Becoming Your Own Financial Advisor – Part 5


In the last article in our series on becoming your own financial advisor we looked at IRAs and mutual fund investments.

In part five of our series we'll look at two more ways to invest – stocks and 529 plans.

What Is A 529 Plan?

529 plans are college savings accounts that are exempt from federal taxes.

Some of the pros of 529 plans include –

  • No income restrictions for contributors
  • Investments grow tax-deferred
  • Distributions are tax-free at the federal level.

Some of the cons of 529 plans include-

  • Contributions greater than $14,000 can trigger the federal gift tax.

You can invest in a 529 plan through participating state and university providers.

529 plans are a good way to help a child financially with education expenses while at the same time limiting your own tax liability. A 529 plan is an investment that lets you save for the future college costs of a beneficiary –like your child or grandchild –while at the same time potentially reducing your own tax liability.

Even though contributions aren’t tax deductible on your federal return, they may be on your state return. In addition, your investment grows tax-deferred. Any distributions from the plan that are used to pay for the beneficiary’s qualified education costs are tax-free at the federal level.

Your maximum level of contribution to a 529 plan is dependent on the state in which the 529 plan is established.

Annual contributions are treated as gifts. Therefore contributions up to $14,000 each year – as of the 2017 tax year- can be made without triggering the federal gift tax.

Lump sum contributions that covers five years’ worth of contributions can be made to front load the investment and reap the rewards of compounding. This comes to a total of $70,000, or $140,000 for married couples – provided no other monetary gifts are made to that beneficiary during the five-year period.

529 plans come in two flavors.

529 Savings Plans

These 529 plans are similar to some other investment plans – your contributions are held in mutual funds and other investment products.

The 529 plan account earnings hinge on the performance of the underlying investments. Most 529 savings plans also offer an age-based investment approach that gradually becomes less risky as your beneficiary nears college age. This means you’ll have a higher concentration of stocks in the beginning of the plan that gradually shifts to more cash and bonds.

You can also choose a more static approach – the investment fund or group of funds keeps the same allocations.

529 Prepaid Tuition Plans

529 prepaid tuition plans –also known as guaranteed savings plans- let you lock in today’s rates by pre-purchasing tuition.

These programs pay out at the future cost to any of the state's eligible institutions. This may be a good deal when factoring in the rising costs of college.

If the beneficiary chooses to go to an out-of-state or private school, you can transfer the value of the account or get a refund.

529 prepaid tuition plans may be administered by the state and higher education institutions.

Stock investment Basics

Stocks are securities that represent a portion of ownership in the corporation that issued the stock. Stocks are also called equities.

Some of the pros of stocks include

  • Capital appreciation
  • Many stocks outperform other investments
  • Stocks may pay dividends
  • Owning stocks incurs voting rights

Some of the cons of stocks include

  • Prices can fluctuate dramatically
  • You have the potential to lose your entire investment.

You can get involved in investing in stocks through full-service and discount brokerages or through a Dividend Reinvestment Program (DRIP). Many investors who pick stocks and pinpoint good times for buying and selling use a combination of technical and fundamental analysis.

Many companies issue stock to raise money for various purposes such as debt payment, launching new products, market expansion and building new facilities.

When you purchase stock shares, you buy a piece of the company no matter what the size of that piece.

Most stock purchased by investors gives shareholders the right to vote at shareholder meetings and to receive dividends. This is called common stock. On the other hand, preferred stock doesn’t come with any voting rights. However preferred stock shareholders have priority over and receive dividend payments before common stockholders.

You can actively trade stocks – for instance day traders get in and out of a trade during the same trading session. I advise against this as you need to beat the market plus the costs of buying and selling. I don't know about you but I can’t predict the future.

The most common tactic is to buy and hold. This is where investors seek gains over the long-term. If you own stock, you make money if it appreciates in value and you sell it, and/or you will earn income through dividend payments.

Market Capitalization

You can categorize stocks by the size of the company. This is known as market capitalization. Market cap represents the total dollar market value of all its outstanding shares.

While the lines between different caps are not set in stone, general guidelines are:

  • Mega cap: $200 billion+
  • Large cap: $10 billion to $200 billion
  • Mid cap: $2 billion to $10 billion
  • Small cap: $300 million to $2 billion
  • Micro cap: $50 million to $300 million
  • Nano cap: less than $50 million

You can also group stocks by certain performance characteristics:

  • Growth stocks: Earnings grow at a faster rate than market average but rarely pay dividends. Investors instead seek capital appreciation.
  • Income stocks – these consistent dividends, providing income for investors.
  • Value stocks – these stocks have low price-to-earnings (P/E) ratios. Investors will purchase in the hopes that price will rebound.
  • Blue-chip stocks – These stocks are large, well-known and well-established companies with solid growth histories. These always pay dividends.

Tips for Picking Stocks For Your Portfolio

Here are some tips for you to consider when purchasing stocks.

  • Look at your overall diversification as well as your time horizon and risk tolerance.
  • Stock analysts who take a fundamental approach consider price and valuation, financial reports and dividend history.
  • More technical analysts look at price charts and technical indicators to analyze past – and predict future – price moves.
  • As I mentioned above many investors consider both the fundamentals and technical.
  • Finally do your own due diligence. Advice from friends and analysts is great but don’t rely too much on it.

Stocks and 529 plans are two more ways which you can invest in your future.

Get a handle on bonds and life insurance by reading part six



  1. For stocks, I like the Warren Buffet 90/10 suggestion (90% of your portfolio in a low-cost index fund like the Vanguard S&P 500 fund, and 10% in short-term government bonds). As far as I know, the S&P 500 has a historical long-term return of something like 9% yearly, so it seems like a sound, low cost strategy.

    As to the 529 plans, I did not know that contributions were not federally tax-deductible. Bummer!

    • Things don’t need to be complicated. Keeping fees and taxes low is the name of the game.

      Check out you state tax deductions. Many states offer deduction for 529 plans. I set up one for my daughter using Utah’s 529 for the low fee funds since Massachusetts didn’t have a state tax deduction. However this year they started offering one. So I figure I’ll contribute up until the state tax return then figure out what to do from there.

      For now though it was a pure psych move since it is more advantageous for me to work on keeping my loan burden low since I’m a first year podiatry student.

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