There are a lot of things to worry about in the months before and after high school graduation. Did your child pick the right school? Are you ready to handle move-in day? And how will your family pay for everything?
If you started saving when your child was young, you're hopefully feeling a little more prepared for that last one.
But if you still have the same investments you picked back then--and if you used individual portfolios instead of an automatic age-based option--you should review your investment choices to ensure they still make sense.
How college savers choose investments
Vanguard recently analyzed over 1 million accounts in several 529 college savings plans* to understand how college savers approach risk when it comes to their investment choices.
Taking the right level of risk is a critical component of any investment plan. And it may be especially critical right before and during the time you withdraw the money.
So what did the data show?
About half (49%) of the accounts studied were invested in a single age-based option, which automatically adjusts to a lower level of risk as the beneficiary gets closer to college age.**
The rest of the accounts used either individual portfolios only (30%) or some combination of individual portfolios and/or age-based options (21%).
Taking too much risk?
There's nothing wrong with custom-building your own mix of investments, of course. But the research shows that people who choose this path tend to hold a lot of stocks.
This makes sense when kids are young--your main concern is getting your savings to grow, and stocks tend to be the best asset class to help you meet that goal.
That's why our age-based options--allocate up to 100% of assets to stocks when beneficiaries are age 10 or younger, depending on the account owner's comfort with risk.
However, investors who go the "custom" route tend not to ramp down on stock holdings quite as fast as the age-based options do. For example, for beneficiaries age 16 to 18, our age-based portfolios hold a maximum of 60% in stocks--and that's only for people who are really comfortable with risk.
Some investors in College Savings Iowa who customize their investments, though, appear to take on even more risk than that. For beneficiaries who are age 16, accounts invested solely in individual portfolios hold an average of 70% in stocks. In fact, over a quarter of these accounts are completely invested in stocks.
Managing risk by ramping down stocks
Over time, stock returns (as well as returns for any other asset class) tend to rebound from losses.*** People who are still a decade away from college have longer to wait out any market downturns. But a parent who loses money when tuition bills start arriving may not have time to wait for a rebound.
If you choose to put your college savings in an age-based option, you'll have help managing your allocation to ramp down your risk. But if you want to choose your own mix of investments, you can still use the allocations of the age-based options as guidance on what level of risk is appropriate for your child's age.
With planning, you can lower the risk that your college money will decrease in value when you most need it.
*CollegeInvest Direct Portfolio College Savings Plan, College Savings Iowa, MOST--Missouri's 529 College Savings Plan, New York's 529 College Savings Program Direct Plan, and The Vanguard 529 College Savings Plan.
**Data in this article provided by Ascensus Broker Dealer Services, Inc., as of June 30, 2015. Sources of analysis: Vanguard, Implications of disciplined investing for 529 college-savings plans (Stockton et al., 2016); Vanguard research series on 529 college-savings plan account owner behavior (analysis data as of December 31, 2014).
***Only about 4% of rolling 10-year periods have experienced negative stock returns. Data covers the period 1926?2015 and uses the Standard & Poor's 90 from 1926 to March 3, 1957; the S&P 500 Index from March 4, 1957, to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; the MSCI US Broad Market Index from April 23, 2005, to June 2, 2013; and the CRSP US Total Market Index thereafter. Source: Vanguard.
All investing is subject to risk, including the loss of the money you invest.
Investment returns are not guaranteed, and you could lose money by investing in the College Savings Iowa 529 Plan.
For more information about the College Savings Iowa 529 Plan, obtain a Program Description online or request one by calling 888-672-9116. Investment objectives, risks, charges, expenses, and other important information are included in the Program Description; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor.
If you are not an Iowa taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
College Savings Iowa is an Iowa trust sponsored by the Iowa State Treasurer's Office. The Treasurer of the State of Iowa sponsors and is responsible for overseeing the administration of the College Savings Iowa 529 Plan. The Vanguard Group, Inc., serves as Investment Manager and Vanguard Marketing Corporation, an affiliate of The Vanguard Group, Inc., assists the Treasurer with marketing and distributing the Plan. Ascensus Investment Advisors, LLC, provides records administration services. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds.