COLLEGE SAVINGS 101

Savingforcollege.com

Expert tips on handling your 529 plan in a shaky market
http://www.savingforcollege.com/articles/expert-tips-on-managing-your-college-savings-in-a-shaky-market-892

Posted: 2016-02-01

by Kathryn Flynn

The stock market certainly hasn't been kind to investors so far this year. In fact, U.S. stocks broke a record for biggest fall during the first five days of January, and experts predict we can expect more volatility to come. And although most parents can't complain about the cheap gas prices (especially those with gas-guzzling minivans), seeing their 529 balances decline has left them feeling unsettled about the future. Many are wondering what steps they can take to mitigate future volatility and keep their education savings intact.

To help answer this question, we consulted three industry experts. Here's what they had to say:

Reactions to volatility

How are families responding to the stock market drop? According to Keith Bernhardt, Vice President of College Planning at Fidelity Investments,

"Fidelity's call volumes have been up modestly during the past few weeks. When the markets are volatile and dropping, investors call seeking answers. They express concern, but not panic, and most are checking their account balances and seeking guidance, but they remain invested," he said.

"During the last bout of market volatility back in August, we saw a slight uptick in customers reaching out to discuss their overall financial plans. Market disruption often reminds consumers to take action, and to put a plan in place to achieve their financial goals, including saving for college," he commented.

Daniel Reyes, Principal, Advised Portfolio Solutions at Vanguard, and his team recognize that market volatility is on the minds of investors and are thinking of ways to provide guidance to college savers. What's more, volatility can be surprising for families saving for college, especially if they've chosen an age-based option within a 529 plan.

"What's interesting about this particular spurt of volatility in the markets is that we've come off of a stretch over the last several years of relatively tame, relatively placid markets, and so the volatility that they're seeing right now relative to what their experience was over the last five years or so seems magnified," he says.

David Malone, Director of Investment Management at Ascensus, the leading administrator of 529 college savings plans, points out that some investors may even be tempted to make changes in their portfolio based on fear.

"Some market participants, compelled by fear, sell risky assets during times of trouble. Should 529 plan participants sell when market indices precipitously slide, or should they use periods of market volatility to re-evaluate circumstances before making any significant changes to their child's portfolio?" he asks.

RELATED: When should you switch 529 plans?

Recommendations

That being said, what can families do to try and protect their investments and ensure that they will have sufficient savings once its time to pay tuition? Malone suggests that investors should start by jotting down answers to a few key questions:

  • How long has it been since you evaluated your college planning?
  • How old is your child now?
  • Have college plans changed?
  • Have income, assets, or gifts to your children changed significantly?
  • With how much turbulence can you, as a parent, stomach?

"Relying on the realities of your situation instead of financial news cycles—whether positive or negative—can keep you grounded and focused when considering portfolio changes. It can also help you avoid making rash decisions that are based on your personal perceptions of the market's behavior," he recommends.

"If your child has aged by more than a couple of years, a prudent and reasonable plan of action is to reassess your level of risk."

Malone also notes that it's also important to reassess the entire family's college plan, especially if family dynamics have changed.

"Consider updating all beneficiaries in all accounts to align your expected college needs with expected college needs. If this change is viable, adjustments to the portfolio should match the profile of the new beneficiary," he says.

RELATED: 5 habits of successful college savers

"If your static allocation options have existed without review for a long period, then this market turbulence should give reason for you to review its appropriateness. During this review, you may consider evaluating where you are today, versus when you first invested. If your child is approaching or in college, then 529 plan assets should shift from risky assets to safer assets."

Reyes advises families with 529 plans to try and remain calm this year, and to try and accept that volatility is a normal part of investing.

"We're always trying to tell our investors, as much as they possibly can, to tune out as much noise as they can, and try to separate the emotional part of investing," he says. According to recent analysis from Vanguard, since 1980 equity markets have seen on average a correction or bear market about every two years.

Global stock prices (January 1, 1980—January 22, 2016)
Declines Number Average return Average time from
peak to trough
Average time from
trough to recovery
Correction 12 –13.7% 87 days 121 days
Bear market 7 –33.4% 373 days 798 days

Source: Vanguard.com

Reyes also reminds parents to stay focused on things they can really control, like the asset allocation in their college savings plan. "Make sure your allocations are appropriate for your time horizon and the amount of risk you're willing to take on," he says.

That's easy to do if the investor is using an age-based option within a 529 plan, since an asset allocation strategy is built into the design. But for those managing their own investments who aren't sure where to start, Reyes recommends looking at the age-based options for a beneficiary of the same age as a reference point.

Bernhardt also notes the benefits of investing in an age-based option during a volatile market.

"Investors in target date strategies like Fidelity Freedom Funds (targeting retirement) and college 529 age-based portfolios tend to worry less about the fluctuations in the market and focus more on maintaining regular contributions. Because target date strategies are designed to get more conservative as the goal approaches, the investor can rely upon the fund manager and the design of the plan to reduce risk and equity exposure as the target date nears – in the case of 529 plans, as their child, or other beneficiary, gets closer to college age," he says.

RELATED: Savingforcollege.com age-based asset allocation study

Closing thoughts

If you're looking for a low-maintenance 529 plan, Bernhardt suggests using an age-based investment option.

"By contributing regularly to a target date strategy, investors can remove some of the emotion that frequently paralyzes those who don't have a well thought out plan," he says.

Malone also points out that change isn't always a bad thing.

"In some cases, revamping 529 assets during a period of negative returns may very well be the right path. My suggestion is to let facts—not fears—help you find the right solution. Keeping a balanced investment outlook is hard. Maintaining a prudent 529 plan does not need to be," he says.

Reyes stresses the importance of discipline in a shaky market. He tells families to "resist the urge to make a dramatic change to their asst allocation," adding that this is one of the most important decisions investors can make. What's more, investors need to maintain their contributions amounts to take advantage of Dollar-Cost Averaging, which can help dampen the volatility over time.

RELATED: How satisfied are consumers with their 529 plans?

The stock market certainly hasn't been kind to investors so far this year. In fact, U.S. stocks broke a record for biggest fall during the first five days of January, and experts predict we can expect more volatility to come. And although most parents can't complain about the cheap gas prices (especially those with gas-guzzling minivans), seeing their 529 balances decline has left them feeling unsettled about the future. Many are wondering what steps they can take to mitigate future volatility and keep their education savings intact.

To help answer this question, we consulted three industry experts. Here's what they had to say:

Reactions to volatility

How are families responding to the stock market drop? According to Keith Bernhardt, Vice President of College Planning at Fidelity Investments,

"Fidelity's call volumes have been up modestly during the past few weeks. When the markets are volatile and dropping, investors call seeking answers. They express concern, but not panic, and most are checking their account balances and seeking guidance, but they remain invested," he said.

"During the last bout of market volatility back in August, we saw a slight uptick in customers reaching out to discuss their overall financial plans. Market disruption often reminds consumers to take action, and to put a plan in place to achieve their financial goals, including saving for college," he commented.

Daniel Reyes, Principal, Advised Portfolio Solutions at Vanguard, and his team recognize that market volatility is on the minds of investors and are thinking of ways to provide guidance to college savers. What's more, volatility can be surprising for families saving for college, especially if they've chosen an age-based option within a 529 plan.

"What's interesting about this particular spurt of volatility in the markets is that we've come off of a stretch over the last several years of relatively tame, relatively placid markets, and so the volatility that they're seeing right now relative to what their experience was over the last five years or so seems magnified," he says.

David Malone, Director of Investment Management at Ascensus, the leading administrator of 529 college savings plans, points out that some investors may even be tempted to make changes in their portfolio based on fear.

"Some market participants, compelled by fear, sell risky assets during times of trouble. Should 529 plan participants sell when market indices precipitously slide, or should they use periods of market volatility to re-evaluate circumstances before making any significant changes to their child's portfolio?" he asks.

RELATED: When should you switch 529 plans?

Recommendations

That being said, what can families do to try and protect their investments and ensure that they will have sufficient savings once its time to pay tuition? Malone suggests that investors should start by jotting down answers to a few key questions:

  • How long has it been since you evaluated your college planning?
  • How old is your child now?
  • Have college plans changed?
  • Have income, assets, or gifts to your children changed significantly?
  • With how much turbulence can you, as a parent, stomach?

"Relying on the realities of your situation instead of financial news cycles—whether positive or negative—can keep you grounded and focused when considering portfolio changes. It can also help you avoid making rash decisions that are based on your personal perceptions of the market's behavior," he recommends.

"If your child has aged by more than a couple of years, a prudent and reasonable plan of action is to reassess your level of risk."

Malone also notes that it's also important to reassess the entire family's college plan, especially if family dynamics have changed.

"Consider updating all beneficiaries in all accounts to align your expected college needs with expected college needs. If this change is viable, adjustments to the portfolio should match the profile of the new beneficiary," he says.

RELATED: 5 habits of successful college savers

"If your static allocation options have existed without review for a long period, then this market turbulence should give reason for you to review its appropriateness. During this review, you may consider evaluating where you are today, versus when you first invested. If your child is approaching or in college, then 529 plan assets should shift from risky assets to safer assets."

Reyes advises families with 529 plans to try and remain calm this year, and to try and accept that volatility is a normal part of investing.

"We're always trying to tell our investors, as much as they possibly can, to tune out as much noise as they can, and try to separate the emotional part of investing," he says. According to recent analysis from Vanguard, since 1980 equity markets have seen on average a correction or bear market about every two years.

Global stock prices (January 1, 1980—January 22, 2016)
Declines Number Average return Average time from
peak to trough
Average time from
trough to recovery
Correction 12 –13.7% 87 days 121 days
Bear market 7 –33.4% 373 days 798 days

Source: Vanguard.com

Reyes also reminds parents to stay focused on things they can really control, like the asset allocation in their college savings plan. "Make sure your allocations are appropriate for your time horizon and the amount of risk you're willing to take on," he says.

That's easy to do if the investor is using an age-based option within a 529 plan, since an asset allocation strategy is built into the design. But for those managing their own investments who aren't sure where to start, Reyes recommends looking at the age-based options for a beneficiary of the same age as a reference point.

Bernhardt also notes the benefits of investing in an age-based option during a volatile market.

"Investors in target date strategies like Fidelity Freedom Funds (targeting retirement) and college 529 age-based portfolios tend to worry less about the fluctuations in the market and focus more on maintaining regular contributions. Because target date strategies are designed to get more conservative as the goal approaches, the investor can rely upon the fund manager and the design of the plan to reduce risk and equity exposure as the target date nears – in the case of 529 plans, as their child, or other beneficiary, gets closer to college age," he says.

RELATED: Savingforcollege.com age-based asset allocation study

Closing thoughts

If you're looking for a low-maintenance 529 plan, Bernhardt suggests using an age-based investment option.

"By contributing regularly to a target date strategy, investors can remove some of the emotion that frequently paralyzes those who don't have a well thought out plan," he says.

Malone also points out that change isn't always a bad thing.

"In some cases, revamping 529 assets during a period of negative returns may very well be the right path. My suggestion is to let facts—not fears—help you find the right solution. Keeping a balanced investment outlook is hard. Maintaining a prudent 529 plan does not need to be," he says.

Reyes stresses the importance of discipline in a shaky market. He tells families to "resist the urge to make a dramatic change to their asst allocation," adding that this is one of the most important decisions investors can make. What's more, investors need to maintain their contributions amounts to take advantage of Dollar-Cost Averaging, which can help dampen the volatility over time.

RELATED: How satisfied are consumers with their 529 plans?

 

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