Expert: Gina Boykin - 10/11/2008

Question
I do not understand why it makes sense to Keep investing in my childrens' college saving's plans when they are steadily loosing money.  I have 3 children that are 10, 6, and 4.  The earliest any of them will need the money for college is about six years from now.  My question is this:  Why should I keep putting money in their college savings plan (which is currently in the "Vanguard aggressive age-based" option--100% stocks) when the account is steadily loosing money?  It seems like you are trying to fill a bucket which has a big hole in it.  You put water in the bucket and as soon as you put it in it goes out.  The volume of water in the bucket never gets higher and the water you are pouring in, like the money you contribute, just gets spilled all over the ground.  That seem pointless.  Wouldn't it make sense to stop the contributions now and resume them when their is positive growth in the market?  But all economists say to keep contributing.  That seems to be throwing away money.  Why keep contributing when the account is not making money?

Answer
The reason that some people suggest to continue the contributions is that you're getting your stocks "at a discount".  By purchasing funds while they are low, over the long-term (10+ years) you will make more money.  Another reason is that if you sell now you will have "locked in" your losses.  However, if your funds have lost money, those losses are real, whether you sell now or not.

You do have to realize, though, that most people in this industry make money when people invest, not when they stop.  So they have a conflict of interest - it's something you have to keep in mind when they continue to tell people to invest in any market.

I agree that it does not make sense to buy while it's going down.  I personally have continued one of my investments (for my 401k) but instead of buying more stocks, the money is going into a money-market fund.

For your college savings funds, remember that money you'll need in a short or medium term (5-9 years) should not be fully in stocks anyway.  So for your 10 year old, you should be moving away from stocks soon anyway.  Since your funds are age-based, they should not be totally in stocks for your oldest child.  If they are, you should consider changing this fund. Your younger children's funds have time to recoup.

A good way to think about your investments is this - Right now, if you had cash to invest, would you invest in that fund?  Don't think about what has happened in the past.  Just think about right now, and the future.  If the answer is yes, you would invest in that fund right now because you believe it will increase over time, then keep the money where it is.  If the answer is no, then move it to something that you do feel comfortable investing in.

I hope this answers your questions.  Sorry about the delay - the internet in my neighborhood has been out for a few days.  I'm trying to catch up.