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Investing and Saving For College

Most of the web pages in this section are referenced in my book about investing which is entitled How to Get Rich Surely* But Slowly   (*Probably).  You can read the first chapter of the book here or you can purchase it at Amazon.

If you've misplaced your homework packet for my Montgomery College investing class, you can download a copy of it here.   

Here's a tool that will tell you the probability you (and your spouse if applicable) will live to a given age.

A Harvard economics professor explains in this article why he believes investing is too complicated.  I do not believe that investing needs to be complicated, and my class and book provide you with a reasonably simple approach.  The Harvard professor complains about performance chasing.  You can see the negative consequences of performance chasing.
Morningstar is the single best website for locating information about mutual funds in particular and investing in general.  On the Morningstar home page, enter the name of your mutual fund, and you can instantly see its Morningstar star rating, which tells you how well the fund has performed since it was created.  One star goes to the worst performing funds, and 5 stars is awarded to the best performing funds.  If you are searching for good mutual funds to own, you can find some good choices by using this basic mutual fund screener from Morningstar.  They also offer a premium mutual fund screener, which is available to their premium (paid) subscribers.  However, if you have a Montomgery County Library card, you can use the premium screener for free.  A DC Public library card will also allow you to use Morningstar for free.  If there is a term that you don't understand on the Morningstar pages, use their glossary.

There are two other excellent investing websites: Yahoo and MSN.  The latter is particularly good for researching stocks.
This table lists which preferred stocks qualify for the 15% tax rate.

If you wish to purchase stocks inexpensively, there are many good alternatives.  
You can call any of the following brokers on the phone to buy or sell stock, but it will cost you more to do so over the phone than online.  As long as you trade online you can purchase any number of shares of a stock for $7 or less from the following brokers: Firstrade, TradekingVanguard, Schwab, Scottrade and Fidelity. When buying or selling stocks there are several types of orders including market, limit, stop, stop loss and stop limit.  They are described here.

If you are considering purchasing an international stock fund/ETF or an international bond fund/ETF, you also need to decide whether to hedge or not to hedge against currency changes.  This column offers some guidance.  

In my book I explain how to choose among corporate bonds (which are fully taxable), Maryland municipal bonds (which escape federal and state tax if you are a Md resident), or U.S. government bonds (which escape state tax).  Part of this decision is based on your marginal tax bracket, which you can find here.  (Look for "marginal tax rate calculator")  You can use this website to compare the after tax yield of a corporate, government or municipal bonds, in order to determine which one is right for you.  That same website can help you choose which type of money market account is right for you: corporate, government, or municipal.

If you determine that government bonds are appropriate for your portfolio, visit this U.S. government
website, where you can buy EE and I savings bonds, TIPS, treasury bills, I bonds,  and other types of government bonds without paying any commission.

Over the long run, stock returns generally correlate with stock earnings.  This chart shows the close relationship between the S+P 500 total stock return and earnings per share.

In July 2014, the SEC voted to impose additional restrictions on money market funds to make them more secure.

BestCashCow  or DepositAccounts can provide you with the banks paying the highest interest rate on money market accounts, CDs, checking accounts and more. 

There are several online savings accounts that enable you to earn interest on money that would otherwise be in a checking account earning little or no interest.  All of these online savings accounts are incured by the FDIC.  Synchrony Bank, GS BankAmerican Express, Ally Bank and Barclay Bank.
If you are investing more than $250,000 in a money market account  or a certificate of deposit, you should investigate CDARS for CDs or InsuredCash Sweep for money markets.

My favorite mutual fund company is Vanguard.  They consistently charge less for their investments than any other mutual fund company.  See this article, which explains many of the advantages that Vanguard offers investors.  Also see this article.  Another Vanguard advantage is their patented way to reduce capital gains taxes in 14 of its mutual funds.  The method Vanguard uses to reduce capital gains taxes is described in this article.  To demonstrate the tax savings, the article compares 3 Vanguard index funds with 6 similar index funds from other companies.  The difference in capital gains tax is dramatic.

In August 2018, Fidelity dramatically lowered the expense ratios it charges on 21 index mutual funds, and created 4 new funds with an expense ratio of zero.  In addition, Fidelity reduced the minimum investment for most of their mutual funds to zero.  These developments are excellent news for investors. 

I strongly recommend index funds.  However, if you want to purchase a managed fund, a good place to start looking is with a list compiled called Morningstar Medalists.  These are Morningstar's favorite funds out of more than 30,000.  You can find the list called "Fund Favorites" by using the Montgomery County Public Library site, and then click on "Fund Favorites" on the left side of the page or the DC Public library Morningstar page, and then click on "Fund Favorites" below.

Many theories are offered to predict whether a stock is headed higher or lower.  Most of these theories use backtesting to "prove" the theory works.  While backtesting can be useful, it also "proves" the Superbowl winner will forecast stock market performance.  This article offers a good overview of backtesting.

If you are about to purchase a mutual fund, be sure to find out how much it will cost you on an annual basis.  All mutual funds charge investors an annual fee.  This fee, known as the expense ratio, is stated as a percentage.  Most funds charge between .1% and 3% of the amount you have invested with the fund.  While 1% or 2% or 3% doesn't sound like much, it can add up to thousands of dollars over a period of several years.  The FINRA website will allow you to find out exactly how much the fund's expense ratio will cost you each year in dollars. 

REITs are a good investment because they provide diversification.  However, you should avoid purchasing Nontraded REITs. You can read more about them here.

In addition to the annual expense ratio, you pay a lot of additional fees to your mutual fund company each year.  These fees are not included in the expense ratio, and it is exceedingly hard to find out how much you actually are paying, because the fund buries these charges.  One of the few websites that can help you learn about these additional fees is this one.  Once you are at the website, enter the 5 letter symbol for your mutual fund to see how much you are being charged in addition to the annual expense ratio.  (Note: You must register to use this site, and they only give you a limited number of uses of the site as a free member.)

Most index mutual funds and ETFs are weighted by market cap.  These mutual funds and ETFs inherently have low turnover, and therefore inherently have low taxes.  However, a few mutual funds and ETFs use alternative methods to weight how much they buy of each stock and/or bond.  These mutual funds and ETFs use what is known as fundamental weighting.  They do not inherently have low turnover, and therefore they do not inherently have low taxes.  You can learn more about this subject.

If you are thinking about purchasing an actively managed fund, you may wish to visit this web site. You can see data about the active funds owned by 12 different mutual fund companies  Performance, Expense ratios and turnover data are shown.  

Another excellent type of investment, which I cover in chapter 10 of my book is an Exchange Traded Fund (ETF).  It can a bit difficult to find ETFs, so I recommend using this web page, which lists all the ETFs that are available. While ETFs are generally very good investments, certain ETFs that are organized as partnerships, trust, or corporations can have significant and costly tax implications for you.  This is a complicated subject.  For more information see this site and this one and finally this one. You can learn more about the way ETFs work, which is a somewhat complicated subject.   
Exchange Traded Notes can be taxed very differently than Exchange Traded Funds.  Here's an excellent article that compares index mutual funds with ETFs.

This article explains some of the potential dangers of purchasing Exchange Traded Notes (ETN) and Structured Notes.  

Some have argued that indexing is becoming too big, and that as a result there will not be enough active mutual funds to keep the stock market efficient.  This article disputes that argument.

In chapter 13 of my book, I discuss the importance of owning a diversified portfolio.  You can instantly understand why you need a diversified portfolio by looking at this web page.  You'll see that virtually every type of investment has been the top performing investment of the year, and the worst performing investment of the year.  If you own just one or two types of investments, your portfolio is bound to swing from feast to famine, and you'll feel as though you are on a roller coaster.  If you own a difersified portfolio, your ride should be much smoother.

When you build a diversified portfolio, you must allocate your investments among the many alternatives that are available to you.  This should be done based on your age, when you need to withdraw your money, and your willingness to take financial risks.  This website can give you recommendations for your asset allocation.  Alternatively, you may wish to look at this allocation recommendation After you have determined your asset allocation, you can use this website to estimate how much return you will receive from your portfolio over time.

A diversified portfolio enables you to increase the expected return and decrease your risk.  In order to build a diversified portfolio, you must find investments whose returns don't correlate with the returns of your portfolio.  You can view correlations between two or more stocks or mutual funds. 
This website will provide you with a list of correlations among major types of investments.

There are 3 types of IRAs to which you may contribute:  Deductible IRAs, Non-deductible IRAs and Roth IRAs.  Which type you can contribute to is determined by a series of very complicated rules.  However, you can instantly see how much you are allowed to contribute to each type of IRA by using this website or this  one. Once you know how much you may contribute, the next question becomes, "which type of IRA is the most beneficial to you?"  This will vary from person to person, depending on a series of facts.  This website provides guidelines that can help you choose between a Roth and a regular IRA.  The first website that I listed in this paragraph can help you with this decision as well.  At the top of the website's screen, you'll see 3 tabs labeled "Eligibility, Comparison, Conversion."  When you determined how much you are eligible to contribute, you were on the "Eligibility" tab.  Click on the "Comparison" tab to learn which type of IRA is best for you.  To find out whether it makes sense to convert your traditional IRA to a Roth IRA, use the "conversion" tab.  There are other calculators that can help you make the decision whether to convert an IRA to a Roth IRA.  They are provided by Vanguard and the Wall Street Journal.
Another type of retirement plan is a Roth 401k.  If you are trying to decide whether it is better to contribute to a traditional 401k or a Roth 401k, you should use this website. You must begin to take RMDs from a Roth 401k at age 72.  However, you are not required to take any RMDs from a Roth IRA.  If you don't need the RMD, you may wish to roll some or all of your Roth 401k into a Roth IRA, but this is complicated because the Roth IRA must be open for 5 years before you can begin to take any distributions.  This site provides more information about this decision.

A Qualified Charitable Distribution (QCD) can save you a substantial amount in taxes.  The rules governing QCDs can be complex, and are described here.  You can learn more about QCDs.

As you approach retirement you'll want to know whether your nest egg will last you throughout retirement.  One of the first questions you need to answer is how long your retirement will last, i.e. how long will you live.  This free tool can estimate an answer to that question for you and/or your spouse.

There are many websites that tell you how much your nest egg will earn each year, but to the best of my knowledge, there only three websites (T Rowe Price  Vanguard and FireCalc that will give you the likelihood that your nest egg will last you X years, e.g. there is a 90% likelihood that your nest egg will last for 30 years, but only a 50% likelihood that your nest egg will last 40 years.  Each of the three may give you a somewhat different answer.

As you save for retirement, you will want to know whether you are saving enough each year.  There are six web sites that can help you with this analysis.  Each of them makes different assumptions, and therefore each of them will give you a slightly different answer.  I suggest you to try more than one of them.  They are offered by Fidelity1,  Fidelity2, VanguardChoose To SaveAARP and Harry MarkowitzMorningstar created a series of valuable articles specifically aimed at retirees. 

In my book, I urge investors to avoid purchasing tax deferred annuities for many reasons, not the least of which is the fact that they are extraordinarily expensive to buy.  A salesperson earns up to $1000 on a tax deferred annuity of $10,000.  Compare that to buying $10,000 of stock through Scottrade, which will cost you just $7.  

There is another type of investment known as a lump sum annuity or immediate annuity.  These sound a bit like tax deferred annuities, but they are very different.  Immediate annuities are perfectly fine investments.  This site is good for comparing options for purchasing immediate annuities.  If you are buying an immediate annuity, be sure to check the rating of the insurance company before purchasing your policy.  You can learn more about all types of annuities herehere and here.  Insurance policies are guaranteed in every state by a State Insurance company.  The guarantee in Maryland is for $250,000 in present value of annuity benefits.  This article discusses several issues you should consider when purchasing an annuity.

If you're looking for a good Health Savings Account (HSA) to invest in, this web site  offers reviews of a large number of options.

Finding a good financial adviser can be just as difficult as finding a good investment.  My book offers a number of methods for selecting a good adviser.  There are two criteria you can use to increase the odds of finding a good adviser.   Use an advisor who is a Certified Financial Planner (CFP) or a Chartered Financial Analyst (CFA).  Second, use a fee only adviser.  You can locate CFPs here. You can also find fee-only advisers.  Garrett Planning Network offers fee-only advisers who only bill by the hour or on a fixed contract basis.

This article from the New York Times offers excellent advice on selecting advisors to help you with your financial affairs.  The SEC offers a web site that allows you to look up individual advisers or companies that offer advice, and determine whether a legal action has ever been filed against them.  The site also provides a lot of additional valuable advice about financial advisers.  The SEC offers another web site that allows you to see a list of all Registered Investment Advisers, including information about their firm.  Go to this page, and scroll down until you find the report labeled "Information About Registered Investment Advisers and exempt reporting advisers."   Click on that, and then download the Zip file for the current month.  FINRA also offers a web site that allows you to look up individual advisers or companies that offer advice.  The Washington Post ran an excellent column that can help you determine whether you need to hire a financial adviser.   The New York Times compiled a list of 20+ online "wealth managers" including Vanguard, who will manage your money for reasonably low fees.

In June 2019, the SEC issued Regulation Best Interest.  It is a 700+ page document that contained new regulations that apply to all types of financial advisers.  While the regulation made some improvements, it also made some regulations that used to be clear, much less clear.  The New York Times has an excellent article that explains the the impact of Regulation Best Interest.

You should try to avoid overly expensive financial advisers.  Overly expensive IRAs, mutual funds and other investment products are 3 more traps to avoid.  This excellent article details several investment traps to avoid.
Taxes are a very complicated subject.  One of the decisions you must make is what type of investments belong in taxable accounts and what type belong in retirement accounts that are protected from taxation as long as they remain in the retirement account.  Morningstar has an excellent article that can help you with this decision.

You can find many tax tips covering a variety of subjects at this Morningstar site.

If you are thinking about selling an investment that has capital gains, this calculator can provide an estimate of what your capital gains will be when you sell the investment.  The calculator includes federal and state taxes.  If you live in Washington DC, enter "District of Columbia County" in the Location field.

If you are a Maryland resident who is age 65+, you and your spouse may qualify for the Md Pension exclusion that allows you to deduct up to $31,100 (in 2020) from pension income or when you withdraw money from a 401k, 403b, or 457b.  The exclusion does not apply to withdrawals from IRA, Roth IRA, SEP or Keogh accounts.

Some mutual funds are inherently tax efficient, while others are inherently tax inefficient.  Morningstar used to tell you which funds fall into the first category and which funds fall into the latter category, but they did away with that data in the summer of 2019.  They have said that the data will be reinstated at some point in the future.  You can learn more about the Morningstar mutual fund tax data. 

If you are trying to decide when to begin taking social security benefits, this simple calculator can help you.  With a few simple inputs, you can determine whether it is better to begin receiving your benefits at age 62, 64, 66 or some later age.

One of my favorite financial writers is Jason Zweig.  He has written many columns for Money Magazine.  This was one my favorite columns written by Zweig:
Funds You Can Trust 

This column also appeared in Money magazine, although it was not written by Zweig.  It contains 101 Things to Know for Investors, and it is a must read.

Two more financial writers I trust 100% are William Bernstein and Jonathan Clements.  The latter has a financial Guide, that is at the top of his home page.  It is an extremely comprehensive guide to all financial matters.

Regulation Best Interest was passed by the SEC on June 5, 2019.  You can read more about the Regulation here or here or here.



Saving for College
There are two 529 plans offered by Maryland.  Both plans are worth considering, because they provide you with a reduction in your Maryland taxes.  Morningstar offers additional detail about the Maryland plan.  You can learn more about the requirements you must meet and the benefits you earn when you take a deduction on your Maryland tax return for contributions to 529 plans.  Alternatively, contributing to the plan can also qualify you to receive a $250 - $500 grant from Maryland.  However, you can't deduct your contribution to a 529 plan and also receive a grant.

If you are not going to choose one of the two Maryland plans, you'll need to choose from over 100 additional plans offered by the 49 other states.  Three websites can help you narrow the field.  They are:
Morningstar (Be sure not to ignore the options at the very bottom of the page.
Saving for College (They rate plans with one to five stars)
Morningstar's Most Highly Rated plans 

If your grandchild is applying for financial aid, he/she will need to complete the FAFSA form.  In addition, there are 245 colleges that also require the CSSP. 

The Washington Post published an article that argues taking money from 529 plans for K-12 education is not as valuable as using the money for college education.

An interesting alternative is the Independent 529 plan which allows you to prepay your grandchild's tuition at one of 270 colleges.

This article offers reasons you might wish to use a Roth IRA to save for college.
Saving for college is an extremely complex issue.  If you need additional help, these websites are an excellent place to begin your search:

Saving for College  (Allows you to compare various state 529 plans)
Vanguard (Another site that allows you to compare 2-3 state 529 plans)
Another Vanugard website with a wide variety of information about 529 plans
A map showing which states offer Vanguard 529 investments
A wide variety of information about 529 plans
The pros and cons of all the methods to save for college (529, Coverdell,IRA, custodial accounts, savings bonds, etc.)
Similar to the item above, but not in chart form
Compares all the plans within the state you specify
NASD (An large amount of material on 529 plans and Coverdell plans, as well as others)
Financial Aid (This site has lots of information about financial aid, including calculators)