A New Year’s Resolution for 529 Plan Savers: Assess, Rebalance, Diversify
As New Year’s Eve revelers counted down toward 2019, many 529 savers hoped the volatility that they witnessed during the end of 2018 was going to be a thing of the past. After all, for much of the last decade the stock market has been mostly kind to investors and only moved in one direction—up.
But with a slowdown in global growth and corporate earnings, political instability and federal interest rate hikes, it appears that 2019 may be trending toward a negative environment for equities and risk assets. Many families are taking this time to review their higher education savings strategy, checking on how they’ve previously invested and when they will need to draw down savings for educational use.
Should the market weaken as many experts have projected, those with younger 529 account beneficiaries may have the benefit of time on their side to correct any short-term losses. Those with account beneficiaries who are closer to using their 529 funds may have significantly less tolerance for market losses.
During market volatility, Invest529 investors should assess their time horizon, rebalance winners and losers in their portfolio, and most importantly diversify any risk.
Consider the example of an account owner who invested in the 2033 age-based portfolio. The young child in this household likely won’t be using 529 funds for more than ten years, so the account owner should be able to remain disciplined with their investments given the long time horizon before usage.
The age-based portfolio is rebalanced annually, adjusting to reduce risk as the student progresses toward a target withdrawal date of 2033.
Some investors may want a little more control over the investment lineup of their 529 account. For investors who opt for multiple Invest529 portfolios, rebalancing may be an annual exercise worth exploring.
Rebalancing involves resetting your account back to the originally intended asset mix of equity and fixed income (or bonds). Due to investment gains, an investor who originally desired 75% in equities and 25% in bonds may find themselves with 85% of assets in equities. In this scenario, the investor could sell 10% of their equity portfolios and redistribute those gains back to bonds. Virginia529 offers the opportunity to move funds between portfolios through its online account portal, which can help investors maintain the intended mix of equities and bonds.
Rebalancing is a disciplined process that is designed to take emotions out of investments when markets do well— or not so well— so that investors can stick to their original goals.
In an alternative scenario, one account owner has opted to only invest and save in the Total Stock Market Index Fund. With a 16-year-old beneficiary that is two years away from entering college, this account owner may want to consider diversifying their portfolio. Depending on when the investment in this portfolio began, the past decade likely provided a healthy return for the account owner.
With the account beneficiary only two years away from withdrawing funds, and with potential market volatility on the horizon, the account owner could consider diversifying into an income-oriented or capital preservation approach. By doing so, the account’s market value may be less affected by equity market movements to sustain the intended use of the 529 savings account.
While New Year’s resolutions may come and go, 529 savers may be able to reach their goals by staying focused on what they are able to influence, and not worrying about highs and lows of market movements. It can be challenging to insulate higher education savings from market volatility and unfavorable trends. Investment gains should be thought of as a long-term focus, not just immediate short-term results.
All investing is subject to risk, including the possible loss of the money you invest. Fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Diversification does not ensure a profit or prevent a loss.
The examples above are provided for illustrative purposes only and are not intended to reflect or predict the actual performance of any specific investment. Virginia529 cannot and will not provide legal, financial, or tax advice, and nothing herein or in any other written materials shall be construed as such.
For more information on Virginia529’s college savings options, visit Virginia529.com or call 1-888-567-0540 to obtain program materials. These include information on Virginia529 programs, investment objectives, risks, charges, expenses and other important information; read and consider them carefully before investing. Virginia529 encourages prospective participants to seek the advice of a professional concerning any financial, tax or legal implications related to opening an account. For residents of states other than Virginia: before investing, you should consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protections from creditors that are only available for investments in that state’s qualified tuition program.