Dr. Don, I am 13 years old and live in Ohio. These are my college account stock picks. I pick them with my dad, and we track them on the computer. Please tell me if these are good choices for five years down the road when I will be 18 and start college. -- BA
What a great way to learn about companies and stocks while investing for your future. Your college expenses should be evenly spread out over the time you spend in college. That means that your planning horizon extends from your freshman year out through graduation. You didn't mention plans for graduate school, so I'll assume that you're investing to fund a four-year degree. If that's the case, your planning horizon is five to nine years.
Your family has done well in committing funds to finance your college education. The question becomes, will this be enough?
Wiredscholar has a college-cost calculator that will help you determine if you have enough invested. They'll also help you estimate college costs. The quick and dirty is that if you're going to
Bowling Green State University
, you've already got enough money set aside and you can dial down the portfolio risk and invest in CDs. If you're going to
Stanford ($23,058 annually), your dad's got to keep contributing to the college fund; either that, or your investments have to earn double-digit returns over the next five years.
You haven't shared with me who owns these shares. Whether they are held in your name or your parents' name will change the tax implications of this portfolio. IRS Publication 929,
Tax Rules for Children and Dependents will provide some guidance if the shares are held in your name. Regardless of how the shares are held, it would be worthwhile for your dad to consult with his tax adviser to be sure that the account is structured in a way that minimizes the taxes due on the investment returns.
But you really don't care about any of this, do you? You just want to know what I think of your list of investments. Let's start out with the
. James D. Oelschlager co-manages all three funds; Pin Oak and White Oak with Donna Barton, and Red Oak with Douglas McKay. All three funds have a majority of their holdings invested in technology stocks.
lists three different categories for these funds, Large Growth, Specialty Technology and Mid-Cap, but it identifies all three as being large-cap growth funds. I think that this is too much of a good thing, and there's no reason to own all three funds. There's a fair amount of overlapping investments between the three funds, and combined, they form more than 20% of your portfolio. I think that's too much, especially when you combine the technology bent of these mutual funds with the technology bent of your individual stocks.
Let's face it, with individual holdings in
, you've already got 35% of your portfolio invested in technology before we even consider the mutual funds. Including the mutual funds, you've got about 55% of the portfolio invested in technology. Technology is just one of the 10 stock sectors listed by Morningstar. The others include utilities, energy, financials, industrial cyclicals, consumer durables, consumer staples, services, retail and health. By overweighting the technology sector, you're saying by your actions that you expect this type of stock will outperform the other sectors of the marketplace. It hasn't worked out that way in 2000, and your portfolio's current value reflects that performance.
Your current holdings were worth about 20% more a year ago. A portfolio composed of these holdings has lost about $17,500 over the past 12 months. That's almost a year's tuition, room and board in a private college. It's a good reminder of why you need to diversify your stock portfolio and the need to include other types of financial investments, like bonds and cash, as you approach your college years. At a minimum, you would want to have a year's tuition in cash just before you pay that first tuition bill.
It would be a great exercise for you and your dad to set up a worksheet trying to quantify how a stock makes it into your portfolio, and what it takes for a stock to be sold out of your portfolio. By establishing benchmarks for the acquisition and sale of stocks in the portfolio, you'll develop a measure of consistency in your trading that will serve you well in investing over your lifetime. If you're buying growth, then you need to be able to identify when the growth rate changes. If you buy value, you need benchmarks for when a stock is undervalued and when it is overvalued.
The beguiling aspect of the stock market is that there are always opportunities. One approach to being successful in investing is being able to identify those opportunities. Another approach is for another day.
Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent arecommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at