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Your Student Loans Are Going To Affect Your Kids Too (Financial Planning)
One-third of American parents are still paying off student loan debt, which is going to negatively impact their ability to pay for the college educations of their kids, according to a new study by the CFP Board.
“Managing expenses from the past and present is crowding out planning and saving for the future, including children’s higher education, retirement and even essential emergency funds,” writes Eleanor Blayney, the board’s consumer advocate.
The survey found that 69% of parents are not yet saving for the college educations of their children, according to the report. 17% of parents have no plans at all to save for college. And on top of that, 56% of parents are going to rely on financial aid.
Meanwhile, college prices keep rising. Since the 1970s, private college prices are increasing at an average annual rate of 6.5% and public college prices are increasing at 6.3%.
“Some parents appear to have unrealistic expectations about their ability to balance funding a child’s college experience with their own financial goals,” Blayney says in the release. “Many parents may not be effectively investing for college, losing out on tax benefits and higher returns from 529 plans and investments.”
It’s always incredibly difficult to predict when and how quickly rates will rise — and that’s naturally a source of tension for clients. The best strategy for clients who want to reduce risk associated with rising rates is to diversify, and in particular, to broaden opportunities globally according to Vanguard’s Josh Barrickman.
But that’s easier said than done — some clients are reluctant to own bonds. Advisors need to manage their clients’ expectations for bonds, and “specifically temper return expectations and reinforce the roles that bonds play in a portfolio.”
Returns most likely won’t be what they were in the last 30 years, but high-quality bonds are the best way to diversifies equity risk and to buffer portfolios against major shocks.
Investors should remember that ageing trends are an important factor in the ongoing evolution of emerging markets. Right now, major emerging market countries — like China and India — have young populations. But as birth rates decline and health care improves, older people are going to increasingly make up a larger percentage of the population. In the top 12 emerging markets, “the over-65 demographic is growing at an annual rate of approximately 3.7% — nearly double the rate in developed countries,” according to AllianceBernstein’s Tassos Stassopoulos.
AllianceBernstein estimates that annual consumer spending while rise by $US50 trillion in 15 years (from $US12 million in 2014 to $US63 trillion in 2030) because of the ageing population.
Because emerging markets are developing so quickly, older people are increasingly losing their jobs. Younger people more quickly become better educated and therefore more qualified than their elders. In fact, peak income earning levels tend to be around 35 to 39 years old.
So that leaves emerging markets with a growing “over-65” demographic that’s most likely going to be poor (since they will have a hard time holding on to good paying jobs). These people will probably not be looking for luxury and leisure goods. “Successful consumer companies will be those that understand how to grab a growing share of the older demographic by offering quality products at good value and services such as retirement insurance or cheaper healthcare.”
The S&P 500 currently has dividend yields at approximately 2%, which is how its been in the last 10 years, but is significantly lower than long-run historical norms. Investors hoping to get 6% or higher returns are going to get way less from dividends. To try and get a higher yield than 4%, investors are going to have to take on a lot of risk.
The big driver is going to be growth in intrinsic value. “Companies are earning cash flows over many years into the future — possibly decades into the future. And you have to discount those future cash flows back to a present value at some expected rate of return. So, that discount-rate assumption or that cost-of-equity assumption drives that growth in fair value estimate over time or that growth in intrinsic value over time. Again, as companies grow earnings, raise their dividends, realise cash flows, as cash accumulates in the balance sheet and is either returned to the shareholders or just accumulates there, all of this shows that companies tend to compound their intrinsic values over time,” writes Morningstar’s Matt Coffina.
“This is really the reason that it’s still worthwhile to hold common stocks,” he adds. In the long-run, fixed-income and cash do not have the same intrinsic growth value.
Bank of America Merrill Lynch just asked two veteran advisers who managed around $US2.5 billion in assets to leave the firm “after they allegedly recommended clients make investments outside the firm,” according to Investment News’ Mason Braswell.
The standard protocol is for clients to go through the Merrill Lynch investment platform. However, the two advisers allegedly told some major clients to invest directly in hedge funds.
The advisers had been at Merrill Lynch since the 1990s. Their removal is an “unusual occurrence.”
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