Expert: Steve Hach - 1/22/2008

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: Hi Nikki,

thanks for the question.

Please be advised that I know nothing about the specifics of your state's college savings program.

However, that being said it is a general principle that if you are investing for the long term you do NOT try and chase returns and mess around with the plan.

You would leave it to run as set up and let the money be moved around according to your sons' ages rather than your own personal attempts to read the market.

Over time the market typically returns @8 percent per year.  This will compound over time and really adds up.

If you buy a bunch of stocks now when the costs are low the theory is that you will be in a much better position when the market rebounds because you will be "buying low and selling high."

So, in general, for all long-term investments, you should NOT pull out when things turn down--within reason of course.

The important thing is to continue saving and socking that money away no matter what investments you choose.  The more money you can save the more you will benefit from compounding interest and gains.

Watch you other debts, avoid credit card usage, etc.

Put as much money as you can into the boys' accounts and try not to micro-manage it.  

Given 10-15 years it should all work out.

The only other option I might suggest is to find out if your state offers the guaranteed tuition sort of plan whereby you actually purchase the future course credits at a reduced cost up front instead of trying to invest the money and make the future tuitions via high returns.



Best,

Steve

PS
Another option would be to consider that many top universities are now offering free or greatly reduced tuition to students that qualify for admission from middle class backgrounds.  Harvard, Yale, and many other top schools may in the future actually be cheaper than many state schools--if you can get your children into them, because they will set tuition based on family income.  
That's something to think about when you are trying to get those boys to study hard!








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

QUESTION: Thanks so much.  That information is very helpful.  My follow up question is:  I know one should not move money with the ups and downs in the market, but I was thinking if I should move it because this downturn is expected to last several years.  5 to 6 years, I heard.  Is this correct thinking?  5 to 6 years is a long time to lose money.  FYI:  Within the Vanguard age-based plan I chose, there are 3 investment "tracks"--the aggressive track which buys 100% stocks for you, the moderate track 80% stocks, 20% mutual funds, and the conservative track (60% stocks, 40% mutual funds).  As the boys age, the % stocks goes down and the % mutual funds goes up.  I have chosen the aggressive track for all 3 boys.

Answer
Nikki,

The answer is that no one knows how long a potential stock downturn may last.

5-6 years seems extreme to me.

I would not make a recommendation based on such notions.

It is tough to gauge the plans based on the information provided.  typically, mutual funds also hold equities.

Again, the rule of thumb is that you do NOT try to market time these things.

With a 9 year time frame I would be aggressive.  If the manager does her job you will be buying stocks at their lows and should make nice gains as the markets recover.

If I were you I would turn off the news and quit stressing about these things, revisit the issue in a month or two and see what is going on then.  

It is easy to get caught up in the panic and then make the wrong decision.  

Best,

Steve