depression of the 1930’s—we can count on one thing. We will recover from the current economic recession. Those who continue to invest now will be the ones who benefit most from that recovery.

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