Your investment time horizon is the time available before you need to sell your investments. Knowing how long you have to invest will help you select the appropriate mix of investments to help you reach your goals.
Generally, the longer your investment time horizon, the more aggressively you can invest. If your time horizon is short, you should focus on preserving your capital investment. A parent’s investment time horizon for a 529 plan will depend on their child’s age and whether they are using the funds to pay for college or K-12 tuition.
Investment time horizon and risk tolerance
With investing, there is a risk-return tradeoff. The riskier the investment, the greater potential reward, but also the greater potential investment risk. Investments such as stocks and Exchange-Traded Funds (ETFs) are more volatile than bonds, CDs and money market funds, but they often produce higher returns.
A longer time horizon allows investors to take on greater risk in their portfolio, since they have more time to recover from potential market losses. Investors with a shorter time horizon are more risk averse, since their objective is to preserve capital.
Most investors start out with a larger percentage of riskier assets and shift their allocation toward more conservative investments over time. For example, parents saving for college may start out with a high percentage of equities when their child is young and increase their fixed income allocation once the child enters high school.
Dollar-cost averaging can help mitigate risk in long-term 529 plan investments. By contributing an equal amount regularly over 18 years, you will purchase fewer shares when prices are higher and more shares when prices are lower.
Examples of investment time horizons
Investment Time Horizon
Length of time
Type of investments
10 or more years
Mix of stocks, bonds and ETFs with a larger percentage of equities
Parents saving for a newborn child’s education
3 to 10 years
Mix of stocks, bonds and ETFs with allocation determined by the investor’s needs and risk tolerance
Balanced, can be adjusted to meet the investor’s goals
Parents of elementary school students saving for college or parents of a newborn saving for high school
3 years or less
Stable investments such as CDs, money market funds, short-term bond funds, FDIC-insured investments
Preserving capital, risk averse
Parents of high school students saving for college or parents of a toddler saving for elementary school
529 plan age-based investment glide paths
Most direct-sold 529 plans offer investment portfolios with an age-based investment glide path. Similar to a target date retirement fund, an age-based investment portfolio automatically adjusts risk in the portfolio over time as the beneficiary gets closer to college. An age-based investment glide path is a hands-off approach where the investment risk is managed by the 529 plan.
Parents who start saving for college when their child is a newborn generally start out with 80% to 100% equities in an age-based portfolio. The portfolio can take on a high level of risk since there is enough time to recover from a potential market downturn. There is also less money invested in a 529 plan when a child is young, so the amount of the potential losses is lower.
As the child gets closer to college, the portfolio will shift toward 10% to 20% in equities, with the remaining 80% to 90% in fixed income. When the beneficiary is in high school, parents not only have less time recover from market losses, but they also have more money at stake.
Earnings in a 529 plan compound tax-free, allowing funds to grow exponentially. Shifting toward more stable investments at the end of the glide path helps you lock in the gains and stay on track to meet your college savings goal.
Using a 529 plan to pay for K-12 tuition
529 plans were originally designed to save for college, but the Tax Cuts and Jobs Act allowed families to use 529 plans to pay for K-12 tuition expenses. In most cases, families who use a 529 plan to pay for elementary or secondary school will have a shorter investment time horizon than a family who is saving for college.
Parents who are using a 529 plan to pay for K-12 tuition should consider having a separate 529 plan account from their college savings, since each goal has a different investment time horizon and investment strategy. But, keep in mind that age-based investment glide paths assume funds will be withdrawn when the child enters college. Parents using a 529 plan to pay for K-12 may want to explore a conservative target portfolio that does not automatically adjust allocations based on the beneficiary's age.