Balance isn't just the key to a happier personal life. It can also enable you to have more control over your investment returns, which in turn can help you to achieve your investment objectives. But that balance won't look the same for everyone.
Although anyone who opens a 529 plan account has the same objective—paying for a child's higher-education expenses—the way each account owner invests to achieve that objective depends on the individual situation.
Age-based options
If you're the parent of a newborn and just opened an account, your situation is different from a new account owner who has a beneficiary in high school. You have time on your side (or at least more of it). With more years to contribute and grow your account, you can manage risk differently.
You may be able to handle the ups and downs of the market by investing in a portfolio that holds more stocks, for example.
If you're looking for a complete portfolio that's based on your risk tolerance level as well as your child's age, consider our age-based savings tracks, which automatically shift the asset allocation from more aggressive investments (stocks) to more conservative ones (short-term investments) as your child nears college age.
Approximately three-fourths of account owners within the plan use this type of investment strategy.
Note: Calculations are based on monthly returns for 518 U.S. balanced funds from January 1962 through December 2011. The calculations use data from Morningstar.
Building your own portfolio
However, if you'd like a more customized option, you can put together your own asset mix from our individual portfolios. You still want to build a portfolio using the combination of asset classes that offers the best chance for meeting your investment objectives.
Some of the factors you want to consider in putting your portfolio together include your investment experience, time horizon, risk tolerance, and financial situation. You can then choose from the portfolio options available within the 529 plan to find those that best match your individual needs.
Looking to the long term
Taking the time to decide on an appropriate asset allocation is one of the most important things you can do to help achieve your investment objectives. Why? The asset allocation you choose for your 529 portfolio is likely to have far more impact on your investment returns than any other decision you'll make.
In fact, 88% of a diversified portfolio's long-term returns—and the amount of volatility in those returns—could be attributed to its asset allocation.*
Only 12% of those returns came from what you might have thought paramount: the specific stocks or bonds an investor chose, and the timing of movements in or out of stock and bond investments based on expectations of what the market would do.
Whatever asset allocation you choose, review it periodically to make sure that it's still the best mix to meet your needs. If your financial circumstances or any other factors change, you might want to take a look at your asset mix to see if it should change as well.**
Devoting some time to your asset allocation, and (if you're not in an age-based portfolio) making occasional changes to remain balanced, is the best way to help manage risk and eventually achieve your reward—paying for college.
