Savings Accounts Won’t Do

WHAT KIND OF INVESTMENT PORTFOLIO does it take to beat the rate of tuition inflation? Certainly, savings accounts and CDs won?t do. But what will? You could buy a pre-paid tuition plan. (See storyTK.)

But if you want your money to compound at a rate higher than the rate of tuition inflation, those are no good.

So what should you do? Don?t panic. Even though tuition inflation is rising at twice the rate of the consumer price index, equities and long-term bonds are still likely to grow faster than your tuition bill.

Over the past five years, annual tuition at four-year public colleges has risen an average 7.4% each year. Over the last 10 years, the rate is 7.6%. What investments have beaten that?

The losers over five years, no surprise, were money market funds which earned an average annual 4.1% and short-term government funds which gained 5.5%. Over 10 years, money markets still lost out, while the short-term fund index?s 7.3% annualized return just about kept pace with the average 7.4% tuition increase.

But what if you want to build wealth, not just keep up with inflation? Then, you?ve got to move money into equities or even long-term bonds. The Lehman Brothers Government Long-Term Bond Index gained an average annual 9.6% over the past five years and 9.8% over the past 10. The S&P 500 earned an even better 15.9% over the last five years and 19.2% over the last 10 years.