Time to get aggressive in 529 investing?

http://www.savingforcollege.com/articles/20091030-time-to-get-aggressive-in-529-investing

When the stock market hit the skids, investors stampeded into conservative investment options, desperate to preserve as much of their savings as possible. But with the Dow crossing the $10,000 mark in October, you may be wondering if it's time to get your savings back into the market to generate as much return as you can to pay ever-increasing college costs.

It's a difficult dilemma: The more aggressively you invest, the better chance you have of meeting your college savings goals, but by investing aggressively, you're taking on risk that could derail those same goals. So how do you balance those competing options?

If you're investing on behalf of a very young child, you should invest aggressively, says Linda Pietroburgo, a Certified Financial Planner with Moneta Group in St. Louis, Mo., because you have many years to grow your funds before your child goes to college. That being said, Pietroburgo doesn't recommend investing 100 percent in stocks, even for a young child. "The maximum equity allocation I would recommend is 80 percent stocks, 20 percent bonds, because the research we have done shows that this is the point at which you don't add return," she says.

Another situation when it's appropriate to invest aggressively is when you can fund college from other income sources, should your investments suffer a large loss at the wrong time, Pietroburgo says. "If you have other sources of income that you can use to fund the first two years of college, you can also be more aggressive," she says.

Generally, 529 plans offer a number of aggressive investment options, including age-based plans that are invested mostly in stocks during the years leading up to the time the child goes to college. Other common options include aggressive allocation options to single fund options that invest in small and medium-sized companies and international companies, says Craig Hyldahl, a CFP with R.I.C.H. Planning Group in Woodbridge, N.J. When choosing between aggressive investment options in a particular state's 529 plan, pay some attention to the underlying investments, he says.

Your 529 plan Web site offers details about what mutual funds make up a particular investment option, who manages those funds and how those funds have performed. Look for funds with low costs and a strong performance over the past three- and five-year periods, says Pietroburgo.

Avoid being overly aggressive when your child is in high school and you don't have cash available outside your 529 plan, says Hyldahl. "With a child in high school, there's too much downside risk. It's better to err on the conservative side once your child is within four years or so of going to college."

If you have limited funds in your 529 account think carefully about how much you should funnel into aggressive options and at what point you should switch those funds over to more conservative options. A major benefit of age-based investment options is that they make these decisions for you, switching away from overly aggressive options as your child moves closer to attending college.

Unfortunately, too many 529 plan investors realized their age-based investments were still too aggressive during the market meltdown of 2007-08, when the value of their investments tanked by 20 to 30 percent, says Hyldahl. Even if your child is in middle school, a loss of that magnitude is difficult to make up, especially if you were spooked into moving your funds into conservative investments and missed the big gains the market has delivered this year.

If you're sold on investing aggressively, monitor your investments more closely than you otherwise would. "If you're working with an adviser, he or she should be doing that, proactively reviewing your investment options and meeting with you to see how your personal financial situation has changed," says Hyldahl.

If you're investing on your own, sit down once a year with your 529 plan statements and do a full-scale review of your situation, including:

• How your investments performed the past year.
• Your 529 plan balances.
• Your personal financial situation.
• Your child's college plans.
• Your monthly or annual 529 plan contributions.

Pietroburgo recommends switching from a 80 percent aggressive, 20 percent conservative investment mix to either a 50-50 mix or a 60 percent aggressive, 40 percent conservative formula once your child begins middle school. When the child enters high school, trim your aggressive mix even further, perhaps to 30 percent aggressive, 70 percent conservative.

And once college is only a year or two away, you may want to drop any aggressive options, unless you have plenty of funds outside your 529 plan to fund college. To play safe, you could choose a money market or stable value fund option. Of course, you'd lose out on any gains from the stock market, but you'd have peace of mind.

Posted October 30, 2009