Investing In Uncertain Times – My 529 Plans

Thursday, November 20th, 2008

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.