by Archie M. Richards, Jr., CFP^®
June 13, 2005

Brenda writes, "My husband and I are both 39 years old. We each contribute 5 percent of our pay to 401(k) plans. We want to start 529 plans for the college education of our children, ages 7 and 4. Can you furnish guidelines for how much to allocate between the 401(k) plans and the 529 plans?

"Also, since our home mortgage has only 10 years left, perhaps we could re-mortgage when the kids go to college to cover the tuitions."

If you and your husband raised your savings to 10 percent of pay, Brenda, couldn't both your retirement and college objectives be met without increasing debt?

I know, I know, it would be difficult to cut your spending this much. But you might be surprised. After an adjustment period, the contentment of your whole family might be greater, not less.

A personal financial plan seems c alled for. Some of the questions to answer: How much is an expensive college worth these days, and how much of the cost should the child pay? How comfortable are you about holding substantial debt when you're approaching 60?

To find a planner in your area who benefits from fees and commissions, consult The Financial Planning Association, 800-322-4237, www.fpanet.org.

For a planner who's paid from fees only probably better - consult The National Association of Personal Financial Advisors, 800-366-2732, www.feeonly.org.

If you have a choice between selling stocks at the day's closing price or at the next day's opening, you're better off avoiding the risk of unfavorable events overnight, right?

Wrong. A study by Larry Connors of TradingMarkets.com reveals the opposite.

The study analyzes the prices of Spiders (SPY), an exchange-traded fund that's a proxy of the Standard & Poor's 500 Index. The analysis extends for 12 years, from January 1993, when Spiders first traded, to May 1995. Mr. Connors constructs two hypothetical accounts, as follows:

In the first, Spiders are assumed to be bought at each day's opening and sold at the closing price on the same day.

In the second, Spiders are assumed to be bought at each day's close and sold at the next day's opening.

The first account completely avoids the overnight period. The second holds only during the overnight period. Here are the results:

The portfolio that holds Spiders only during the trading day loses money at the rate of 2.6 percent a year.

The portfolio that holds Spiders only overnight gains at the rate of 8.4 percent a year.

The study is hypothetical, taking into account just the opening and closing prices of Spiders. The following transaction costs are avoided:

Commissions: Two brokerage commissions a day would be paid. Assuming $10 each (relatively low for most firms), this would come to $20 a day. With 250 trading days a year, the cost would be $5,000 per year.

Spreads: The price for buying any security (the "asked" price) is higher than the price at which you can sell it at that moment (the "bid" price). The spreads for Spiders are narrow, because they have the highest trading volume of any security in the world. At the close on the day of this writing, the asked price for Spiders was 120.22, and the bid was $120.19. The difference of 3 cents was 0.025 percent of the average between the two prices. Multiplying this by 250 trading days, the cost of the spread would be 6.25 percent a year.

Some television advertisements say, "Don't try this at home." The caution certainly applies to this study.

Surprisingly, the exercise reveals that holding Spiders only overnight is safer than holding it only during the trading day.

The stock market doesn't operate as our intuitions tell us. It's counter-intuitive. In fact it's counter-intuitive so often that you're better off assuming that your guesses about short-term price changes will be wrong. Therefore, make as few guesses as possible.

Instead, put the bulk of your money into broad-based index funds representing the stocks of the world. Except for annual rebalancing, hold for life.

But if you are selling at the close, why not wait overnight and sell at the next day's opening?