If recent market volatility has you second-guessing investments in your college savings plan account, that’s a normal reaction. What’s important is to avoid making quick investment decisions. Before taking any action in your college savings plan account, consider the tips below.
1. Diversify – One important way to manage investment risk is through diversification. When you spread investments across different types of assets, such as stocks, bonds, and cash, you can help protect your account from succumbing to the declines of any single investment. Broadly speaking, assets such as stocks and real estate respond well to growth trends such as expanding corporate profits, increasing incomes, or even population growth. Other investments, such as bonds and cash-type vehicles, can provide stability when markets are volatile. Several investment portfolios available through the Edvest College Savings Plan already offer exposure to multiple asset classes to simplify the diversification process for you: Age-Based Investment Options and our Multi-Fund Investment Options. Edvest also offers stable principal investment options that seek to preserve capital and maintain a fixed rate of return.
2. Rebalance – It makes sense to review your account regularly and consider rebalancing periodically.* For example, if stocks have fallen for a significant period of time while bonds have risen, adding stocks may help return your account to its original allocation. As your beneficiary moves closer to college, increasing the portion of your account that is in bonds and guaranteed assets may help stabilize returns as you prepare to take withdrawals. A simple way to ensure regular rebalancing of your account is to invest in one of the Age-Based Investment Options. This investment portfolio automatically adjusts your holdings based on the age of your beneficiary. The closer your beneficiary gets to college age, the more conservative the investment mix in your account becomes.
3. Avoid chasing returns, focus on consistent savings habits – Over time, asset classes will take turns as leaders or laggards. Impulsively selling an underperforming investment can lock in losses, while buying an investment that has enjoyed a run of strong returns could mean you are getting in at the top. Since the market’s future direction is impossible to predict, staying the course and maintaining consistent savings habits over time with a diversified portfolio may be the best way to reach your investment goals with less stress.
*You are allowed to rebalance your 529 plan account twice per calendar year under federal law.