John Munley, College Funding Specialist
Despite being a successful foreign currency trader with a 27-year career on Wall Street, John Munley was still worried about paying for college, saving for retirement, and spending quality time with his family. This urged him to sign up as a financial planning client years ago.
As John’s financial planner guided him through obstacles and showed him the path to success, John discovered that he wanted to do the same for others.
When he was presented with the opportunity to leave Wall Street behind and start his journey as a financial planner, John co-founded wHealth Advisors, a New Jersey-based company that aims to provide the highest quality, objective financial planning to its clients.
John actively works as a College Funding Specialist, helping thousands of families find the best possible college fits for their students and demonstrating how to attend college for the least amount of money.
Questions Answered Today:
What are the basic building blocks of a typical 529 plan?
The rate of return of your 529 account depends on what kind of investments you choose inside your account. Here are the basic options:
1. Stocks. With stocks, you invest in a company and you get to own a portion of the company in return.
- This is often one of the most aggressive or riskiest types of investment, as your returns depend greatly on how well the economy is doing.
- When talking about investing in stocks, the most common companies that appear in conversations are the S&P 500 companies or the 500 largest companies in the U.S. such as:
- Procter & Gamble
2. Bonds. With bond investments, you lend companies money in exchange for a rate of return. This also means that you have no ownership in that company.
- Bond investments are less risky compared to stocks, and you shouldn’t expect as high of return as when you invest in stocks.
- Unlike stocks, bonds move around based on interest rates. If interest rates move higher, you get a higher return.
- When interest rates increase, newly issued bonds offer higher interest rates, which means that existing fixed-rate bonds must be sold at a reduced price in order to remain competitive. This means that your existing bonds become lower in value. For example, if your bond is worth $100, it can go down to $94. However, any value lost can be compensated by the return on the initial investment that you made.
3. Cash. With cash investments, you put money in the bank.
- This is the safest way to invest because banks have more guarantees compared to companies.
- However, your returns are limited by the fact that banks typically offer relatively low interest rates on the money you deposit with them. Thus, you typically don’t earn much money from your deposits compared to other investment options.
- Cash can’t keep up with inflation. The money you deposit now won’t have the same purchasing power 10 years from now. For example, a college that costs $75,000 today may cost $150,000 in 10 years. But if you put your cash in the bank, it won’t grow much over that same timespan. Any interest you earn will typically lag well behind inflation.
Is there a way that I can eliminate the risks of my investments?
You can’t completely eliminate risks—and this is why investments aren’t for the weak-hearted. But you can reduce investment risks by diversifying your portfolio.
Diversifying means reducing the risks by not putting all of your eggs in one basket.
There are certain ways to diversify, and they include:
1. Investing across industries. Instead of investing in just one company, you invest in many companies all at once. As mentioned earlier, one of the most popular diversified funds is the S&P 500. This allows investors to invest in all 500 companies at one. That way, even if one or two companies go down, there will be 498 more to rely on.
Of course, this kind of investment is not only limited to the S&P 500. There are also options to invest in international companies, companies that are outside the S&P 500 bubble, or any other fund that offers investing across hundreds of stocks.
2. Mixing bonds, stocks, and cash. To reduce risks, building portfolios that are part bonds, part stocks, and part cash may also work. This is actually the very core of 529 funds—a very good example of diversified funds where investors have full control of how exactly they want to invest their money (e.g. 80% stock and 20% bonds).
Diversification sounds really good, but are there any downsides?
There are downsides to diversification. One is that investing has one simple rule: the higher the risk, the higher the return.
Diversification lowers risk, but it consequently lowers investment returns. Lower-risk investments generally have lower rates of return. Also, diversification wasn’t the decision made by billionaires such as Mark Zuckerberg and Bill Gates, who once decided to put their money and full trust in one company and converted their millions to billions.
Is there research on the risks and returns of different investments?
Yes, as you might expect, there has been extensive research into investments, including long-term historical studies of investment returns and risks. Here are a few highlights:1. Vanguard created a 100% stocks and 100% bond portfolio, considering the stock and bonds data from 1926 all the way to 2019. Here are some vital data it uncovered:
100% Stock Portfolio
- Has an average return of 10.2%.
- At its best year, it went up 54% while the worst year it was down by -43%.
- It had 26 losing years out of 94 years
100% Bond Portfolio
- Has an average return of 5.3%
- There was one single year that went up to 32% (which can happen when there is a sudden change), while its worst year was -8%.
Had the portfolio been more diversified, say, 50% stocks then 50% bonds, the results would’ve looked different:
- Average: +8.2%
- Best year: +60%
- Worst year: -23%
2. Another study by JPMorgan showed the rate of return for the S&P 500 (diversified stocks) over the last 42 years (1980 to 2021). Below are some key data:
- The lowest rate of return was -38%
- The highest rate of return was 34%
- The average rate of return was 9.4%
- 32 out of 42 years, the S&P 500 had a positive rate of return
- 1 out of 42 years had zero return
- 9 out of 42 years had a negative return
These data coincide with notable economic crises that occurred over the last few decades. Some of the more recent crises include:
- Hurricane Katrina in 2005
- The Sub-Prime Blowout in 2007
- The financial crisis of 2008
- The Flash Crash in 2010
- The Ebola pandemic in 2014
- Brexit in 2016
- Trade wars and inflation scares in 2018
- COVID-19 in 2020
- COVID Omicron in 2021
3. Dimensional also did a study with data from 1926 to 2021 (95 years). They looked at two time periods: every 10 years and every 15 years.
Among all 10-year periods, only two were negative at -2%, and the rest had a positive return. These years were 1998-2008 and 1999-2009, which are both presumably because of the dot-com bubble in 2000 and the mortgage crisis in 2007.
For the 15-year periods, there has never been a negative return.
These studies all say essentially the same thing: time is the key. While there’s always the fear of uncertainty, the longer you sit tight and wait, the more you’re likely get a positive rate of return.
What about media perceptions and reports about investing?
We don’t have a crystal ball. We don’t know what the future holds. But based on the past, the longer time period that you have, the more you’re able to generate a positive rate of return.— John Munley
Journalists could be saying two different things about the market, so it’s important to be smart about processing information they share.
One preconceived notion about the stock market is that “it’s like gambling.” Financial journalism plays a huge part in this. This is because more often than not, their goal is to sensationalize the stock market in order to get more clicks on their articles or more views and listens on TV, radio and podcasts.
As John and I have been talking about, we don’t have a crystal ball. Nobody knows for sure where the market is going, but there are people who are paid to say something negative or something positive in order to stir up the public’s interest.
The bottom line:
With the world facing crisis after crisis, there will always be a reason not to invest. But there’s time-tested data to look through to help you make better investment decisions, and there are experts who can guide you through the process. So invest smartly.
How do I know which kind of investing works for me?
John shares that it all comes down to three things:
1. Your risk tolerance, or your willingness to take risks and suffer losses. For example, do you want to aggressively put your money in 100% equities, or do you want a safer route?
2. Time horizon, or the time you have before you actually need the money for a specific purpose (e.g. college or retirement). The longer the time you have, the more aggressive you can be in order for your money to attain maximum growth.
3. Ability to take risks. How mentally and emotionally strong are you to bear losses? If you watch the news and find out that the market goes down by 2% or 3%, do you lose sleep? If you do, then it’s probably not good for you to have a risky portfolio, so you should opt for safer investments.
Where do I start if I’d like to start investing for my kids’ college?
Most 529 plans have age-based options based on the age of your child or children. There’s a target date, and depending on that date, you can opt for riskier and safer options. Typically, these questions need to be answered:
- How old is your child?
- How long before your child gets to college?
Brad, having worked with families to plan and save for college and invest in 529 savings plans for nearly 20 years, encourages beginner investors to go beyond those two questions. There could be other options after looking at your family’s situation and circumstances.
Brad would love to answer your questions, point you in the right direction, and even serve as your 529 plan advisor if you’re in one of the states that he serves.
To get started, contact Brad now.
Investors should carefully consider investment objectives, risks, charges and expenses. This information and other important information are contained in the fund prospectuses, summary prospectuses and a 529 product program description. These documents can be obtained from financial professional or directly from the plans website. Please read them carefully before investing.
Depending on your state of residence, there may be an in-state plan that offers tax and other benefits, which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state’s 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education. The withdrawal could be subject to a 10% federal tax penalty, state penalties, federal income tax and state income tax.
Brad Baldridge is a Registered Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA / SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Baldridge College Solutions and Cambridge are not affiliated.
This communication is strictly intended for individuals residing in the states of California, Colorado, Florida, Georgia, Iowa, Illinois, Indiana, Maryland, Minnesota, Missouri, Montana, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Texas, Utah, Virginia, and Wisconsin. No offers may be made or accepted from any resident outside the specific states referenced.
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Brad Baldridge 0:00
529 College Savings Plans. We're covering the basics for beginners.
You have kids, they grow up, and before you know it, it's time to plan for college. Where do you start? How much is it going to cost? Will you qualify for financial aid? Should you be looking into scholarships? When will you be able to retire? What about student loans? The list of questions is never ending. The good news is all the answers are right here. Welcome to the Taming the High Cost of College Podcast. Here is your host certified financial planner, Brad Baldridge.
Brad Baldridge 0:35
Hello, and welcome to Taming the High Cost of College. I'm your host Brad Baldridge. Today, we have a great episode with John Munley again. Today we're going to cover the very basics on investing in 529s. So if you're a beginner investor, and you don't have a lot of confidence in how to work with a 529, this episode may be for you. If however, you've got a lot of advanced planning under your belt, you've worked with IRAs and 401ks and you understand mutual funds and stocks and bonds and that type of thing, this may be a little bit basic for you, it may be stuff that you've already learned over the years. You're certainly welcome to continue to listen. But again, this is really targeted to be the very basics on what people need to understand in order to invest in college. Now, 529s have a lot of pros and cons. So we have all the disclosures at the end of this episode. But just be aware that 529s do have some benefits and they certainly have drawbacks as well. And we cover some of that in all these episodes. And also, it's all covered in the disclosures at the end of this episode. As always show notes and a lot of great resources are available at our website at tamingthehigh costofcollege.com. We've got Scholarship Guide for Busy Parents, a college money report that can help you figure out how much college might cost for you. And that may help you of course, figure out how to do 529 planning as well. And lots of other great free resources. So head on over there, sign up for our free newsletter. And again, get a lots of free resources. Alright, let's go ahead and jump into the interview with John Munley. All right, John, we're back to talk more about 529s. How have you been?
John Munley 2:17
Excellent. And glad to be back. Thank you, Brad. And hopefully everything's doing well out by you.
Brad Baldridge 2:23
Oh, yeah. So we're gonna do 529 for beginners today. So we're going to talk about things that are pretty basic. So if you're a seasoned investor, you can put this on fast forward, or just breeze through it or skip it all together, because most of the more technical and is going to be in the other 529 programs that we have. So this is designed for somebody that has not been investing their whole life or doesn't understand a whole lot about how the very basics of investments work. So and again, everybody starts somewhere. So let's jump into a little bit. And what's your advice for someone that's just getting started in investing in general? And then 529 specifically?
John Munley 3:11
Well, I think what we're doing right here is perfect. It's kind of knowing what is investing? What kind of instruments do I have to actually start investing? What are returns? How do you diversify portfolios? What is the risk component of all this, there's a lot of different things that go into making investing decisions. So I think what we'd like to do here is break them down so everybody has a good understanding of what these different things are and how they affect at the end of the day, what you're really looking for is the rate of return on the portfolio that you've created.
Brad Baldridge 3:47
Right, absolutely. So I think a great analogy would be that a 529, basically, is very similar to a retirement plan that you may have at work or an IRA, where you're doing basic, and you're doing investing in those types of accounts as well. And it's designed for retirement, where you get tax benefits and that type of thing. And then you have choices to make, like at your 401k typically, they give you a menu of 10 to 50 options, depending on where you work and what's out there. And then you get to pick from the menu, which course now ideally, you understand what your choices are and which ones make sense. It's almost exactly the same with a 529. There's the mechanics of actually opening the account and giving them their your socials and picking an owner and a beneficiary and all that all this stuff we covered last time. But now we're gonna get into the basics around well, how do you choose an investment or what do you look out for that type of thing, because that's going to be the next step right as you decide you want to save 200 a month for each child. And then you set up to 529. And that part's not that hard. It's you go online, you put in your names and addresses and socials, and it's owned by a parent, and it's for the benefit of a student. And then they're going to ask you, where do you want the money to go. And there's a whole list of age base, this and aggressive growth and small cap, and international funds and guaranteed accounts or CD accounts. And there's all these different choices. So that's what we're going to talk about first, I think is what all that stuff means. And not only is this this part of it applicable to 529. But it's very applicable also to all your investing your 401ks, your IRAs, all those things. So I guess what are the basic building blocks, let's start there, for a typical investment?
John Munley 5:54
Basically, for simplicity's sake, it's there's three options, you can own a stock on a bond or have money in cash, and what's the difference between them. If you own a stock, so you own an individual company, let's say Apple, if you actually have ownership in that company. So when you say I have a certificate or a stock certificate, or I own Apple, you are an owner of Apple. With bonds, you don't own the company, but you're lending that company money. And when you lend that company money, they're giving you a return on that money. So companies, if they have to raise money, they'll put out bond issues. If you'd like the return, you like the company, you like the risk of the company, you're able to purchase that bond, you're essentially giving them that price that they're asking for. So let's say a bond is $10,000, you're giving them $10,000. They're giving you a return on that money, but you have no ownership in that company. And with cash, you're just keeping it all to yourself, whether it's in a checking account savings account under your mattress, you're not giving it to anybody, that's yours, and you're keeping it. And that's where you can expect the lowest rate of return over time.
Brad Baldridge 7:03
Right, exactly. So stock allows you to invest in the market. And of course, bonds, you're also investing in the market, just a different market. So I guess that's another clarification is people talk about the stock market. And in reality, depending on how you look at it, there's many stock markets, right? A very common market that people talk about all the time, and we're going to talk about as well is the S&P 500, which is 500 of the largest US companies. And they kind of track that as an indicator of how stocks are doing. And you can even invest in those 500 companies through various instruments and that type of thing, but it's all the big names, we're all familiar with are Apple and Walmart, and the oil companies and etc. etc. Microsoft, all the tech, but also some of the boring companies Procter and Gamble, and Boeing and some companies that we use every day are in the S&P 500. So let's talk a little bit about that. So I have a chart in front of me. And it shows the rate of return for the S&P 500 over the last 42 years. So it starts in 1980, and goes through 2021, which is the last full year. And it shows the rate of return had you invested in the S&P 500, which again, is diversified into a whole bunch of different stacks. But the actual rates of return are all over the map from the lowest year would have been '08 at -38%. So had you invested $100, you'd have $62 after that year, and then the best year is 34%. So if you invested $100, you'd have $134 at the end of the year. And every year, all kinds of numbers in between, so if I started and say 90, and it was like -7, +26, +4, +7, -2, +34, +20, +31. And then we get into the '07, or excuse me, we get into the tech crash in 2000 and have -10, -13, -23 and then +26, down, and then we get to 2007 is -38%. That was the big drop around the mortgage crisis, and so forth and so on. So if you add them all up, if you had just invested for those 42 years, your average rate of return would have been 9.4% long term. So that's a pretty decent rate of return. But as you remember, for all the numbers I just talked about, you very rarely actually got anywhere near 9%. You had some minus you know 10, 20 numbers and you had some up, zero 10, 20, 30% up. And it averages 9.4%. Because in general, there's more ups and downs, if we look at this, there's 32 of the 42 years were positive, one was zero, and nine were negative. So there are no negative years and there are downturns. But over the long haul, if we can stay invested 5 years, 10 years, that type of thing, it's relatively likely, at least historically, and again, nobody can predict the future for sure. But if it acts anything like historical, then we generally are positive over a 3-year, 5, or 10-year number, and the longer you can invest, the more likely it will be positive. So that's great news for young people that are a long, long ways from retirement. Put it in the stock market, maybe diversify it, that type of stuff we'll get into. But it's very likely in 20, in 30, in 40 years, you make money. Unless, again, there is no guarantee, nobody can predict the future, for sure, maybe life as we know it will change. But it's probably the only reasonable option for most people, is to use some form of investments in order to build for their retirement and or college.
John Munley 11:26
Brad Dimensional did a study on this exact thing that you're talking about, they looked back from 1926, out to 2021. And they looked at two periods of time, every 10 years and every 15 years. So you'd go like 1926 to 1936 1927 to 1937, every 10 year period outside have to always had a positive return with the S&P. The only two down years was 1998 to 2008 and 1999 to 2009. And they were both under down 2%. And there you had two major crises, you had the .com bubble in 2000, you had the mortgage crisis in 2007. So you had to sit through a lot of pain in those two 10 years, but even then you pretty much came out flat. When they looked at 15-year time periods, there's never been a down 15-year time period. So like you were saying, we don't have a crystal ball. We don't know what the future holds. But based on the past, the longer time period that you have, the more you're able to generate a positive rate of return when you're investing.
Brad Baldridge 12:37
Right, exactly. So when I'm working with families, we talk about, well, maybe the stock market alert return 8% or 10%, or some number in that neighborhood. It's kind of the assumption as we're doing things like retirement planning and that type of thing. So do we know that for certain, of course not. But we need to start somewhere. And that seems like a reasonable assumption, based on the fact that it's 9.4. And you see a lot of averages at various time periods and various stock markets and that type of thing. And they're often, 8, 9, 10, 12, something in that neighborhood. Again, some years are better than others, and some time periods are better than others. But that's one building block that we that we've talked about. So that's stocks. So that's the one that you know, I would say the roller coaster ride of the stock market is the wild that's that goes up the most goes down, the most can have some very sudden twists and turns. But if you can stay in your seat, it's probably worth it. Next, we have the bond market. So explain a little more about what a bond is. Again, I think he just mentioned it briefly. But so what is a bond? And why do we care about bonds?
John Munley 13:53
Sure. So with a bond, you're actually lending money. So you're giving your money to a company, or in terms of a bond, mutual fund or ETF to a group of companies. And you're expecting a real rate of return back for lending company the money. With stocks, unlike stocks, you're not in for that much of a wild ride, they definitely have lower risk, then stocks and we'll show an example of this in a little a little while. But it's really, bonds are kind of used to as an anchor to your portfolio in terms to dampen risk a little bit. And again, their rate of returns are historically going to be lower than the stock market again, but you're taking less risk. So you shouldn't expect as high of return as when you invest in stocks. But it's kind of a way between rather than sitting in cash and getting no return or just a small return. It's a way to lend companies money and be able to expect a higher rate of return. And again, the riskier the company, the more rate of return, you should expect, how bonds actually move around is based on where interest rates are going. So if interest rates are moving higher, you'll still get your rate of return. But that price of that bond is going to be worth less. So let's say interest rates go up a percentage point and your bond was worth 100, when you bought it, when that interest rate does move up, that value will go from 100 down to 93, or 94. So you will lose some money. But because you're getting a return on that, you will get a return on the initial investment that you made.
Brad Baldridge 15:43
Right, exactly. So that's the way you think about it is if I got a bond, let's say I got a John Munley bond, and you promised to pay me 5% interest. So I give you $10,000, you pay me 5% interest, but then rates rise. And now John Munley's saying 'I'll pay people 10%.' Now if I want to sell my 5% bond, when somebody to go directly to John and get a 10% bond, nobody's willing to buy my bond for what I paid for it. So I'm gonna have to sell it at a discount, essentially. And if I sell it at a low enough discount, anybody would buy it for a dollar. So somewhere between the dollar and what I paid for it is a fair price. So that's the bond market where just like stocks are bought and sold every day, bonds are bought and sold every day. So there's the way the instruments themselves work. And then there's the way that the markets react, stocks tend to react to things like how well the economy is doing and how well companies are being profitable. Bonds tend to react to interest rates, and what's going on there, again, because that's what people are concerned about, if I can get a bond over here for 6%, or a bond over there for 4%. You know, we get that's the comparison. And then of course, the last thing is cash, which again, is money in the bank, we know the bank has a lot of nice FDIC guarantees and stuff. So the money is very safe. But as we all know, banks don't pay a ton, especially in this environment where maybe we can get one or 2% on CDs, and half a percent or a quarter percent on our savings account or whatever it might be. So we're not making a lot of money by having the money there, but we know that money is relatively safe, and maybe appropriate for at least some of our money as well.
John Munley 17:42
And the one downside with cash, it's great to have cash because you have it there. But the purchasing power as years go on that cash most likely does not keep up the return you get or the interest that a bank pays, you most likely will not keep up with the growth of inflation. And if it doesn't, something that costs $100 today may cost, 10 years from now, $120, you still have that $100 It doesn't have the same purchasing power as it will in 20 years, which is why a lot of people invest in the capital markets against stocks and bonds, because they want to at least keep up with inflation to keep their purchasing power. Keep up with the inflation rate that's going to happen throughout the years, right. There's a study like the whole McDonald's study, I forget what it is, but a big a big mac that cost 20 cents in 1960 versus now, whatever I don't even know, McDonald's. But let's say $5, it's the 20 cents that you had back then you can't buy a Big Mac now with that money. So again, you want to make sure you're able to keep up with the rate of inflation when you're making investments.
Brad Baldridge 18:53
Right. And if we're parents of teenagers, we all can talk about, I can remember as an example getting five doughnuts for $1. I can remember 25 cent candy bars, I can't remember go into a movie for $4.50. You know, and now obviously those prices are much higher.
John Munley 19:12
And let's come back to colleges, which we're talking about a 529. I remember when I went to college, it was 12,000 when I was a freshman and now the same college is 75,000. So inflation has definitely taken its toll over the last 30 some odd years.
Brad Baldridge 19:29
For sure. So and that's where again, a lot of times the stock market is a better way to fight inflation. And cash is a way to minimize risk. So we got to find a balance. And that's what's important I think is when I'm working with families a lot of the times we're doing all the above we have some money in the stock some money in bonds and some of the in cash. Especially if college is imminent, right if you've got a high school senior or even Junior and you're saying well college very close, you might have some of your money tucked away in cash, just so you know it's there when you need it freshman year, but then the money that you might have for the youngest in your family who might say, say is in seventh grade, and we know, college is 5, 6, 7 years away. And now all of a sudden, we've got more of a time horizon where we might choose to invest a little more aggressively. And the other thing we need to talk about is diversification, because diversification is built into both 529s. But I think it's important that you understand it. And I mean, there's diversification a couple of different ways. So as we mentioned we have the stock market where you can go out and own a stock of a particular company. So, I like to use the example of Facebook, because there's a story that most people can remember. But you could go out and buy individual Facebook shares and say, I own Facebook. And had you done that when Facebook first came on the scene, and you still owned it today, it would have been a great investment, and you would have made a lot of money. But there was a time when there was not just Facebook, but there was also that company called MySpace. And there was a time when they were neck and neck and you had you know, some people were doing one and some were doing the other some people were doing both. Obviously, Myspace didn't make it. And Facebook kind of won that war, so to speak. Now, you could have just as easily said, 'No, I believe in MySpace,' put all your money in MySpace, and essentially lost it all or a vast majority of it. That's where diversification comes in. Where, again, if you invested in an S&P type of fund it would spread your money across all 500 companies in the S&P. So now any one company is not much of a risk anymore, because there's only a small piece, right? So if my space was in the S&P and it went bankrupt, you still have 499 companies to go. So yes, it hurts a tiny bit, but it's well-diversified and you don't even notice it. And again, big names used to be in the S&P 500 that are no more today, you know, Kodak and Sears and a number of different companies were big stalwarts until they weren't. And that's where I think, especially if you're a beginning investor, there's no, in my opinion, no reason to go and try and figure out which stock to buy. I think you're better off diversifying across many stocks by using either mutual funds or ETFs, or other financial products out there that automatically will find a good 529 do this automatically as well. They have stock funds and bond funds and cash accounts, but they're all diversified across many stocks for the stock funds, many bonds for the bond fund, and often many banks for the cash accounts. So
John Munley 22:59
I think a good thing to remember about it is you're not only with the S&P, you have 500 of the biggest companies in the US, but you're also investing across industries. So any given year, you may have healthcare industry does well, but software doesn't. So you're exposed to all different industries also. So again, that just increases your diversification, because it's not just the companies, but it's the industries that they're in. Because any given year, certain industries are going to perform better than others.
Brad Baldridge 23:31
Right? Absolutely. And that's where, so that's one way to diversify, right is when you buy a particular fund that says we're going to invest across 100 stocks or 200 stocks or 500, stocks or whatever choices you have there. Another way to diversify those that not diversify the types of stock you own, or even mixing stocks, bonds, and cash. So you can choose a fund that invests in the S&P 500, which is 500 US companies, then you could choose another fund that invests in international companies, and at different times, they do different things. And because you have not your eggs are not in all one basket. Now, you know what some do? Well, some don't do well. And on average, you do okay. Now, that's the downside of diversification, right? If you want to become a multibillionaire, you need to do it like Bill Gates or Mark Zuckerberg, where you put all your money in Microsoft or all your money in Facebook, and let it ride and let it ride and let it ride. You know, there was a time when these billionaires had only had 100 million. And it was probably concentrated in their company. And what did they do? They said, well let it ride. And then it got to a billion. And they said, oh, let it ride. And then it got to 10 billion and oh, let it ride. Now. That's not prudent and I'm hoping, and most likely some of their financial advisor were having them peel off 100 million and put it in cash or something here and there. So that they would, you know, never be truly broke. So that's a way to hit a homerun. But then you get to the MySpace example of, I don't even know who founded MySpace. He's not famous, because he's not as famous because his company didn't thrive and do the fantastic.
John Munley 25:27
But you can also see where diversification works. If you look at Warren Buffett, like he looks at undervalued companies across multiple industries, and he'll buy different companies. And granted, he's got a lot of money to go and buy these different companies at large blocks. But he's over the course of the year, him and Charlie Munger have always followed a philosophy, find companies that are valued, and that are undervalued right now. And hopefully, down the road, they're going to be much higher priced, which not to complicate what we're talking about. But we've been talking about the S&P 500. But there's when you look at the stock, when you look at stocks, they've broken down into different categories, there's large cap, mid cap and small cap, and that's based on the market capitalization of those companies. But then you also have growth and value stocks. growth stocks are well established. And it makes it harder for them, because they've always got to keep up with their expectations. And what's expected of them were value stocks are, you know, they're not quite where they need to be yet, but they have the potential. So there's all different ways to invest in stock markets. And like Brad was saying diversifying amongst everything is the best way to get exposure to all of it.
Brad Baldridge 26:50
Right, exactly. And then, right, and then the second way to diversify would be to say, well, some stocks, some bonds and some cash. So a lot of times, in retirement, or even in your 529, you might say, well, there's funds available, that might be a 60% stock and 40% bonds, or there might be a choice, that's 80%, stock and 20% bonds. And then there's some that are more conservative that are mostly bonds and a little bit of stock. So that's another way to take some volatility out. I think we've got another study that would make sense to talk about now, which is kind of expected the Vanguard study, and
So Vanguard, built portfolios with 100%, stock, and another portfolio with 100% bonds. And again, they didn't actually, and they used indexes. So they went and looked at the history and said, 'Well, we're just going to follow some historical numbers.' So this is not an actual investment, you can't actually invest in it. But they went back and looked at the various returns. And they actually started all the way back in 1926. So they pulled the historical data from 1926. And this study ended in 2019. And the 100%, stock portfolio, its average return was 10.2%. Its best year was 54%. Its worst year was -43. And it had 26 losing years out of 94. So the other study we talked about had 9 down years out of 42. When we expand it and include things like the Great Depression, and in the '30s, now we have 26 out of 94. So roughly a quarter, a little over a quarter of a third are down in that time period. And the best year and worst year, by the way happened to be in 1931 in 1933, which, you know, again, during The Depression, the stock market was very volatile, and had both good years and bad years. On the other end of that spectrum, the bond portfolio did 5.3% and its worst year was minus 8%. So dramatically less volatile as far as the downside. And there was one good year that at 32%, which was definitely an outlier but it can happen here and there in the both the stock and the bond market where you have a sudden change. And then if you just mixed it up and if you went 50-50, well you kind of get somewhere in between. So if you're a 50-50, you would average 8%. So again, all bonds 5%, 50-50, 8.2%, all stocks 10% on average over that whole time period, but the best year is 36%. And the worst year is -23%. In the 50-50, which also is less of a roller coaster ride than 100% equity for sure. So, a lot of times people add bonds to reduce the volatility a little bit. And I think that makes sense. You know, for some, both for retirement, and for college, and again, you don't have to do 50-50, you can also do 70-30, or 80-20. So there's all kinds of different mixes out there that might be appropriate.
John Munley 30:47
And I think people listening to this right now is saying, 'Okay, Brad, okay, John, this is great. But how do I know if I'm 100% fixed Income? How do I know if I should be 100% equity?' And that all comes down to risk tolerance. And it there's basically three components to look at when you're looking at your risk tolerance. And that's something that we both touched on a little bit here is your time horizon. So how long you have before you actually need the money, your risk need? Do you need to take a lot of risk? For instance, if you're, you know, if you have a newborn, and you're putting $5,000 into a 529 plan, you need that money to grow, and you have a long time horizon. So you may say, you know what, I have the time horizon, and I need this money to really grow. I'm going to put it in 100% equities, because I know historically, that's had the highest rate of return. And I know over a 10-year period, I'm most likely I'm not going to lose money. But the third component, and this is a hard one for people, it's the ability to take risk, are you the type of person who has CNBC on and if the markets down 2% in a week or 3%, that you lose sleep, if that's the case, you probably don't want that risky of a portfolio, because you don't want to be following it up and down and all the all the different gyrations that the market will take. And if that's your personality, you'll sleep a lot better having a less risky portfolio where you'd want to supplement the equities with with bonds and cash.
Brad Baldridge 32:23
Right? Absolutely. So that's the basics on investing. The other important piece of the puzzle is, a lot of times people talk about what is the rate of return of a Roth IRA, or what is the rate of return of a 529. And we need to just mention that the 529 or the Roth IRA, or IRA are all those are tax wrappers around an investment. So the rate of return is based on what you choose inside the account. So the rate of return is based on whether you choose stocks or bonds, or combination or cash or whatever it is, if you put cash, you've already put a savings account inside a 529, you're gonna get savings account like returns, and if you put us S&P 500, inside of 529, you're gonna get S&P-like returns. So the return is based on the basics of the investments, the building blocks that we've talked about what the account does, like a 401k, or a 529, that determines who has control of the account, what the account can be used for, penalties if you don't use it properly, all that type of stuff. So obviously, we got things like 401ks and 403bs at work, that are designed to help us retire, and IRAs and Roth IRAs that we can do personally that are designed mostly for retirement. And then we've got 529s and Coverdales for college. And then there's all kinds of other types of accounts out there, as well. But those are the basics. For again, this is the basic score. So that let's start there for now. And you can kind of go on from there as you learn more. And then finally, let's talk a little bit about financial journalism and the overall markets because I think a lot of beginning investors have preconceived notions, a lot of times based on what they see in the press or, you know, maybe they invested a little bit at work once and had a tough year right out of the gate so that it's like, okay, never again, stock market doesn't work. I mean, I hear lots of people saying things like, well, stock markets, just like gambling, all kinds of things like that, where so I think financial journalism comes into play because there's a lot of people out there that write about the markets and their number one goal is to get you to click on their article. So generally speaking, they need to write a headline that's going to get your attention, you know, another boring day in the stock market, click here doesn't work. They have to sensationalize it and give you reasons to be scared, again, fear sells in the stock market. So they tend to focus on that as well. So even in good times, they try and find some black cloud somewhere that may or may not come to fruition. But again, it's something that will get a click. And that's their goal.
John Munley 35:24
And I have perfect examples for this. Just remember, nobody has a crystal ball, and everybody who is giving you advice is getting paid. And they have to have, they can't say I don't have a view. Perfect example. Before I got into this wonderful career with helping families through college and financial planning, I was a currency trader on Wall Street. So we had economists, we had strategists, and they had to come up with recommendations. A lot of times, they didn't have a view, they didn't have an idea of where the market is going. But they're getting paid to tell clients and customers, this is what we think it's going to happen. So even if they did not believe it, they had to say something. So just remember a lot of the things that you're hearing, people are getting paid to say, and they're looking to stir up interest. And so it's kind of, again, remember your risk tolerance, if you have a long time horizon, you don't care about the noise, just block out the noise. Again, if you're somebody who just can't, then you probably want to have less risk exposure, so less equities, more cash and bonds. Really, it's kind of how your personality is.
Brad Baldridge 36:38
Right, absolutely. So then, right. So here's, I found a piece from JP Morgan, where they talk about all the different things that were going on. So you know, again, some examples in 2005, we had Hurricane Katrina 2007, the subprime blowout, we had the financial crisis in 2008. Flash Crash in 2010, the S&P was starting to downgrade the US debt and whether the US will be able to afford to take to pay off their own debt. And the Greek debt was in trouble. We had the Ebola pandemic in 2014, the Brexit in 2016, trade wars and inflation scares and 2018, obviously, COVID in 2020, Omicron in 2021. So there's all kinds of reasons. And sometimes the markets did react to these, and sometimes they didn't. And, actually, we don't even know that the market reacted to these particular things, or if they just reacted to something else. That's another interesting, journalists love to say, well, the markets are down today, because XYZ, and it's like, they have no idea why the markets are down. But those two things happen to happen at the same time. So they assume that they're together, which isn't necessarily the case. But so there's always reasons to not invest. But over that time period, from 1999, through 2016, to 2021, the cumulative return was 400%, more than 400%. So your money grew if you put in $100 in 1999 in the S&P, it would have grown to over $400 by the end of 2021. So again, that's that cumulative rate of return of 8, 9, 10%, year after year after year. But of course, we don't get it all in one year, right, we get 12%, one year, -3%, the next year, +26%, the year after that downtime the year after, but generally more up than down. So we made a good rate of return over those years when there was always something bad to talk about.
John Munley 38:55
And the other thing that generally happens when people trade off of the news is it's easy. Let's say you own equities. And there's negative news out and you say okay, I'm going to sell out of my equities, I just want to go to cash, and I'll buy back in on the bottom. Well, if somebody can always tell me where the bottom is, I wouldn't be sitting here right now. And I don't think you would be sitting here either Brad right? You don't know where the bottom is, you don't know when the markets going to turn. You don't know if the market is going to bounce off 10% then drop back down 20% or it's just going to keep going straight up. Again, I had I had experience with this in 2007, 2008. With the subprime crisis in the mortgage crisis, getting out of investments saying, okay, this is great now, and it dropped down even more and I'm like Google, I'm a genius, but then it bounced back up. And I'm like, okay, when do you get back in when you get back in and you hear a lot of that from clients. So it's easy to make the decision to get out. It's very hard to make the decision on when to get back in. Which again, why if you have a plan in place and a long time horizon, you kind of just want to block out that noise knowing that over the course of years, your portfolio is going to have a positive return.
Brad Baldridge 40:11
Right, absolutely. All right. So what it really boils down to at the end is, families need to make choices around how they're going to deal with this. So obviously, we just spent a half an hour, 40 minutes talking about things. And now many of you out there your eyes have glazed over, you said, oh my god, there's no way I just not interested, I don't want to deal with this. And some of you are like, okay, I understand, you know, I'm ready to take the next step. Investing that for everyone, and not everybody wants to do it can do it. So you've got some choices, right, you can do it yourself. So you can study the markets learn more about it, you can take a course, or you can just jump in with both feet and try and figure it all out. But you also have the option, you can also get help, right, you don't have to do it alone. You know, you could if you've got friends or family that can help you with it. And you feel like you can trust them, then maybe that's the course. And then of course, you can hire someone like John and myself financial advisors who do this essentially, for a living where we help people talk through what kind of risk are you willing to take and what makes sense and understand all the tax benefits and all the different nuances and build a portfolio that goes together? I think that's a challenge for a lot of people. And then somewhere in between might be just find someone that can do some spot checks to make sure that what you're doing make sense for your situation
John Munley 41:50
And that's the minimum, and two things we've been really talking about our 529 plans and 401k plans which are similar. Most 529 plans have an age-based options. So you basically put that money in and they'll adjust it as you get closer to needing that money for college, it'll get less risky, more fixed income. Same thing with your 401k, they have target date funds. So let's say you're going to retire in 2035, you'll have more risky assets now. And you know, as you get closer to retirement, you'll have more, much more exposure to fixed income. There's inherent problems with those two, which is beyond the scope for what we're going to talk about now. But at least if you're looking to start out and don't know where to start, those are two kinds of places you can look.
Brad Baldridge 42:46
Right? Absolutely. I mean, they, the people that run the 529 essentially say this is what we think is appropriate for someone that has a 12 year old or a 17 year old or a 4 year old. Now, they don't know the whole story, that's all they know is how old is your child? And how long till college? So, again, you might want to go beyond that. But again, that's often a place where people will start? I encourage, when I'm working with families, we go beyond that, because I think the problems are real. And eventually we might move away from those, once we understand what our other choices are. But it is a good place for some to start. All right. I think that covers the basics for 529s. We appreciate you sticking around and listening, we will continue on this 529 path here. So we will have a couple more episodes to talk about strategies, advanced strategies, some of those types of things. So if you need to listen to this more than once to absorb it all, or take some notes or go ahead and do that. But if we appreciate you listening, and we'll see you again next week. All right, that was a great interview with John, hopefully you've learned the basics and are ready to get started. If you're still feeling overwhelmed, as we mentioned, us always can work with professionals to help with this, I would encourage you to find a professional that understands college in more detail than just the saving and investing. You know, hopefully, they might be able to help you with need-based planning or merit aid and all the other areas of college planning all the things that we've covered on this podcast over the years. But again, you know, there are people out there that can and will do it themselves. And there's some people out there who either don't have the inclination and don't want to learn how to do this. Or perhaps they just don't have the time and don't want to spend it on this and they would spend their time doing other things instead. Alright, that's all we have for today. Stay tuned for the disclosures.
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Brad Baldridge 45:14
Disclosures. The information provided to you today is for educational purposes only. It is not intended to be specific recommendations or advice. Please consult with a qualified professional before acting on any of this material. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss including total loss of principal. 529 College Savings Plan disclosures, investors should carefully consider investment objectives, risks, charges and expenses. This information and other important information are contained in the fund prospectuses, summary prospectuses, and the 529 product program description. These documents can be obtained from a financial professional or directly from the plans website. Please read them carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits, which may include financial aid scholarship funds, and protection from creditors. Before investing in any state's 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education, the withdrawal could be subject to a 10% federal tax penalty, state penalties, federal income tax, and state income tax. Brad Baldridge's disclosures. Brad Baldridge is a registered representative with Cambridge Investment Research. Securities are offered through Cambridge Investment Research Incorporated, a broker dealer and member of FINRA and SIPC. Brad Baldridge is also an investment advisor representative with Cambridge Investment Research Advisors, a registered investment advisor. Baldridge Wealth Management and Baldridge College Solutions are affiliated. Cambridge and the Baldridge companies are not affiliated. The registered brands location is at 10521 West Leighton Avenue Suite 200 Greenfield, Wisconsin 53228.
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