Differences in performance of age-based investment glide paths are attributable to several key characteristics in the asset allocations. Savingforcollege.com analyzed 180 age-based investment options offered by all 85 of the 529 college savings plans for which data was available in Q3 of 2018.
The report, Characteristic Differences among Age-Based Investment Glide Paths, identifies eight key characteristics that contribute to differences in investment performance.
- Initial and Final Percentage Equity. The return on investment for an age-based investment increases with higher initial and final percentage equity, but the risk of investment losses also increases. The percentage equity can be characterized as conservative, moderate or aggressive based on comparison with specific thresholds for the initial percentage equity (60% and 90%) and the final percentage equity (10% and 30%). The average initial percentage equity is about 85% and the average final percentage equity is about 9%.
- Delayed Onset of the Age-Based Investment Glide Path. Sustaining a higher percentage equity for up to 10 years before switching to an age-based investment glide path can increase the annualized return on investment by 0.10% for each year of delayed onset. None of the 180 age-based investment glide paths involves a delayed onset of the age-based investment glide path.
- Average Percentage Equity. The average percentage equity summarizes how the percentage equity changes throughout the age-based investment glide path, not just at the start and finish. Delayed onset of the age-based investment glide path, for example, will yield a higher average percentage equity than an age-based investment glide path with no delays. The average percentage equity among the 180 age-based investment options averages about 46% (range of about 18% to 73%). Curiously, the average percentage equity for a linear age-based investment glide path is the average of the initial and final percentage equity.
- Curvature of Age-Based Investment Glide Paths. The curvature of an investment glide path measures how much it varies from a linear investment glide path, with positive curvature for concave glide paths and negative curvature for convex glide paths. Positive curvature corresponds with higher investment returns and greater investment risk, while negative curvature corresponds with lower investment returns and decreased investment risk.
The curvature is equal to the difference between the average percentage equity for the glide path and the average of the initial and final percentage equity. The curvature of a linear age-based glide path is 0%. The curvature of a delayed onset of an age-based investment option can be much greater than the typical curvature for even just a few days of delayed onset. The average curvature among the 180 age-based investment options is -0.5% (range of about -13% to 19%). This represents about -4% of the average percentage equity, with two-thirds within 10% of the average percentage equity.
- Exposure to Domestic vs. Foreign Stocks. Although diversification can reduce risk, significant exposure to foreign stocks can lead to greater fluctuations in investment gains and losses. The current economic and political climate has lead to big swings in 529 plan performance among 529 plans with significant foreign stock exposure. Among the 180 age-based investment options, about 70% of stocks are U.S. and about 30% are foreign. About 10% of the age-based investment options have no foreign stock exposure and about a third have above-average foreign stock exposure.
- Market Capitalization Mix. Market capitalization measures the total market value of all of a company’s outstanding shares. Large-cap stocks dominate age-based investment options, with about 90% large-cap, about 5% mid-cap and about 5% small-cap on average. Most of the 180 age-based investment options have just token amounts of small-cap and mid-cap stocks.
- Investment Style. Investment style differentiates investment portfolios according to growth (stocks that appreciate and reinvest profits in the company), value (dividend-paying bargain stocks) and a blend of the two styles. Growth stocks tend to carry more investment risk than value stocks. Growth stocks have a higher price-to-earnings (P/E) ratio and value stocks have a price-to-book (P/B) ratio below 1.0. Blended portfolios dominate the 180 age-based investment options, with about 90% blended, about 5% growth and about 5% value. More than half of the 180 age-based investment options are solely invested in blended portfolios.
- Real Estate Exposure. More than half of the 180 age-based investment options include a token amount in real estate (about 2%). These investment options treat real estate as high-risk investments similar to stocks. Since the stock market losses of 2008 and 2009, 529 plans no longer treat investments in real estate as low-risk.
The number of age ranges in the 180 age-based investment options (typically 8 or 9) does not seem to affect investment performance.
