9 thoughts on “College Investing – Reader Case Study, Beginner MD”

  1. Very well put together. Could you do an article on a 53 year old with a 16 year investment horizon? I am interested in putting together a indexed fund (Vanguard, Fidelity or Schwab) outside my 401k at around 85% small/large caps and rest in bonds, foreign stocks. I could invest about $1-2K per month.

    Thanks for your detailed analyses.

    1. DocB – thanks for dropping by, I can’t promise I’ll be quick, but I’ll try to look at that. Thanks!

  2. Thank you so much for your thorough analysis! It looks like I need to start cranking up the contributions, although at least I have the allocation set correctly for now! Look forward to seeing your future post about equity allocation that grades down.

  3. Masterpiece!! Thank you for introducing the “efficient frontier” to blog land. Took an actuary to do it! Many blogs consist of boilerplate posts that are click bait. Some, like this one push the envelop of understanding.

    The way people learn is in small chunks, mostly by exposure. First the word efficient frontier. Then someone looks it up on investopedia. Then maybe a tinker toy scaffold stick man brain picture develops. Nothing that requires Matlab but just the ability to understand the notion. Then maybe a few sentences in another post expanding on the notion.

    I’m going to describe the “risk free asset” (another term in efficient frontier lingo) but I think an important contrast.

    My college choice for my kids was a State sponsored pre-paid college education. I bought 120 hours (not 4 years but 120 hours) of education at any state run institution tuition and fees. It was a fixed cost, in my case $22K. It is guaranteed and inflation protected. I bought it when they were 2 and my oldest is going into her last semester of senior year. My intangible cost is that their universe of choices are limited. My goal was to have them graduate debt free, and guaranteed in case of my death, which lowered the cost of my life insurance because I could justify a smaller policy. I didn’t need $500K of “college cost” factored into that equation, and again my cost WAS AND IS FIXED, and already paid for. This is why it is the risk free asset.

    For variable costs (the cost related to keeping a kid alive during college) I plowed another $15K into some stocks only Vanguard funds, in a UGTM gift trust. Over 20 years those funds grew to about $55K. I use that $55k to pay various expenses of theirs like travel computers cameras clothes monthly allowance, even a car. In 1996 when I started looking into this problem, 529b’s had terrible track records and terrible funding options. I have friends who’s 529b’s are under water because of the drag and poor fund choice. I see virtually zero advantage to “the pre tax” marketing gimmick if your money goes into crap funds. So once again I’m challenging the echo chamber.

    Your analysis of the risk is spot on! College is a virtually fixed number of months, NOT decades. The money also is disbursed over time. I just left my kids money invested and sliced off little hunks of dough to pay for a year or half year. This is why I count the investment as 20 years as opposed to 16. It comes off as a glide path. I never had any problem saying yes to the “Daddy can I…” request, even after I fully retired, because the UGTM had that cash flow covered.

    To better expand the idea of what you need to save somehow “real” inflation needs to be included into the analysis, not just CPI or something. And maybe something about borrowing costs and leverage.

    Were I to do it again, I would choose an all stock portfolio of individual stocks plus a bond fund using an efficient frontier calculator as opposed to VTI or something. I would start with $4K and add $2K per year into the UGTM. Mine are housed at Fido, and my investment choices are whatever Fido has to offer..

    Super interesting discussion

    1. Thanks, I had never thought about pre-paid college as the risk free asset, but you are exactly right. That’s the right way to look at it.
      The treatment of inflation does trouble me. I really need to examine the failure scenarios a bit more closely, because I wonder whether erosion of purchasing power is what’s making some of the scenarios really high cost. If that was the case then I’m really under-stating the problem by not incorporating a decent attempt as “college inflation”. Glad you enjoyed the post.

  4. Interesting analysis, can you expand on the market returns data selection risks ? is this US only ? how relevant is it to include results from 2 centuries ago before a more globalized world and democratized investing, 401k, indexing, etc …
    Then for this particular example, it doesn’t make sense to save a lot when inflation is high, more recent dollars are more valuable. In this case should the savings be dynamic ? For example shift to short term bonds for college cost and move college funds to the retirement bucket (longer term). Does it significantly change the approach that should be adopted ?

    1. Hi , yes the equity returns are US only. Mainly to keep things simple for me. Is the last two centuries of data useful as any kind of guide to the future? I don’t know, but the alternative is to come up with my own forward-looking assumptions (or borrow someone’s assumptions) and do a Monte Carlo analysis. That introduces a whole load of new subjectivity about the future. So IMO using back-testing provides quite a nice transparency that Monte Carlo simulations do not.

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