Every Wednesday, Legg Mason Wood Walker Inc. financial adviser Jonathan Murray answers e-mail on your investments. To be included next time, send your questions.
> From: Beamon, Todd
Sent: Monday, Nov. 11, 2002
To: 'Murray, Jonathan P.'
Subject: $
Hello, Jonathan:
My son is a junior in high school. We established a mutual fund for him many years ago to help pay for college.
In applying for student aid next year, should we cash out his mutual fund by Jan. 1 so we're not penalized when we apply for assistance, or should we wait to cash out right before we apply for financial assistance next year?
Scott
From: Murray, Jonathan P.
Sent: Tuesday, Nov. 12, 2002
To: Beamon, Todd
Subject: RE: $
Dear Scott:
Congratulations that you saved for your child's education.
Regarding "cashing out" his fund, I don't know if the fund is in a custodial account. If it is, those funds legally must be used for the benefit of the child.
More broadly, even though you might not intend to do so, I cannot support any form of "manipulation of assets" to make it seem like you need more aid than is the case. That's one of the reasons that the student financial-aid system is vulnerable: Too many people apply for, and sometimes receive, aid who shouldn't -- attempting to "hide" their assets, leaving truly deserving students needy.
Financial aid should be used for those families who cannot afford to pay for college.
While it's true that funds in the child's name generally are seen by financial-aid offices as more "available" for tuition than assets in your name -- that is, after all, what they're for, aren't they? And, you've had a tax break, however small, on the growth of those assets in custodial name.
Regarding my investment advice, make sure that your fund is more conservatively positioned than it was five years ago, since your son will need these assets next year. It should be heavy in money markets and short-term bonds, with not too much in stocks.
> From: Beamon, Todd
Sent: Tuesday, Nov. 12, 2002
To: 'Murray, Jonathan P.'
Subject: $
What is a Ginny Mae? How secure are they? Do the current ups and downs of the stock market make them more attractive now than before? How do I go about investing in it?
Bill
From: Murray, Jonathan P.
Sent: Tuesday, Nov. 12, 2002
To: Beamon, Todd
Subject: RE: $
Dear Bill:
A Ginnie Mae is a government-sponsored entity, or GSE. It comes from the acronym GNMA, for the Government National Mortgage Agency.
There are other GSEs, like Freddie Mac and Fannie Mae, which are government-sponsored.
There are many ways to invest in these kinds of securities. Buying the bonds directly is probably the most secure route. Even though they are not U.S. Treasury bonds -- most folks do not know that, and think they are guaranteed by the U.S. government -- they have a fixed maturity, a coupon that is steady, and they do not pay down your principal. They have an implied AAA rating.
I fear, however, that many investors do not understand the risks associated with owning certain types of government-agency investments. I hear too many times that investors think they are buying a government bond, paying 7 percent interest, with no risk, backed by the full faith and credit of the U.S. government -- and that might not be true in all cases.
So, be careful, Bill, and make sure your broker or financial adviser explains exactly what you're investing in.
From: Beamon, Todd
Sent: Monday, Nov. 11, 2002
To: 'Murray, Jonathan P.'
Subject: $
I have seen advertising that points out how much one would "miss out" on if they were out of the stock market on the 10 or 20 "best days" of the year.
Could I not argue for timing the market by pointing out how much I would save by "missing" the 10 or 20 "worst days"?
Are both arguments equally valid? Can one "time" the stock market effectively, especially given its recent volatility?
Bob
From: Murray, Jonathan P.
Sent: Tuesday, Nov. 12, 2002
To: Beamon, Todd
Subject: RE: $
Dear Bob:
There's no question that if you knew when the best or worst days in the market were to occur, and got in or out of the market on those days, your returns would be significantly higher.
The problem is, nobody -- and I mean nobody -- can tell you when those days will occur. You might get lucky, and avoid a bad day by selling out prior, but then, the chances of you knowing when to get back in -- to capture the upside -- are slim.
Therefore, most financial advisers tell you not to attempt to time the market, to ride it out -- perhaps making purchases at regular intervals, buying more shares at low prices or fewer shares at high prices.
In the end, they argue, you'll experience decent stock market returns.
Lastly, the proof is in the pudding. Among the most successful investors of all time -- say, Warren E. Buffet or Peter Lynch -- there's not one among them who's a market-timer.
> From: Beamon, Todd
Sent: Tuesday, Nov. 12, 2002
To: 'Murray, Jonathan P.'
Subject: $
Thanks, Jonathan.
Talk to you next week.
> From: Beamon, Todd
Sent: Monday, Nov. 11, 2002
To: 'Murray, Jonathan P.'
Subject: $
Hello, Jonathan:
My son is a junior in high school. We established a mutual fund for him many years ago to help pay for college.
In applying for student aid next year, should we cash out his mutual fund by Jan. 1 so we're not penalized when we apply for assistance, or should we wait to cash out right before we apply for financial assistance next year?
Scott
From: Murray, Jonathan P.
Sent: Tuesday, Nov. 12, 2002
To: Beamon, Todd
Subject: RE: $
Dear Scott:
Congratulations that you saved for your child's education.
Regarding "cashing out" his fund, I don't know if the fund is in a custodial account. If it is, those funds legally must be used for the benefit of the child.
More broadly, even though you might not intend to do so, I cannot support any form of "manipulation of assets" to make it seem like you need more aid than is the case. That's one of the reasons that the student financial-aid system is vulnerable: Too many people apply for, and sometimes receive, aid who shouldn't -- attempting to "hide" their assets, leaving truly deserving students needy.
Financial aid should be used for those families who cannot afford to pay for college.
While it's true that funds in the child's name generally are seen by financial-aid offices as more "available" for tuition than assets in your name -- that is, after all, what they're for, aren't they? And, you've had a tax break, however small, on the growth of those assets in custodial name.
Regarding my investment advice, make sure that your fund is more conservatively positioned than it was five years ago, since your son will need these assets next year. It should be heavy in money markets and short-term bonds, with not too much in stocks.
> From: Beamon, Todd
Sent: Tuesday, Nov. 12, 2002
To: 'Murray, Jonathan P.'
Subject: $
What is a Ginny Mae? How secure are they? Do the current ups and downs of the stock market make them more attractive now than before? How do I go about investing in it?
Bill
From: Murray, Jonathan P.
Sent: Tuesday, Nov. 12, 2002
To: Beamon, Todd
Subject: RE: $
Dear Bill:
A Ginnie Mae is a government-sponsored entity, or GSE. It comes from the acronym GNMA, for the Government National Mortgage Agency.
There are other GSEs, like Freddie Mac and Fannie Mae, which are government-sponsored.
There are many ways to invest in these kinds of securities. Buying the bonds directly is probably the most secure route. Even though they are not U.S. Treasury bonds -- most folks do not know that, and think they are guaranteed by the U.S. government -- they have a fixed maturity, a coupon that is steady, and they do not pay down your principal. They have an implied AAA rating.
I fear, however, that many investors do not understand the risks associated with owning certain types of government-agency investments. I hear too many times that investors think they are buying a government bond, paying 7 percent interest, with no risk, backed by the full faith and credit of the U.S. government -- and that might not be true in all cases.
So, be careful, Bill, and make sure your broker or financial adviser explains exactly what you're investing in.
From: Beamon, Todd
Sent: Monday, Nov. 11, 2002
To: 'Murray, Jonathan P.'
Subject: $
I have seen advertising that points out how much one would "miss out" on if they were out of the stock market on the 10 or 20 "best days" of the year.
Could I not argue for timing the market by pointing out how much I would save by "missing" the 10 or 20 "worst days"?
Are both arguments equally valid? Can one "time" the stock market effectively, especially given its recent volatility?
Bob
From: Murray, Jonathan P.
Sent: Tuesday, Nov. 12, 2002
To: Beamon, Todd
Subject: RE: $
Dear Bob:
There's no question that if you knew when the best or worst days in the market were to occur, and got in or out of the market on those days, your returns would be significantly higher.
The problem is, nobody -- and I mean nobody -- can tell you when those days will occur. You might get lucky, and avoid a bad day by selling out prior, but then, the chances of you knowing when to get back in -- to capture the upside -- are slim.
Therefore, most financial advisers tell you not to attempt to time the market, to ride it out -- perhaps making purchases at regular intervals, buying more shares at low prices or fewer shares at high prices.
In the end, they argue, you'll experience decent stock market returns.
Lastly, the proof is in the pudding. Among the most successful investors of all time -- say, Warren E. Buffet or Peter Lynch -- there's not one among them who's a market-timer.
> From: Beamon, Todd
Sent: Tuesday, Nov. 12, 2002
To: 'Murray, Jonathan P.'
Subject: $
Thanks, Jonathan.
Talk to you next week.