College savings too conservative / risk-averse?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Dallas1521
Posts: 46
Joined: Sun Jan 06, 2008 2:47 pm

College savings too conservative / risk-averse?

Post by Dallas1521 » Sat May 11, 2013 5:05 pm

I understand there is no consensus on the asset allocation for college savings, with some people very comfortable having 100% in stocks for the first several years while others will never have more than 50% in stocks (although it seems that those in the latter category are able to save much more thus reducing their reliance on stock market appreciation).

I recently opened a 529 plan for my newborn. Due to mostly gifts, the principal is a few thousand dollars which is 60% stocks / 40% bonds, using a mix of Vanguard’s aged-based options (40% Moderate & 60% Conservative).

I have since shifted this to 80% Moderate & 20% Conservative (which is 70% stocks / 30% bonds) for future contributions only, which will be at least $100 per month.

My question/concern is whether I am being too conservative and risk-averse and will miss out on future market gains (yes, assuming there will be such gains).

Please note that I look at this allocation as separate from my overall asset allocation so it is not my intention to bring up that discussion.

Thank you in advance for your input. Much appreciated.

livesoft
Posts: 62776
Joined: Thu Mar 01, 2007 8:00 pm

Re: College savings too conservative / risk-averse?

Post by livesoft » Sat May 11, 2013 5:22 pm

Who knows? I think that even though you have written that the 529 is separate, what is going on with your other assets will affect things.

For example, if one can pay for college from current cash flow, then what does it matter how the 529 is invested? In such a case, the 529 plan is really a tax shelter and not a college savings vehicle.

Or perhaps one is not making the maximum possible contributions to their retirement accounts. In such a case, a 529 plan is a poor choice for where to put money.

Or if one is only going to pay out what is in the 529 plan and stiff their children if it is not enough, then perhaps one would have different asset allocation in the 529.

Maybe a chart of possible outcomes would be helpful and would include what one would do with each outcome:

1. Low risk allocation:
1A: Not enough to fund college, so pay for it out of other sources including current income, 401(k) loans, other loans, working student, etc.
1B: Not enough to fund college, so plan ahead and put even more in the 529 plan during the accumulation years.

2. High risk allocation:
2A: Risk shows up, so not enough to fund college, so pay for it out of other sources including current income, 401(k) loans, other loans, working student, etc.
2B: Risk shows up, so not enough to fund college, so plan ahead and put even more in the 529 plan during the accumulation years.
2C: Risk does not show up in early years, so switch to low risk allocation once comfortable with funding level
2D: Risk does not show up in early years, so stop contributing altogether

3. Moderate risk allocation:
....
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
nisiprius
Advisory Board
Posts: 36898
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: College savings too conservative / risk-averse?

Post by nisiprius » Sat May 11, 2013 5:38 pm

A problem is that typically, dollars go into a college fund spread out over 0-18 years before they are needed. I'm not sure how you would go about making an accurate calculation of the "average time in the market" for a college fund, but it would be on the order of maybe ten years. Even if you buy into the concept of "stocks for the long run," ten years isn't even close to being "the long run."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

livesoft
Posts: 62776
Joined: Thu Mar 01, 2007 8:00 pm

Re: College savings too conservative / risk-averse?

Post by livesoft » Sat May 11, 2013 5:43 pm

Generally it takes 4 years to get through college, so perhaps make that 0-21 years before the funds are needed and maybe perhaps longer if one wants to help fund beyond the first degree.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
momar
Posts: 1359
Joined: Sun Nov 13, 2011 12:51 pm

Re: College savings too conservative / risk-averse?

Post by momar » Sat May 11, 2013 5:43 pm

I agree with livesoft. It all depends on what else you have outside the accounts and whether you will pay for college regardless. If you have taxable accounts and/or enough income to cash flow it, treat it as just another tax shelter and part of your normal allocation.

If not, if this is all they will get, just do 60/40 or something. You can adjust your contributions or the allocation as you go and have seen the early returns.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

lwfitzge
Posts: 311
Joined: Sun Jun 12, 2011 8:01 am

Re: College savings too conservative / risk-averse?

Post by lwfitzge » Sat May 11, 2013 5:44 pm

it's different from your overall allocation but really it may not be. The thinking that got you to a retirement ISP and the current state of that retirement funds is relevant to decisions re: 529 (e.g., pay yourself and your retirement first). You can forecast expected return and monthly contributions needed to hit a target for school funding. If you are 18 yrs out of paying for college, what asset allocation would you employ if you were 18 yrs out of retirement. Ask if your risk tolerance for blowing the kids education (assuming its the principal source of funds for education) is more, equal or less than risking your retirement assuming 18 ys out and adjust accordingly. If I were 18-20 ys away from retirement, I'd beginning with a 70/30 or 60/40 mix. If that mix, expected return and monthly contribution does not get you there ask.. will more risky weighting of equities help (80-20?) or would it be better to just up my monthly contribution. For me, my funding of education for my kids at young age was to be equity heavy (80/20) giving 18 yrs out, and to fund it heavily early w chunk of money to maximize the benefits of time/compounding. My 16 yr old is at 25%/75% S/B and my 11 yr is 50%/50% for 529s.

livesoft
Posts: 62776
Joined: Thu Mar 01, 2007 8:00 pm

Re: College savings too conservative / risk-averse?

Post by livesoft » Sat May 11, 2013 5:50 pm

lwfitzge wrote:it's different from your overall allocation but really it may not be. ....
And we expected to be retired when our oldest started college, so her college expenses were really retirement expenses for us. That said, we have paid for college from 3 different places: (a) paychecks, (b) selling equities as needed, and (c) withdrawals from a 529 plan. For us, the 529 plans were basically just tax shelters.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
momar
Posts: 1359
Joined: Sun Nov 13, 2011 12:51 pm

Re: College savings too conservative / risk-averse?

Post by momar » Sat May 11, 2013 5:55 pm

lwfitzge wrote:it's different from your overall allocation but really it may not be. The thinking that got you to a retirement ISP and the current state of that retirement funds is relevant to decisions re: 529 (e.g., pay yourself and your retirement first). You can forecast expected return and monthly contributions needed to hit a target for school funding. If you are 18 yrs out of paying for college, what asset allocation would you employ if you were 18 yrs out of retirement. Ask if your risk tolerance for blowing the kids education (assuming its the principal source of funds for education) is more, equal or less than risking your retirement assuming 18 ys out and adjust accordingly. If I were 18-20 ys away from retirement, I'd beginning with a 70/30 or 60/40 mix. If that mix, expected return and monthly contribution does not get you there ask.. will more risky weighting of equities help (80-20?) or would it be better to just up my monthly contribution. For me, my funding of education for my kids at young age was to be equity heavy (80/20) giving 18 yrs out, and to fund it heavily early w chunk of money to maximize the benefits of time/compounding. My 16 yr old is at 25%/75% S/B and my 11 yr is 50%/50% for 529s.
They aren't quite equivalent; most of us would hope that our children are not in school for as long as we are retired. Either at the short or long end.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

inbox788
Posts: 5667
Joined: Thu Mar 15, 2012 5:24 pm

Re: College savings too conservative / risk-averse?

Post by inbox788 » Sun May 12, 2013 4:32 pm

Dallas1521 wrote:I recently opened a 529 plan for my newborn. Due to mostly gifts, the principal is a few thousand dollars which is 60% stocks / 40% bonds, using a mix of Vanguard’s aged-based options (40% Moderate & 60% Conservative).

I have since shifted this to 80% Moderate & 20% Conservative (which is 70% stocks / 30% bonds) for future contributions only, which will be at least $100 per month.

My question/concern is whether I am being too conservative and risk-averse and will miss out on future market gains (yes, assuming there will be such gains).
Conventional wisdom says to invest tIRA/401k in fixed income while Roth gets equity. This is based on the assumption that equities will outperform fixed income, and so you want your higher growth at in tax advantaged Roth accounts instead of traditional tax liable/deferred accounts. Since the 529 is like a Roth, I put 100% equities there. Add to that your long timeframe giving the account the most possible time to grow. If you have extra cash, front loading 529 plan with up to 5 years gives the funds more time to grow maximally. If need and available, increase bond allocation in the traditional tax deferred accounts.

Post Reply