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But then horlander countered

I have to be nitpicky and ask if a taxable account wouldn't also be "tax deferred" if you subscribe to a LTBH philosophy, whether in individual stocks or mutual funds. The only thing taxable may be dividends, but even that is up to you because you can choose to invest in stocks without dividends.

And there the thread ended.

Can someone answer horlander's question ?

It is pretty much the same as mine.

I could say put $10,000 split between GE, SPY, CSCO and NOK and never sell till time to cash out to pay for my kid's college. The downside would be a sudden horrible drop in the market just before or during the four years he/she is there. The upside would be, potentially higher growth over the 16 or so years, and we all know what a one percent difference can make compounded over that many years. (11% rather than 10% annualized growth creates a $7,000 difference on $10,000 initial investment).


You are right: if you are a LTBH investor, and you have good investing skills, then you are better off buying stocks in your own portfolio (or even for the child's portfolio via UGMA) instead of using a 529 account.

However, you must be truly committed to LTBH for this to work. For example, suppose three years from now you decide that CSCO isn't such a good idea -- maybe JNPR is taking away its business, or the DoJ is suing it for antitrust reasons, etc. If you turn over your portfolio just once every three years, paying the 20% capital gains tax each time, you will need to do noticeably better than the 529 plan to break even.

Suppose you get 11% returns. Then, assuming you sell every three years, you will have a total return of 263% in 15 years after taxes. If you put the money in a 529 plan and it got a 9.9% return, your total return would be 265% after paying tax on the earnings at the 15% rate.

I consider myself LTBH, but I find myself selling stocks earlier than I had planned -- not to "take profits" or to time the market, but because I no longer think that particular company is the best place to put my money. I buy companies that I think I can keep for 10+ years, but technology changes so quickly that it's hard to be sure I can keep that commitment. If I no longer believe in the company, then I don't hesitate to sell.

If you are certain that you will hold your stocks for a long time, then more power to you. But for those who try to follow LTBH, but still find themselves trading their stocks every few years or so, the tax-deferral of 529 plans can be very valuable.

-- Edmund Ross
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