Home > About SMI > Meet The Team > Joseph Slife

Joseph Slife

Joseph Slife

Most Recent Articles

Is a College Education Still Worth the Investment?

In recent decades, going off to college has become the de facto expectation for students graduating from high school. A college degree often is seen as the key to launching a successful career. But the exploding costs (and related debt) associated with getting a bachelor’s degree, along with relatively fewer attractive new jobs for college grads, should prompt parents and students to reconsider whether four (or more) years of college is the best approach to post high-school education.

"Two thirds of people who go to four-year colleges right out of high school should do something else." So argues former U.S. Secretary of Education William J. Bennett in his 2013 book Is College Worth It?, co-authored with David Wilezol. "Rather than simply swallowing the conventional wisdom and following the conventional path," Bennett writes, "more students need to make realistic assessments of their abilities and finances and then decide the best path for themselves."

Social scientist Charles Murray agrees. After examining SAT scores and other data, Murray has concluded that most students enrolled in four-year Bachelor of Arts programs shouldn't be in college. Their gifts lie in areas other than the academic. Besides, Murray notes in his 2008 book Real Education, except in fields such as science and engineering, a bachelor's degree is no longer a reliable measure of whether someone is truly educated.

The views articulated by Bennett and Murray go against the conventional wisdom that (1) earning a B.A. is the natural "next step" for high-school graduates, and (2) such a degree is the basic qualification for a well-paying job.

Their arguments are echoed by another contrarian, Richard Vedder at the Center for College Affordability and Productivity. He points to the growing "mismatch between labor market realities and college graduation rates," noting that colleges are turning out more grads than the job market can assimilate "in the technical, managerial, and professional areas where college graduates historically want to work." The result: as many as a third of college graduates—including many who go into debt to pay for their schooling—end up in jobs that don't require a college degree.

Of course, those who argue that most young people should get a college diploma can point to statistics too. "On virtually every measure of economic well-being and career attainment ...young college graduates are outperfoming their peers with less education," concludes a 2014 Pew Research study titled The Rising Cost of Not Going to College. "[T]he disparity in economic outcomes between college graduates and those with a high-school diploma or less formal school has never been greater in the modern era," the Pew findings show. Likewise, an Economic Policy Institute analysis of Labor Department data recently found that Americans with four-year college degrees earn—on average—nearly twice as much per hour as people without a degree.

Why statistics don't provide the full picture

The earnings-comparison data may seem compelling, but such statistics should be viewed critically. First, keep in mind that the studies referenced above reflect the earnings of college graduates. Many people who start college, and take on school-related debt, don't finish. According to the U.S. Department of Education, four out of 10 students who enter college still haven't earned a degree six years later. At best, the wage-comparison studies show the value of completing college, not going to college.

In addition, as William Bennett notes, "It is important to remember that the [earnings] data are true only in the aggregate. If we disaggregate the data, it is a far more complicated picture." Indeed, a 2013 report by the consulting firm McKinsey and Company found that 41% of recent graduates from the nation's top colleges and 48% of those from other schools could not find jobs in their chosen fields. And a study by Canadian economists found that today's students earning a B.A. are more likely to end up in "routine and manual occupations" than were graduates prior to the year 2000.

Another factor to consider when looking at earnings comparisons is what social researchers call "selection bias." At least some of the variation in earnings between college graduates and those with only a high-school education is likely a reflection of personal qualities. In other words, the qualities that drive many people to earn a college degree tend to be the same qualities many employers find valuable and are willing to pay for (e.g., intelligence, diligence, creativity). One could argue that such intelligent, diligent, creative people may have enjoyed higher career earnings regardless of whether they earned a four-year college degree. Therefore, the variation in earnings outcomes could have less to do with college itself, and more to do with the people who "self-selected" into the two groups in question (i.e., those who went on to earn four-year degrees and those who didn't). There is no way to know for certain.

And finally, a critical reflection on earnings data should consider the larger equation. Yes, college graduates—on the whole—do earn more than high-school-only grads, but the cost of earning that college degree must be taken into account, especially if a graduate is still making school-loan payments. As shown in the graph below, when repayment amounts are subtracted from gross earnings, four-year college graduates are at an income disadvantage in relation to high school graduates for well over a decade.

Indeed, it takes a remarkable 14 years of work before the typical B.A. recipient reaches net-pay parity with a high-school-only graduate, according to the College Board. This is not only because of debt payments, but also because college students typically forgo several years of potential income while earning a degree. (See Education Pays 2013: The Benefits of Higher Education for Individuals and Society. ) Personal finance writer Scott Burns sums it up this way: "During all of those 14 years, college doesn't pay. High school pays."

All that said, there is no universal experience. Some students earn a college diploma in a timely manner while incurring little or no debt, then go on to financially lucrative careers. Others drag college out over more than four years, take on huge amounts of college-related debt, and end up languishing in low-paying jobs. Those are the extremes. The majority of students will fall somewhere in between, but most will take some school loans.

School debt is now the norm, and the amounts borrowed are rising. A study released last year by the Institute for College Access & Success found that more than 70% of bachelor's degree students use school loans to help pay for college. While the average debt load at graduation in 2008 was $23,450, by 2012 the average had risen to $29,400—a sharp 25% increase in just four years. (Notably, the Institute study found that students graduating from colleges in the West and the South tend to borrow less than those who earn degrees from schools in the East and Midwest.)

The shifting cost/benefit picture

What are parents and students getting for their college-education dollar? That question isn't easy to answer. For one thing, early in the process of choosing a college it can be difficult to figure out the true dollars-and-cents cost of attending a particular school. Each college has a per-year (or per-semester) "sticker price," but the majority of students don't pay that full price. Instead, the sticker price likely will be discounted by means of institutional grants and scholarships. For example, more than 50 U.S. colleges and universities now have sticker prices of more than $60,000(!) a year (tuition, fees, room, board, books, supplies), but a family's net cost will likely be much less than that. How much less depends on the student's academic or athletic prowess, the family's overall financial situation, and a particular school's ability to offer institutional aid. (All colleges and universities are required by law to include a “net price calculator” on their websites.)

Still, the full sticker price remains the "baseline" from which any institutional aid is subtracted, so the sharp increase in baseline prices is a key indicator of the rising cost of higher education. The table at right details the steep increase in average annual sticker prices since the early 1980s—at a rate more than four times that of overall inflation.

In a market economy, steep price increases typically are difficult to maintain without an accompanying increase in quality. People may be willing to pay more for an upgraded product, but they balk at paying more for a product that hasn't improved, or perhaps even has declined in quality. Higher education, however, has been able to turn basic economics on its head—at least thus far. Despite abnormal price increases (in comparison to the overall economy), there is little indication that those investing in a college education today are getting an improved product over what was available decades ago. To be sure, college facilities and technology have improved, but the quality of the education itself has not, at least according to the 2011 study Academically Adrift. The study, by sociologists Richard Arum and Josipa Roska, found that nearly half of students showed "no statistically significant gains in critical thinking, complex reasoning, and writing skills" in their first three semesters in college.

That startling finding buttressed the conclusions of an earlier report by the Commission on the Future of Higher Education. That report noted "a remarkable absence of accountability mechanisms to ensure that colleges succeed in educating students." The Commission, established by the U.S. Department of Education, found "disturbing signs" that "many students who do earn degrees have not actually mastered the reading, writing, and thinking skills we expect of college graduates."

The apparent lack of academic rigor at many colleges may be disconcerting, but even more alarming is what many students are learning. As William Bennett writes in Is College Worth It?, "In today's colleges, much of what is taught in the humanities and social sciences is nonsense (or nonsense on stilts), politically tendentious, and worth little in the marketplace and for the enrichment of...mind and soul." That is, of course, of great concern to Christian parents, who may find themselves paying tens of thousands of dollars so that their son or daughter can sit under "progressive" professors who teach leftist dogma and mock long-held moral values.

Yet despite such concerns about cost, quality, and content, consumer demand for a college education remains strong—driven in large part by abundant financial aid available to students. Beyond the institutional aid offered by colleges themselves, the federal government and the states serve up an alphabet soup of grants, loans, and work-study programs. While such aid surely makes college more affordable for some, the perverse overall effect is to drive prices even higher.

Years ago, William Bennett formulated what he calls the Bennett Hypothesis. "College tuition will rise as long as the amount of money available in federal student-aid programs continues to increase with little or no accountability." In Is College Worth It?, Bennett gives a clear example that supports his hypothesis. He quotes Peter Wood, formerly of Boston University and now president of the National Association of Scholars: "[At Boston,] I attended numerous meetings of university administrators where the topic of setting next year's tuition was discussed.... Our job was to figure out how to consume as much [government financial aid] as possible in tuition increases."

The connection between more aid and higher prices is why any attempt to "make college more affordable" by bolstering financial aid works only in the short term. As government aid swells college coffers, the money is typically spent on expansion of faculty, staff and facilities. This results in ongoing higher costs for running the institution. These increased costs, "inevitably [put] upward pressure on tuition," notes Andrew Gillen, a scholar at the Center for College Affordability and Productivity. "Higher tuition, of course, reduces college affordability, leading to calls for more financial aid, setting the vicious cycle in motion all over again."

Forecast: expect change

The late economist Herb Stein once wryly observed, "If something can't go on forever, it won't." Applying Stein's Law to the higher-education marketplace, it seems clear that the model of rising costs and stagnant (or reduced) quality is not sustainable. And the marketplace is finally responding. Broad innovations are occurring in higher education, fueled in part by technological advances that are helping to cut costs and increase flexibility for students.

"The traditional model of college is changing," notes a report from the Chronicle Research Service, affiliated with the Chronicle of Higher Education. The report cites as examples online learning, hybrid class schedules (part in-class, part online), and the proliferation of for-profit colleges (where market discipline helps hold down costs). "The idyll of four years away from home—spent living and learning and growing into adulthood—will continue to wane," the report states. And the primary reason is financial. "The full-time residential model of higher education is getting too expensive for a larger share of the American population.... More and more students are looking for lower-cost alternatives to attending college."

Trying to tap growing demand for better-value higher education, some established schools are responding with options such as three-year degrees (i.e., accelerated programs) and no-frills satellite campuses (since you're not getting the frills, you don't pay for them). In Texas, several colleges—rising to a challenge from Gov. Rick Perry—are now offering bachelor's degrees for a total cost of $10,000. (To be eligible, students may be required to earn certain college credits in high school, attend a junior college for two years before transferring, or major in certain fields.)

One lower-cost option that has been around for years is gaining renewed attention: the two-year associate degree. A 2014 New York Federal Reserve study, reported by The Wall Street Journal, found that "paychecks for holders of associate degrees in a technical field are outstripping [those] of many grads with four-year degrees"—at least for the first several years after graduation. "If you know how to fix something or to fix people, you're going to do well with a two-year degree," College Measures president Mark Schneider told the Journal. "If you're in construction, IT, high-tech manufacturing, or if you're in a health profession, a two-year degree pays off."

Mike Rowe, former host of the reality TV show Dirty Jobs, laments that American society tends to view an associate degree or a technical certification as being inferior to earning a B.A. "We have embraced a ridiculously narrow view of education. Any kind of training or study that does not come with a four-year degree is now deemed 'alternative,'" he wrote in 2012.

Ironically, good, well-paying jobs that require post-high school training but not a four-year college degree are reasonably plentiful. According to a study by the Georgetown University Center on Education and the Workforce, by 2018 nearly 14 million jobs in the U.S. will require more than a high-school education but less than a bachelor's degree. Some of those jobs (including air traffic controllers, construction managers, and radiation therapists) have median salaries significantly higher than the national median income.

But isn't a non-B.A. approach to post-secondary education "settling for second best?" Not according to Real Education author Charles Murray, "[Y]ou aren't asking the kids to settle for second best," he told WORLD magazine. "What you're doing is recasting the goal of education so it no longer is, 'get the B.A.' The goal is to bring young people to adulthood…having discovered things they enjoy doing and that they know how to do well."

Considering the options

What all this means is that parents of today's (and tomorrow's) teenagers need to re-think assumptions that have guided post-high-school choices for decades. Is earning a four-year bachelor's degree the best choice? (It may be, depending on your child's gifts and field of interest.) If so, is going the route of a high-cost residential program worth it, or would it be better to live at home and pursue a degree at a "commuter college"? Would a two-year degree be sufficient? Should your son or daughter consider a lower-cost (and perhaps more-marketable) education at a vocational school—or maybe a certification program in an area such as accounting or computer programming?

What about earning a degree online? In some cases, online courses are less expensive than taking courses in person at the same school. For example, through Penn State's World Campus, you could earn a bachelor's degree in economics—one of 19 bachelor's programs available online. If you earned such a degree on campus, the economics courses would cost $670-$770 per credit hour (Pennsylvania resident), or about twice that if you live out of state. Online, however, the per-credit-hour cost is about $500—no matter where you live.

Online education is also available via companies that offer courses from a variety of schools. Fees vary, often depending on whether the course is being taken for credit. Among the most popular online-learning platforms:

  • Coursera—nearly 700 courses ranging from computer science to songwriting;
  • edX—about 200 courses from universities such as MIT, the University of Chicago, and Wellesley;
  • Udemy—roughly 10,000 courses on everything from math to marketing;
  • Udacity—mostly computer-related courses on topics such as web design and programming.

Making choices

All of which brings us back to the main question: Is a traditional, four-year, living-on-campus college education worth the investment? The answer, of course, is "it depends." To begin with, it depends on how one defines "worth the investment." Campus life has intangibles that aren't reflected in one's tuition bill (not the least of which is the very real possibility of finding a husband or wife). Such intangibles are impossible to judge in advance.

But an even larger aspect of the "it depends" answer has to do with the student. Is this young person "college material," or do his or her gifts lie outside of academics? "Students who have a high probability of graduating from a good-quality university are likely to find attending college financially worthwhile," says Richard Vedder of the Center for College Affordability and Productivity. "Generally [those students] are the ones who did well academically in high school and had pretty good scores on college entrance tests," such as the SAT or ACT.

Because the student is the key, the decision about what kind of post-high-school education to pursue must be a personal one. You can't simply assume that earning a B.A. at State U. or Christian Campus College is the "best" option. Instead, prayerfully consider the following list of ideas, asking the Lord for wisdom as you seek to "train up [your] child in the way he should go" (Proverbs 22:6):

  • Wait and work.
    There is no rule that says a high-school graduate must immediately enroll in college. Perhaps your son or daughter would be better served by taking a year or two to work and save. During that time, he or she can be gaining workplace skills, growing in maturity, and seeking the Lord about the next step. If that step turns out to be going off to college, money saved during the "sabbatical" will help cover first-year expenses.
  • Know thyself.
    One of the best ways for parents and students to gain confidence in making educational and vocational decisions is to get a clear picture of the young person's personality, skills, interests, and what type of work he or she is likely to find most satisfying. Among the assessments that provide this kind of information is Career Direct, an online assessment tool from Crown Financial Ministries. Reviewing the results may make a choice between vocational education and a four-year degree much clearer.
  • Study and reflect.
    If your child decides he or she does want to get a four-year degree at a residential school, do plenty of homework on the options, keeping in mind that cost—although important—is only one factor among many. Other factors include such things as location, size, and spiritual life. Visit campuses if possible and ask plenty of questions.
  • Take tests.
    You can cut the cost of college significantly if your son or daughter can pass Advanced Placement or College Level Examination Program tests (both offered through the College Board). Students who pass these tests can gain full credit for certain courses at a fraction of the cost of tuition. (Advanced Placement tests require taking related AP courses in high school. Not all schools accept credit for all tests.)
  • Make a transfer.
    Another option for reducing the cost of a four-year degree is to go to a community college for the first two years, then transfer to a four-year school. (Important: Check ahead regarding which courses will transfer!) If the student is able to live at home with parents during these two years, additional room and board expenses can be avoided.
  • Search for scholarships.
    Spend time at a library looking through books such as The Scholarship Handbook (Published annually by the College Board.) and Kaplan Scholarships. (Published annually by Kaplan Publishing.) These resources, and others like them, list thousands of available scholarships and explain how to apply for them.
  • Explore online learning.
    As noted earlier, there are many options for learning online. Online students now account for more than a third for total higher-education enrollment.
  • Consider the military.
    Military life isn't for everyone, but entering the armed services is an excellent way to gain a solid education at low or no cost, while also serving the nation.

As you consider these and other options, keep in mind that we serve a God who made each of us for a purpose, and He is fully able to guide us toward fulfilling it. "For it is God who is working in you, enabling you both to will and to act for His good purpose" (Philippians 2:13).

Continue Reading

What If the Bank Breaks? How to Be Sure Your Savings Are Safe

In almost any good-sized city, many of the largest buildings are likely to be bank buildings. Being housed in an impressive edifice sends a not-too-subtle message: "Our bank is solid and successful. We're here to last." After all, bankers know that gaining and retaining depositor confidence is essential. If customers lose faith in a bank, then that institution is in serious trouble. Wary depositors will act quickly to take their money elsewhere.

Continue Reading

Going Steady: The Advantages of a Systematic Investment Plan

Back in the day, entering into a serious dating relationship was called "going steady." That term may not be used in the dating scene anymore, but it's a good way to describe making a serious, consistent commitment to investing for your future.

In investing, going steady is easy—once you make the commitment to do it. Each month, you simply have money automatically transferred from your bank account to an investing organization to purchase shares. Setting up the transfer requires signing a form that authorizes the investment of a fixed amount of money (say $50 or $100) on a regular basis. Automating your investing is one of the best steps you can take to build long-term wealth. Here are a few advantages:

Continue Reading

Your 10 Most Important Financial Moves for 2012

[If you choose to print out this article, we recommend downloading the printer-friendly PDF version, which includes the month and page number for each referenced article.] Each December, we present a list of planning ideas for the year ahead. Our list isn't meant to be one-size-fits-all, however. You must winnow it down to the items that apply most directly to you. As you read, mark each idea that seems particularly relevant to your situation. From those items, prayerfully — and with counsel from your spouse if you're married — choose your personal "Top 10" for the new year. For those who are prepared, the next 12 months will present opportunities for financial progress and achievement. Will you be ready?

Continue Reading

Introducing Compass - Finances God’s Way

In the late 1970s, Florida real-estate developer Howard Dayton had one goal: "To get rich," he recalls, "and not just a little rich, but filthy rich." Then he met Jesus Christ. Ever since, the developer-turned-ministry-leader has pursued a different kind of wealth—the "true riches" Jesus referred to in Luke 16: "If...you have not been faithful in the use of worldly wealth, who will entrust the true riches to you?" To Howard Dayton, no greater riches exist than "knowing Christ intimately."


A few years after his conversion, Howard wrote a small-group curriculum aimed at helping others learn to separate the false riches from the true. That study became the flagship resource of Crown Ministries, an organization Howard launched in Orlando in 1985. Crown's multi-week study, for use in groups of 8-12 people, focused on both theological and practical issues related to finances. Homework involved studying and memorizing Scripture, and implementing personal-finance projects such as developing a workable budget.

In 2001, Crown merged with Larry Burkett's Christian Financial Concepts, creating Crown Financial Ministries. The new organization melded Crown's small-group emphasis with CFC's well-known media ministry. After Larry's death, Howard took over Larry's position as the radio voice of the ministry, hosting the popular Money Matters program from 2004-2008, while also serving as Crown's CEO.

After leaving Crown following a 2008 leadership shakeup, Howard decided to refocus on small-group studies, and in 2009 launched a new ministry called Compass — finances God's way. The ministry's mission is to "equip people worldwide to faithfully apply God's financial principles so they may know Christ more intimately, be free to serve Him and help fund the Great Commission." So far, Compass has introduced four small-group studies, including its core guide, Navigating Finances God's Way. (The SMI newsletter will offer excerpts from this study in 2012.)


The latest Compass resource is Money and Marriage God's Way, a six-week small-group study that focuses on marital issues such as setting common goals, resolving money conflicts between a husband and wife, and recognizing the impact that debt can have on a marriage relationship. Memory verses for the study include Ephesians 5:33 ("Each one of you Money and Marriage God's Wayalso must love his wife as he loves himself, and the wife must respect her husband") and James 1:19-20 ("Let everyone be quick to hear, slow to speak and slow to anger; for the anger of man does not achieve the righteousness of God.")

"God designed marriage to be a blessing," Howard says. "He intends married couples to use money — even challenges with money, even crises with money — to bring them closer together rather than separating them."

The Money and Marriage study has received a strong endorsement from popular radio host and author Dave Ramsey, who calls the study "an absolute must do" for couples. Florida couple Doug and Colleen Allen say the study has had a huge impact on their relationship. "We're now on the same page financially, communicate well, and have almost reached our goal of becoming completely debt free."

Howard notes that developing the Money and Marriage study has had a positive impact on him too. "Even after 40 years of marriage to Bev, writing this study helped me to become a much better husband!"


In addition to the two small-group studies already mentioned, Compass offers studies aimed at discipling business people (the Business by the Book study) and helping people of significant wealth manage their resources in a godly way. Compass also has materials to help teach children and teens how to manage money wisely.

The ministry is experimenting with creating a small group experience online, allowing participants to connect via video feed. Compass is also expanding internationally. The ministry's main study, Navigating Finances God's Way, is being used in India and rollouts to other nations are in the planning stages.

After a three-year absence from radio, Howard Dayton returned to the airwaves in March when Compass rolled out a six-day-a-week call-in radio program, MoneyWise. The program pairs Howard with co-host Steve Moore, who served as co-host of Money Matters for 20 years. MoneyWise is heard on more than 400 stations and outlets.

To learn more about Compass — finances God's way, visit the ministry's website.

Continue Reading

Time to Get on the ETF Bandwagon?

In the battle between traditional mutual funds and exchange-traded funds, it is now clear that ETFs will win. At least that's the conclusion of MarketWatch columnist Chuck Jaffe (who happens to be no particular fan of ETFs). Jaffe threw in the towel in a recent column: "Simply put, ETFs are the advancement in technology," he wrote, arguing that investors are choosing ETFs over traditional funds in the same way consumers have embraced superior flat-screen video monitors over traditional television sets.

But the analogy doesn't quite work. ETFs are gaining market share while traditional funds are losing. But while old-style TVs are fading away (tried buying one lately?), traditional mutual funds aren't likely to go anywhere. They continue to work well for tens of millions of existing customers. And even though the number of ETFs — and the number of ETF investors — is growing, holdings in traditional funds still dwarf those in ETFs ($12 trillion in traditional funds compared to only $1 trillion in exchange-traded funds at the end of 2010).

Still, if ETFs are a technological advancement over traditional funds, should you make the switch? Not necessarily. Let's go through a quick review of what ETFs are and how they work, and then we'll consider the advantages and disadvantages.

Like traditional mutual funds, exchange-traded funds offer a convenient way to invest in a pre-assembled basket of stocks. And like traditional index-based mutual funds, most ETFs are designed to passively track a particular market index or sector of the economy.

But this is where the similarities end and the differences begin. Whether these differences make ETFs more (or less) attractive than traditional funds depends on the circumstances of each investor. Here are the pros and cons as a typical investor would likely evaluate them.

Advantage #1: ETFs trade like individual stocks. Flexibility is a key selling point of ETFs. Unlike traditional funds, which are priced and available for purchase only at the end of each trading day, ETFs trade continuously while the market is open — in the same way individual stocks do. ETFs offer other "stock-like" attributes too. You can buy them on margin, short them, and use limit and stop orders.

To be sure, these aspects of ETFs are quite appealing to active traders and professionals. However, they are of limited value to most "average" investors. After all, the strategic approach of index-fund investors is to simply buy and hold "the market," as represented by a collection of index funds. Being able to buy at the 1:38 p.m. price rather than the 4:00 p.m. closing price is usually of little importance.

Advantage #2: There's an ETF for virtually anything you want to index. The stock market is a lot like baseball — there's a statistical measurement for everything that happens ("This is the third time Smith has had to re-tie his left shoe in the 5th inning this year.") As a result, there are many different stock indexes, each measuring a slightly different slice of the market.

As ETFs have become increasingly popular, the companies that create them have responded by designing ETFs to track almost any index available. Therefore, it's easier to invest in certain market niches using ETFs than traditional index funds, simply because in some cases there aren't any index funds following the less prominent indexes and market segments.

But, again, for the average investor, the relevant question is how finely do you need to slice the market? An institutional investor may want to track only the "value" segment of a particular mid-cap index, but most individuals aren't likely to need such specific coverage.

Traditional index funds that track a wider range of stocks can be easily combined to provide excellent full market coverage, which should be the goal of most individual indexers.

Advantage #3: ETFs are more tax efficient than traditional funds. In considering this point, keep in mind that index funds are tax efficient by their very nature because they rarely sell stocks from their portfolio (it is selling a fund that triggers assessment of capital gains taxes). But in addition to sharing this natural benefit of indexing, ETFs avoid the possibility of having to sell stocks from their portfolio to meet redemption requests. When ETF owners want to sell, they do so on the open market, transacting with buyers. So there's no need, even in the face of heavy selling pressure, for the fund to sell any stocks in the underlying portfolio to raise money.

Further, ETFs tend to make smaller distributions to shareholders than comparable index funds, holding down taxes for their investors.

Still, the actual dollar difference of these advantages is quite small for most investors. It leads to significant savings only when investing six-figure sums.

Advantage #4: No minimum investment. This is nice for investors who want diversification across various funds but don't have a large amount of money to invest. Such investors are typically "newbies," so this advantage recedes with time. Still, it is an area where ETFs have a clear advantage over traditional funds.

While there is indeed much to like about ETFs, they aren't without disadvantages. Consider this one:

The main disadvantage: ETF's trade like individual stocks. The top advantage of ETFs turns out to be their primary disadvantage too. While the flexibility of being able to buy and sell any time during the trading day sounds like a plus, it's a mixed bag. From SMI's standpoint, of course, we're concerned that the trade-anytime possibility of ETFs may foster a market-timing mentality that works against the "slow and steady" long-term approach that we think is better for most investors.

Further, since ETFs are traded continuously on the open market, buying and selling them is slightly more complex than buying and selling traditional funds. This diminishes one of the chief virtues of traditional-fund investing: simplicity. Buyers of traditional mutual funds know that everyone buying that day gets the same price, calculated based on the value of the underlying stocks at the end of the day. Not so with ETFs, where you pay a "market price" rather than one based on the value of the stocks owned by the portfolio.

Another concern — not major, but a concern nonetheless — is that intraday price anomalies, such as occurred in the May 2009 "flash crash," can inflict serious damage on ETF traders. Granted, the flash crash was an unusual occurrence, but we're not convinced it won't happen again given the rapidity with which trading computers can magnify glitches.

In addition, most ETFs are too thinly traded to be considered for use in SMI's investment strategies. Consider this: while the U.S. has over one thousand registered ETFs, the top 150 or so represent over 85% of the assets invested in ETFs. The smallest 700 make up just 2% of assets. This narrows the pool of "helpful" ETFs considerably for SMI's purposes.

One former disadvantage of ETFs — commission costs — has largely evaporated over the past couple of years. All three of our top-recommended brokers for Upgraders — Schwab, Fidelity, and Scottrade — have introduced no-commission ETFs.

In most cases, commission-free funds are limited to each company's in-house offerings — i.e., Schwab-branded ETFs are free at Schwab and Fidelity's ETFs are free at Fidelity. Scottrade's commission-free ETFs are from a third party company, FocusShares. A reader following SMI's Just-the-Basics strategy within a Vanguard account could utilize either Vanguard's traditional index funds or the company's ETF equivalents without paying commissions.

Keep in mind, however, many ETFs that are not in-house offerings of specific brokerages still incur commissions to buy and sell, particularly those focused on narrower market niches (for example, buying the SPDR Gold Trust ETF — GLD — is still going to incur a commission).

Many exchange-traded funds carry slightly lower expense levels than traditional index funds, so lower expenses are often touted as a significant advantage for ETFs. But it's worth noting the differences are often minor for the average investor. For example, the expense level on Vanguard's S&P 500 ETF is 0.06%, as compared to 0.17% for its Vanguard 500 index fund. That works out to a difference of $11 per $10,000 invested. For those investing large amounts, this savings may be worth the additional complexity of investing via an ETF rather than a traditional index fund. But many smaller-account owners may prefer the simplicity of traditional index funds rather than the slightly lower expenses of ETFs.

So, now back to the question: Is it time to jump on the ETF bandwagon? For SMI, the issue comes down to how ETFs fit into our core strategies. Many ETFs follow traditional market indexes, and as such fit most naturally with our Just-the-Basics indexing strategy. But using ETFs with this strategy works against one of our goals, namely, giving JtB users the simplest possible approach to market investing.

Readers using our Fund Upgrading strategy know that we do recommend ETFs occasionally (most recently, we held the PowerShares QQQ ETF from November 2010-April 2011). But any particular ETF recommendation has to make strategic sense within the framework of Upgrading's momentum approach and our five risk categories. As noted earlier, many ETFs are narrowly focused on particular sectors. Most of these don't fit well within our Upgrading methodology.

Although ETFs offer no great improvement over traditional funds for either of our SMI core strategies, there may be some upside to utilizing ETFs to a greater degree within our Sector Rotation advanced strategy. We've been continuing to test and explore this, though so far, the jury is still out.

It is clear that the mutual fund marketplace is evolving. If we reach a point where we are persuaded that SMI readers will be served by a greater foray into ETFs (i.e., beyond an occasional ETF recommendation for Upgraders), we'll move in that direction. But we're not convinced that day is here yet.

To sum up, most of the advantages offered by ETFs (i.e., continuous trading, tax efficiency, lower expenses, ability to slice and dice the market) are of greater value to institutions and high-dollar investors than most "regular folks." While ETFs get lots of media attention, most individual investors, especially those in it for the long haul, will continue to do quite nicely with traditional mutual funds.

Continue Reading

A generous budget

Do you have a "generosity line item" in your budget? Personal finance blogger Jason Topp does, and he thinks it's an idea others should consider. SMI-July2011.gifJason writes about a "generous budget" in the July issue of the Sound Mind Investing newsletter:
Imagine you are out to eat with your family and you strike up a conversation with the server. You learn she is a single mom with three kids and works two jobs to make ends meet. After her children go to bed, she spends several hours taking online classes in hopes of getting a college degree and moving forward in life. Your heart goes out to her.... You can only imagine how difficult it must be to juggle the demands of employers, children, and professors. You would love to help in some way, but you feel like you can't afford to.... You imagine how exciting it would be if you had an extra $25, $50, or even $100 a month set aside specifically for times like this. You picture yourself plopping down an extra large tip with a note that says, "We're praying for you!" But how can you increase your ability to give without hurting your own financial situation?
We encourage you to read the entire article, Building Generosity Into Your Monthly Budget. Or listen to this excerpt from Jason's conversation with host Bob Crittenden last week on Alabama's Faith Radio (click the arrow below—6 minutes).
(Audio player won't work? Click here.)
Continue Reading

Charity Watchdogs Help Givers Make Informed Decisions

Scripture commends both generosity ("God loves a cheerful giver" — 2 Corinthians 9:7) and wisdom ("Get wisdom; get insight" — Proverbs 4:5). This suggests our giving should be done with both heart and mind.

Continue Reading

Making the Most of Your College-Savings Program

Parents who have children entering college over the next few years enjoy a much more attractive college-savings landscape than existed when their children were born. It was just 15 years ago, in 1996, that Congress first authorized tax-advantaged "529 plans." A year later, lawmakers added the option of Education Savings Accounts. Continuing legislative refinements — along with innovation at the state level — present today's parents with better ways to save for college than ever before.

Continue Reading

Adding Fine-Tuned “Withdrawal Strategies” to Asset Sequencing

After decades of working hard to build retirement assets, new retirees face a new financial challenge: trying to figure out the best strategy for withdrawing those assets.

Continue Reading