Checking your 529 plan account balance? Don't forget about your allocation!

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When it comes to investing for higher education, there are a few key variables that have a big impact on your final account balance: how early you start saving, how much you put away, and how you allocate your investments.

Selecting an asset allocation isn't a once-and-done affair. Movements in the markets can throw you off your target allocation. Plus, you should think about changing to a different allocation as your child gets closer to college. (But remember that if you're invested in an age-based portfolio, all rebalancing and allocation changes are done for you automatically.)

Asset allocation: A refresher

Asset allocation is the mix of stock, bond, and short-term investments you hold in your account. Your allocation determines the risk your account is subject to, the extent of the fluctuations you see in your account balance, and the amount of return your investments may generate.

In general, stocks have the highest risk, volatility, and potential return, while short-term investments have the lowest. Bonds are somewhere in the middle.

Because these asset classes act differently, diversifying your account—spreading your money across asset classes—can help moderate some of the risk and volatility you might face. The specific allocation that's best for you depends on the amount of time before you need the money and how much risk you're willing to handle.

Take a look at your asset allocation

It's not as much fun as checking in to watch your account balance grow, but make sure to peek at your asset allocation at least once a year to see if you need to make any changes. As you review your allocation, ask yourself the following questions:

Answer these questions to get your ideal asset allocation

  1. What should my allocation be?
    If you've selected an allocation relatively recently—within the last couple of years—it may not be necessary to make any changes to your target. But there are a few situations where you might need to go through the allocation decision again: if you don't remember your target allocation, if your beneficiary has aged several years since you chose an allocation, or if you've found that the amount of risk you thought you could handle just isn't working.
  2. Do I need to make changes to align with my target?
    Next, log on to your account and take a look at your actual asset allocation. (To do so, select the account you want to view and then choose Allocation Management.) Are you on target? If you're off by 5 percentage points or more, you should consider rebalancing. Here are two options for rebalancing:

    Exchange money from one asset class to another. For example, if your target is 60% stocks/40% bonds and your actual allocation is 65% stocks/35% bonds, you could exchange some money from your stock portfolio into your bond portfolio—just be aware that IRS regulations allow you to make only one exchange per calendar year in your 529 plan account.

    Use your contributions to buy more of one asset class. In the example above, you have too much in stocks and not enough in bonds. So you could direct all of your 529 plan account contributions to your bond portfolio until you're back in balance again.

Once you've rebalanced, you're done—until next year! Keep in mind that if you'd rather not spend time checking your allocation and rebalancing, we have investments that will do the work for you—age-based portfolios automatically rebalance and gradually move to more conservative (less risky) investments as your child approaches college age.

All investing is subject to risk, including the possible loss of the money you invest. Investments in bonds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.