Expert: Gina Boykin - 1/21/2008

Question
QUESTION: I currently live in NC and have three 529 College Savings accounts for my three boys--ages 3, 5, and 9.  I have chosen the aggressive (age-based)inestment option--which I understand to mean that my money is invested in stocks.  It is "age-based" because as my children age, the way the money is invested changes.  As they get close to college age, the money will be put in mutual funds or bonds--something more "safe".  This is how I understand it to be.  My question to you is should I change my investment option to a less aggressive one, given the current state of the market.  And given the fact that this down turn is expected to last several more years.

ANSWER: Age-based funds are usually invested in stock mutual funds, bond funds and some lower-risk things like treasuries (but should not be in any individual stocks and should not be 100percent in stock mutual funds either).  The ratio changes as your child gets older just like you said.  You have a pretty long time until you will need the money, and these are meant to be long-term investments.  A lot of people panic when the market turns and take money out at the worst possible time.  The decision really is dependent on how well you can sleep at night. If you can't sleep, then take it out - just realize that your only other option is a "safe" investment such as savings bonds or CD's, which will be a  low return.  If you want a higher return over the long-term, you will have to get comfortable with the risk.  This means knowing that your account may go down at times, and go up at other times.

A third option you have is to leave the money in these 529 plans, and put future investments in something else.

There is a lot of information on ways to save for college on the website www.savingforcollege.com.



---------- FOLLOW-UP ----------

QUESTION: Thanks so much Gina!  That info. helps.  Rather than my completely taking the money out, do you think I should change the investment option.  Within this Vanguard Age-based plan you can choose the "aggressive" (100% of $ in stocks), "moderate" (80% stocks, 20% bonds), or the "conservative" (60% stocks, 40% bonds)option.  I chose the "aggressive" option for all three of my boys.  As the children age, the % stocks goes down and the % of bonds go up.  It seems to change about 20% every 6 to 10 years.  I can live with the ups and downs in the market.  I don't look at its performance on a regular basis.  I just don't want to be stupid by not changing for a while, if I need to.  Especially since this downturn is expected to last several years.  I have heard 5 or 6 years.  I don't want to loose $ for 6 years!  What do you think?

Answer
Because I am not a very risk tolerant person, and because I actually like bonds, I would go with moderate or conservative for your oldest child.  The other two children should be fine with aggressive; however, if you chose moderate, you will be getting greater diversity with a only little bit less overall return.