Have you been wondering if you should make some changes to how you invest in your 529 plan? Or, are you curious about how other college savers invest in their plans?
Researchers at The Vanguard Group, Inc., the investment manager for College Savings Iowa as well as four other 529 plans, analyzed the investment choices of nearly 1.3 million account owners across those five 529 plans.* Here's what they found.
Most choose age-based options
Your 529 plan offers a range of investment options, including:
- Individual portfolios that are invested in a single fund.
- Individual portfolios that hold a mix of investments that cover all major asset classes and investment styles, with a variety of risk profiles.
- Age-based options that gradually and automatically become more conservative (holding fewer stocks and more bonds and cash) as the student gets closer to college age.
The research found that most account owners gravitate to the last option. Almost 70% of college savers chose at least one of the age-based options.
Many 529 plans, including College Savings Iowa, offer multiple age-based options so that each account owner can make a selection based on his or her personal risk tolerance. One benefit of these options is that you don't need to actively change how your investments are allocated in order to reduce risk as your children age. So, if you have a busy lifestyle, like to have someone manage your investments for you, or simply prefer not to have to think about your asset allocations each year, these options are designed to provide you with an appropriate combination of assets year after year.
The research found that about 70% of those who invest in age-based options use them as they were designed, with no other investments. However, the other 30% hold additional investments in their plan accounts, either other age-based options or individual portfolios.
Remember that when you choose an age-based option, you already have an asset mix that's professionally managed based on expert research and investment principles. Adding other investments can throw your mix off—and could make it difficult to tell what your overall mix is. That's why the recommendation is to choose just one age-based option.
Savers with older children may have too much invested in stocks
Vanguard's research uncovered a notable trend among 529 account owners saving for children ages 19 to 21. Approximately 67% of those who manage their own investments with individual portfolios have more than 20% of their balances in stock investments. However, only 13% of those using age-based options (with or without additional investments) have more than 20% of their balances in stocks.
To better understand the risk for an account owner who is holding stock when there's a short time horizon, consider that since 1928, annual stock returns have been negative 28% of the time.** So, there is a very real possibility that an account owner could need to make account withdrawals in a year when returns are negative.
If you're building your own portfolio, remember that your 529 plan investments should follow the same principles as all well-balanced investment portfolios. According to Vanguard research, the right strategy for you depends on whether your goal is to grow the portfolio to meet future college costs or to pay for near-term costs, such as tuition for a child who's already in college.
Although it can be hard to shift to more conservative investments just when the tuition bills start coming in, that's when you need to do it. Stocks offer an opportunity for greater returns, but that opportunity comes with greater risk. When your children are getting closer to college age, your focus should be on preserving principal so you have the money you need to start making withdrawals. If you've chosen an age-based option, that shift will be made automatically over time.
Knowing more about how to invest, whether it's for college or other financial goals, can help you make wiser choices that may lead to more successful outcomes.
One way that you can make sure you've got the basics down is to read Vanguard's principles for investing success. You can also take Vanguard's questionnaire to get help finding the right asset allocation for your 529 account.