By: Daniel D. Reyes, CFA

Principal, Vanguard’s Education Savings Group

July 27, 2015

I’m in the earliest stage of college investing, saving for my son, who’s about to turn 2. Since we’ve got about 16 more years to go, we can afford to take on a bit more investing risk to get the potential for more reward. That means we can have a larger percentage of stocks, which provide a greater opportunity for growth, but also a greater potential for losses, based on a variety of factors.

On the other hand, my colleague Kim Stockton (with whom I’ve been studying college savers’ investing behavior) has kids aged 10 and 14. She’s getting closer to the tuition-checkwriting stage, so while she’s still looking for growth, she’s also aware that she’s getting closer to the time she’ll need to preserve her account balance to pay expenses.

Kim and I have been spending a lot of time diving into the investing trends of nearly 1.3 million investors across 5 529 college savings plans.* The patterns of people in that checkwriting stage (children ages 19 or older) showed the stock percentage in their portfolios—and the potential pain a drop in the market can inflict without time to recover from any rebound—wasn’t always aligned with their need to preserve savings to meet tuition demands.

While it’s not uncommon for investors to combine 529 savings with assets in other account types, everyone should be mindful of the percentage mix of stocks and bonds (what we call an asset allocation) at all points in their college-savings lifecycle. Because stocks are generally more volatile than bonds and cash reserve holdings, it’s prudent to hold fewer of them as you get closer to the spending stage.

Using age-based portfolios that move along a “glide path” and become progressively more conservative as the target age approaches helps reduce the amount of stocks—and the associated risk—by the time investors need to start using their savings. Most 529 plans offer age-based options. And our research found that 70% of investors use them.

We found that 66% of investors who are saving for someone aged 19 or older and who chose their own investment mix instead of an age-based portfolio held more than 20% in stocks.  Meanwhile, only 13% of 529 savers using age-based portfolio options built on Vanguard research–based best practices had more than 20% in stocks. It can be tough to shift from focusing on growing your investments to preserving the money you’ve accumulated. It’s a challenge many retirement savers also face. Seeing an account balance hold steady or even go down as you start using the assets to pay for expenses is counter to years of habit striving to see that balance go up.

As I’ve observed, having an age-based component, where the shift is automatic, helps make the transition to a less-volatile allocation easier. That shift provides some protection against market downturns (part of any investing cycle) when you don’t have time to wait them out before tapping your account to pay for college expenses.

I urge every investor to be mindful of asset allocation at each stage of your investing goal. No matter your reason for investing, you want to be sure your asset balance is appropriate for the amount of time you have before you need to start taking withdrawals. If you’re unsure of what that balance looks like for your college savings account, consider looking at an age-based portfolio’s allocation—or investing in one.

*The Vanguard 529 College Savings Plan, CollegeInvest Direct Portfolio College Savings Plan [Colorado], College Savings Iowa, MOST—Missouri’s 529 College Savings Plan, and New York’s 529 College Savings Program Direct Plan.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a  taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
Investment returns are not guaranteed, and you could lose money by investing in a 529 plan.

About the author

Dan is a principal and head of Vanguard’s Education Savings Group, responsible for providing education savings offerings to state and retail clients. Mr. Reyes joined Vanguard in 2004 and has worked in several roles spanning Human Resources, Vanguard Institutional Advisory Services®, and the fixed income portfolio management group on the agency and mortgage-backed trading desk. Prior to his current role, Mr. Reyes served as Chief of Staff for Vanguard’s Retail division. Before joining Vanguard, Mr. Reyes work as a consultant with Towers Perrin in their Executive Compensation practice. Mr. Reyes earned a B.S. in economics with concentrations in finance and management from the University of Pennsylvania’s Wharton School. He earned his M.B.A. from the Kellogg School of Management at Northwestern University and holds FINRA series 7, 63, 24, and 51 licenses. Mr. Reyes is a CFA® charterholder.