Investing in a choppy market can be painful, especially when an unpredictable president takes the helm. If you rely on these investments to pay for things as important as your child's college tuition fees, it can be even more and more, and you will need the money in the near future.
Last week I realized that my busy parents were in this position, reminding me that university admissions are creeping up in the market these days.
However, this situation acts as another reminder. Market uncertainty remains constant, but it is still part of a game that is forced to play to fund your own needs and desires in the future. Markets regularly plummet when the global financial crisis, the pandemic, the bubble of technology, and when the US president appears to push it to the edge with his index finger.
He suspended most of the so-called mutual tariffs when Trump realized Wednesday that the US government bond market was shaking or calling it “yppies.”
The market was delighted, climbing the S&P 500 by 9.5%, sliding nearly 1.8% on Friday, reaching a level that reached volatility during a pandemic-inducing sale in 2020. No one knows what will come next or how this film will end.
If you have money in a 529 university savings plan, or another type of investment account, now is the time to reassess whether a mix of stocks and bonds is suitable for your time frame or whether your stomach is suitable for risk.
If you can't afford to lose a certain amount of money and need it right away, it's time to develop an exit strategy. For everyone else, you have the luxury of time to make better long-term plans.
I need the money now (or really soon). What now?
If you need money within a year, it shouldn't be in stock. Some financial planners have said they can even engulf some losses now (by moving your money into cash, even if your investment is low), but there are some other things that may be considered.
“We recommend that you consider whether you have other resources to cover your first year, such as cash flow, gifts, and student aid.
If you borrow more than you would expect in the first year to avoid being exposed to your investment, pay federal and many private student loans early (per beneficiary for your lifetime) using up to $10,000 in money within the 529. Another idea: temporarily suspend or reduce savings and pay more tuition directly.
There's time. What should I do?
Sometimes the best solution is the simplest solution. It reduces complexity and decision-making and puts things in the autopilot. Certainly there may be a more accurate investment strategy, but there is something totally great called the Target-Date Fund.
When massive tuition fees emerged in September, and if you were in such a well-managed fund, your portfolio would drop by just 0.35 percentage points after the intensity and insane volatility of the past two weeks. You will not lose sleep on it.
Target Date Funding – As the university's registration date approaches, the combination of investments gradually becomes more conservative, but it can be useful for those who want a handoff approach. But that means you either need to work a little up front to analyze the funds or hire someone to help you (always trustees, always).
Many 529 university savings plans offer these funds to their investment menu, but not all of them are created equally. Funds from different providers with the same registration date can have different mixes of investments and some are risky as they have a more aggressive share allocation.
Don't forget to also consider the types of bonds and cash investments. Bonds usually act as ballasts when stock drops, but as we saw this week, all shocks are not impermeable.
You also need to understand how the fund will evolve over the years as you approach the registration date. How quickly does it change? What does it look like when college is only five or three years away? If the market drops 30%, are you happy with the mix at that point? And how does it compare to similar funds? How much does it cost? (Sticking to low-cost index funds, which simply tracks the performance of large swaths in the market and doesn't try to beat it.)
CJ Stermetz, financial planner and founder of EquityFtw, a company in San Jose, California, said funding is particularly good in times like these, as parents don't have to worry about it. They know that over time, college money is being fed into safer investments.
In fact, targeted registration date funds are similar to those targeted at retirement dates, but the former makes SHEDS stocks more quickly in a compression time frame. Generally, funds start at 95% for stocks and 5% for bonds, but about 5% of stock points are transferred to bonds each year. If you were purchasing a Pioneer Fund for your newborn on your 2043 registration date, then start there. As the market approached on Thursday, it fell by about 6.5% since the start of the year.
But by three years ago, the university (like Vanguard's 2028/2029 fund), there were about 25% stocks, 54% bonds and 20 more cash equivalents. The fund was only 1.06 years old as of Thursday.
When universities are only 1-2 years (2026/2027), 19% of investments will be in stocks, 47% in bonds and 34% in cash, while the target registration for the 2024/2025 academic year is only 15% in stocks. This was down 0.35% as of Thursday.
“This may not be “optimal” in the sense that it fits all products, but most parents do, as that means that there's less to think about it,” Stermetz added.
Keep in mind that if your child feels too aggressive the fund's registration date is too aggressive, you can choose it for your older child. You will invest less in stocks.
If you can't afford to lose money, Eric Maldonado, a financial planner in San Luis Obispo, California, proposes a different approach. When your child is in high school, you will put the corresponding college year expenses into a cash or money market fund. For example, if your child is a freshman in high school, put the freshman college tuition into cash.
“Whatever the mix of strategies is, the key is to shift your mindset as college approaches,” said Maron Fitzpatrick, head of wealth planning at Robertson Stevens. “At some point, the goal is not to grow your money anymore, but to make sure you're there when you need it.”
Do you have any specific questions? Please write to me in tsbernard@nytimes.com And my colleagues and I can answer them in upcoming newsletters.
