Expert: Paul Henneman - 10/14/2008

Question
QUESTION: I do not understand why it makes sense to Keep investing in my childrens' college saving's plans when they are steadily loosing money.  I have 3 children that are 10, 6, and 4.  The earliest any of them will need the money for college is about six years from now.  My question is this:  Why should I keep putting money in their college savings plan (which is currently in the "Vanguard aggressive age-based" option--100% stocks) when the account is steadily loosing money?  It seems like you are trying to fill a bucket which has a big hole in it.  You put water in the bucket and as soon as you put it in it goes out.  The volume of water in the bucket never gets higher and the water you are pouring in, like the money you contribute, just gets spilled all over the ground.  That seem pointless.  Wouldn't it make sense to stop the contributions now and resume them when their is positive growth in the market?  But all economists say to keep contributing.  That seems to be throwing away money.  Why keep contributing when the account is not making money?

ANSWER: Kim,
  Thank you for your question!
What you say makes perfect sense. Here is the problem: If you pull the money now, you could very well miss a market recovery and will have locked in those losses. Think of it as a hose that will be turned on to fill your buckets back up, but if you remove the buckets now, you will miss it.  That is not to say that that the markets will not decrease some more. The goal of every investor should be to invest when the markets are low, and sell when the markets are high. But, the vast majority of investors do the opposite: panic when the markets are low, and try to jump on board to a sure thing when the markets are doing well.
   If you close out those accounts now, you will have done this very thing: lost money, then eliminated the ability of the accounts to grow again just when the markets are perhaps at their most undervalued level in decades. Ultimately it would have been best to slow down or stop your contributions months ago when there were so many signs of what was to come. But, now that we are here, the savviest investor will put everything they can in while markets are low. It may take a few years to come out of this, but it will. And it sounds like you have many years before you will need the funds.  The best advice for a stock portfolio in this type of environment: think long term, don't look at your balances in the short term! Vanguard is a good company.
   All of the above can be very stressful, and does require taking risks. You may decide that it is not for you, very understandable. Realize that there are other ways to invest that require much less to no risk at all, for example CD's (certificate of deposits). These pay usually about 4% interest, and are perfectly safe. Any major bank or online investing service offers CD's, I suggest looking at www.ingdirect.com as they offer fairly high return rates for this type of investment. In the long run this type of account will earn less than a stock portfolio, but there is no risk to worry about. Nothing can really go wrong.

I hope that this helps, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.comn


---------- FOLLOW-UP ----------

QUESTION: My follow up question is:  I am not considering closing the accounts or taking all the $ out of them.  I am sorry, but I still do not understand why it makes sense for me to keep contributing to the accounts--to keep putting $ in.  It seems futile because I put $ in and it looses that money.  So I guess my question is more accurately, "why keep putting contributions in"?  Contributing $ now may allow me to buy cheap stocks, but I am loosing what I am buying so it seems futile.  It seems a cycle of buying then loosing, buying and then loosing, buying and then loosing...

Answer
Thank you Kim for the follow up!
   Yes, I do understand your concerns. The issue is if you feel that the market will continue to drop. If you do, then yes, you should certainly stop your contributions right away. You could perhaps use the amounts that you usually contribute for other things, such as investing in CD's (certificate of deposits). This is a low return investment, but perfectly safe. I like www.INGDirect.com for this, they offer good rates and are FDIC insured.
   However, many believe that the market is at an all time low. If this is the case, then by stopping your contributions now you would be reducing the effect of rising markets in the future. Your continued contributions would benefit from a rise in the market.
   It may take quite some time for markets to rebound, but they will. I do not know what your contributions are, but if the markets stay low for a year, then rebound, you would have lost a year's worth of contributions for the rise in the market later on. The way that interest compounds over time, this can be a big difference. It can mean thousands.
   I believe that you said you will not be using the funds until your children go to college, six years away for the oldest. The markets will likely rebound by then. Returns are based on the amount you have invested, if you stop contributions now, when markets rebound the returns will the same percentage, but a smaller dollar amount because your funds will not have grown by the addition of your continued contributions.
   There is information out there to look to for help in deciding if the market will rise or fall in the coming year. Our own website, www.ValuEngine.com has a free weekly newsletter where we provide some analysis on the overall market, and other sources such as www. motleyfool.com, finance.yahoo.com, and others may be of help. The Economist is by far the best financial publication I am aware of.
  To sum up: if you think the market will continue to fall, then stop contributions. This is already perhaps the worst performing month in the history of US markets, so if you think it will rebound (yesterday the market was up 10% in one day), then you should continue to contribute. A tough decision I know! The answer can be very different for different people. Ultimately it is my belief that it hurts almost all investors if they try to market time, and I personally would continue your contributions. It takes time, but things always come back. But that is me, don't take that as the absolute bottom line.

I hope this helps, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc