When it comes to investing for college, you need to be smart about where you put your money. One way to potentially improve your chances of investing success? Make index funds a part of your portfolio.
1. Low costs
Costs matter. With index funds, you’ll generally pay low fees and keep more of your money.
Index funds have low fees because they don’t pay fund managers for their research time and expertise, trying to beat a benchmark. An index fund like the Vanguard Total Stock Market Index Fund buys all (or a representative sample) of the securities in a specific index. The fund holds these securities until the investments in the index change, keeping management costs low.
2. Broad diversification
A diversified portfolio is an important part of a successful investment plan. That’s especially true when you're investing for a short-term goal like college tuition.
Index funds hold most or all of the securities in their target indexes, which means certain index funds can expose you to thousands of securities in a single fund. Actively managed funds typically hold fewer securities the fund manager forecasts to outperform their index.
Diversification can’t protect against broad market declines, but it can reduce the risk of a sharp price drop in any one security.
3. Greater relative predictability
There’s no guarantee your investments will perform the way you expect. However, index funds tend to follow their benchmarks more closely than actively managed funds.
Here's why: When fund managers attempt to outperform an index, they risk underperforming an index. Index funds don’t try to outperform the index, rather to match it, which makes them more likely to follow a linear path than up-and-down swings.
Investing in index funds in your 529 plan
MOST 529 offers age-based options, comprised of underlying investments that are index funds. Age-based options are all-in-one portfolios that help you invest for college with a specific target date. The assets shift from riskier investments to more conservative investments as your child gets older and closer to the first year of college.
Or you can build your own MOST 529 portfolio and invest in index funds as a part of it.