Two interesting items on page D2 of today's Wall Street Journal.
First, Karen Blumenthal spends a few hundred words noting that the mutual fund industry makes it very difficult for young, first-time investors to get started, even in IRAs. Though none of our clients fall in this category, we've noticed this problem in doing some "pro bono" work for young people. It really is ridiculous.
Here's a telling passage:
Lovely. Fidelity imposes low minimums for those who commit to contributing $200 per month or $600 per quarter, but as Blumenthal notes, that's not necessarily easy for young people who work uneven/seasonal jobs. Sometimes we wonder where investor loyalty comes from in this business. Why is Blumenthal still a Fidelity customer? The more we learn about physics and financial services, the more we understand the all-encompassing power of inertia.
Blumenthal settled on a total-market ETF from Vanguard. We think that's a good call, and the logic of her choice undercuts the mutual fund apologists who argue that ETFs' brokerage costs make them an unwise choice for small-dollar investors. No, you wouldn't want to do monthly dollar-cost averaging using ETFs. But $1,500 in one trade? We see Blumenthal's point.
Then there's this, late in the column:
We know Blumenthal will make the obvious point to her daughter (we know this because she does it in the very next paragraph), but this notion, that what happens in the first year of a thirty- to fifty-year investment program is indicative of anything at all...well, it frustrates us to see stuff like this. Blumenthal's daughter should be absolutely beside herself with glee that the future of the global economy has been put on sale. And she should work hard this Summer to increase her 2009 Roth contribution when the buying's good.
Immediately adjacent to the Blumenthal riff is a Jane Kim story on 529 college savings plans offering more "safe" choices in their menus of investment options. That's fine, but as with the insurance industry rolling out "guaranteed" products to 401(k) plans after the market meltdown, this is a little like handing flood victims umbrellas...after the rain has stopped and the water is up to their knees.
As with near-retirees who are on the verge of annuitizing their savings, this is very simple: college savers with short time horizons should not be invested in volatile assets.* In fact, college savers wth short time horizons probably shouldn't even bother with the hassle of the 529 plan in the first place. The plans' tax benefits can be great for those with more than a few years to contribute (and, of course, ride out market swings). But for short-timers, what's the point? A good, solid, FDIC-insured online savings account would almost certainly be a better bet.
What we hate to see is so many people get thrown off track by market volatility. This is just another reason why good, truly independent, fiduciary advice is so indispensable to so many people. The alternatives--the do-it-yourself route on the one hand and being subjected to Wall Street's product-driven selling on the other--aren't good at all.
* As we've written over and over in this space, the situation of the near-retiree is different. He has to protect and invest for what is likely to be a much longer period than a four- or five-year stint in college. The key for the about-to-retire, then, is to ensure that they have enough liquidity to avoid tapping into depressed assets at or near market bottoms.
Karen Blumenthal, "Obstacles for Young Investors," Wall Street Journal, February 11, 2009
Jane J. Kim, "States Offer Safe Choices in 529 Plans," Wall Street Journal, February 11, 2009