Investing In Uncertain Times - My 529 Plans
What the up and down market is teaching me is that I am much more conservative, as far as doing things with my money, than I ever really realized I was. It is easy to be a risk-taker when times are good, but when times are tough you really learn your own risk tolerance. And mine is not as high as I thought it might be. Especially when the timeline is less than 30 years.
I have a Roth IRA that I haven’t touched in about 10 years. In that time, its value doubled, and now in the past year has gone back to pretty close to the same value as when I opened it. It is 90% invested in stocks, so it has had a rocky ride these past few months. And I am okay with that. It isn’t a huge amount of money, and I know there is a long time from here to when we’d want to use it, because I am only 34.
But going forward, I want to make investing choices that are more tailored to my own risk tolerance, and also are more than just stabs in the dark at what might be a good idea.
I want to start investing more in my IRA, but I know I need to shift it more conservative than it is right now for my own peace of mind. And, as I mentioned yesterday, I also am opening 529 accounts for my children. We have a big in-state tax break for investing in our home state’s 529 so we are doing that. (In the interest of full disclosure, we live in Indiana, which has a 20% tax credit for the first $5000 of 529 contributions each year, a benefit not matched by any other state as far as taxes.) I’m finding I am even more conservative when it comes to my kids - they have a shorter timeline (15-17 years vs my own 30+) and that makes me pull back, a lot.
As I said, I am a lot less risk tolerant than I thought I was. I guess in my old age I’m becoming more attached to what I have - or maybe just more crotchety. 
So I opened 529 accounts for my kids last week with a small initial investment just to get them set up. And then, this week, moved their college funds completely into them ($2500 for my son and $1500 for my daughter). And I invested it all, wholly and completely, into Vanguard Short Term Bond funds. Why? Because I am making a big investment all at once ($4000, for me, is a big investment), and I want to try and make it as safe as possible while still being invested in a 529. I looked that the funds available in my home state’s 529 plans, and this fund was the one I was most comfortable with as far as risk for a big lump sum invested at once.
Starting in January, we are going to make systematic $25 per month investments in each of the 529 accounts (for 2009 at least) as to take advantage of the concept of dollar-cost averaging. When I start doing that, I am actually going in the opposite direction, and investing the future contributions into the age-based portfolio. Because my kids are young (my son is 4 and my daughter 2) the age-based portfolio is about 90% stocks. Investing small amounts systematically in the age-based portfolio, going forward, gives the portfolio as a whole more risk introduced, but slowly over time. And will shift the asset allocation of the portfolio a little bit into stocks instead of being completely invested in bonds. That gives more possibility for reward but also of course, more risk. But I am comfortable with a small amount of risk. Just not 90% of the total.
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November 20th, 2008 at 12:26 pm
You might want to consider joining Upromise, it’s a good way to snowflake a 529 plan. You can check out their website at www.upromise.com.
I’ve been a member for about 6 months, I use it to snowflake my student loan. I’ve really only earned about $70 towards my loan, but I’m of the opinion that every little bit helps.
A friend of mine joined to add to her two sons’ 529 plans a couple of years ago, and she’s already earned $600 for each of them.
I blogged about Upromise this past summer, if you want to read about my experience, check out: http://changejarandall.wordpress.com/2008/07/07/money-for-college-%e2%80%93-every-little-bit-helps/
November 20th, 2008 at 1:48 pm
I am already a member of UPromise, but thanks :)in 2 years I have earned less than a dollar. I think my exact total is something like 62 cents. My MIL is hooked up to our UPromise too and she’s earned us $30. lol I don’t shop enough apparently
November 20th, 2008 at 4:51 pm
Oh! I’m so jealous! I’m from Indiana and I wish I could live there again (all the family is there). I was born in Indianapolis, lived in South Bend for a few years, spent my teen years in West Lafayette, and went to school in Bloomington. Love that place the most.
ANYWAY. I think it’s good that you’re being a bit conservative with your children’s education funds. My parents were too risky, I’m afraid.
My great-grandma had given me a small amount of stock when I was 12 or so. Rather than it being moved to a really diverse mutual fund or CD later on, it stayed put, where it lost a good 20% of its value by the time I needed it
I think when I start my son’s 529, I’ll consider being a bit more aggressive with it until he’s about 5. After that, we’ll make it more and more conservative, until it’s completely in CDs for his years in high school.
November 20th, 2008 at 7:00 pm
You don’t have to make a huge adjustment, in reaction to your realization of your risk tolerance. Just put a percentage, 25 or 33%, into a money market fund. Vanguard is a good choice for that one, too. In the current downturn, it has helped me sleep at night, for having done that over the years, in my 401k plan accounts. Of course, right now, I’m wishing that my percentage had been a bit higher, but that’s okay.
November 20th, 2008 at 8:11 pm
That is a sensible decision it seems to me. Taking advantage of dollar cost averaging is wise. And while it is difficult for many to invest anything in stocks these days, when your needs are over 5 years away I think it makes sense (and dollar cost averaging is a good way to do so - I am not at all sure what the next year holds). Only time will tell, but I believe stocks 10 years from now, will be well above where they are now.
November 20th, 2008 at 11:37 pm
I am in the same boat as you, this market has made me realize how risk adverse I actually am. I am slowly reducing my stock positions. I am just a little worried I will miss a move on the upswing. Assuming that ever happens.
November 21st, 2008 at 10:15 am
Just a bit of advice from my very wise father who has been insanely successful in the stock market over the last 35 years….
“Going up the hill of the roller coaster [Rising Interest Rates over 10 %] you should be in the money market car and stay put. When the roller coaster TOPS and begins it’s down turn [Falling Interest Rates] you should buy BONDS. So buy Bonds High when interest rates are high and buy stocks low when interest rates are low else stay in MM. If you were to buy Bonds now in the valley of death of low interest their face value will plunge as interest rates rise. While many will be lured into Bonds and CDs it’s the kiss of death now.
So where should you place your money today - as crazy as this sounds STOCKS but wait just a bit till this market settles then put 50% in Stock Funds and 50% in Money Market. Not one broker would recommend this but stocks are now very very cheap and should be considered a very good buy. Remember to always buy stocks low and sell them high. It’s hard to do this because of the panic in the news, the anxiety of flock, the horror of the news but the rule is don’t follow the crowd or herd turn the other way because they will always jump off the cliff, follow simple economic principals of buying bargains and sell successes when everyone wants them. We are in low interest, stocks are dirt cheap and the market will come back.”
November 21st, 2008 at 1:25 pm
Starting 100% in bonds and DCA into a larger portion of stocks is interesting. I understand if you want to be conservative with a large initial investment, however, by adding more and more into stocks, the portfolios will become increasingly risky as the college horizon nears. Shouldn’t it be the reverse?
November 21st, 2008 at 3:48 pm
@Start-Up: I won’t continue to invest in stocks as college approaches. I am investing in the age-based portfolio, which will automatically shift my portfolio to more conservative things as my kids get older. It is just the initial investment that I put into bonds.
Subsequent investments will go into the age based portfolio and will become more conservative as my kids age. They are young right now (4 and 2) which means they are in the more “risky” age-based one. But over time they shift to more conservative. Starting at 5 actually, that portfolio is more like 75% stocks I think.