Investing your hard-earned money for your child’s (or grandchild’s) education when the market is strong feels great! But when market volatility hits? Not so much. In fact, it could leave you counting sheep instead of nodding off to sleep.
While there’s no way to foresee how markets will act in the future, there are ways to lower the risk that volatility can cause. Following the three steps below can help you reduce risk and keep you on track toward your education goals—even in the face of a market correction.
A sound way to help defend your portfolio against volatility is to choose an asset allocation that’s a good fit for your goals. A diversified allocation helps you avoid two investment traps:
- Investing too conservatively. If you hold all your assets in cash, you risk being unable to keep up with inflation. You also limit your portfolio’s potential to grow.
- Investing too aggressively. On the other hand, if you invest everything in stocks, the market could severely decline when you need your money the most.
A mix of investment types allows you to create a portfolio with a risk level that’s comfortable for you. A long-term investment plan should include a combination of:
- Stocks: to help your portfolio grow when the market is strong.
- Bonds: to provide stability during market downturns.
- International investments: to give you access to markets that may be generating positive performance when others are going a negative route.
As your withdrawal date (or, in the case of college savings, your child’s high school graduation date) gets closer, it’s a good idea to shift your investments away from potentially volatile stocks and into more stable bonds and cash. With a 529 plan’s age-based option, this is actually taken care of for you.
2. Automatically adjust your asset allocation
Here age-based options really come into play. If you’re not inclined to adjust your asset allocation annually, an age-based option can be a great choice.
Age-based options, designed specifically to help you invest for higher education, shift from stocks to bonds as your child gets older and closer to high school commencement.
Your 529 plan offers 3 three age-based portfolio options, which you can choose based on your risk tolerance: Conservative, Moderate, and Aggressive.
For instance, if your child is younger, and you select the portfolio that corresponds to your child’s age, you’ll start off with more stocks than bonds. That portfolio will gradually transition to one with more bonds and short-term investments, reducing the investment risk as tuition bills come into focus.
3. Invest consistently
It’s sometimes uncomfortable to invest when the markets are unstable, especially if you check your accounts too often. It can seem as if you’re losing the money you’re contributing, and you may be tempted to move to lower-risk investments. Or maybe even stop saving altogether.
Unfortunately, market timing thoughts like this often result in selling low and buying high. They might save you from the worst trading days, but they could also keep you from investing on the best days.
Instead, try to focus on what you can control—consistent investing. Set up a system for recurring contributions that will regularly transfer money to your 529 account for you. Such automatic investment plans (AIPs) increase potential return, reduce risk, and can help you avoid missing out on tax breaks.*
An AIP boils down to less stress too. You’ll no longer have to feel guilty about choosing a Florida vacation over saving for your daughter’s education. That’s because you’ll know you’ve already contributed toward a goal that can pay far bigger dividends than basking on the beach.
Here’s another bonus. If you do take the three steps of diversifying, reallocating, and investing regularly through an age-based 529 account, you‘ll likely sleep better too, no matter what the market does.
*The availability of tax or other benefits may be contingent on meeting other requirements.