The story is all too familiar: a family doing all the right things invests in a 529 Plan to limit the amount of debt their child has coming out of college. Pre-COVID investors, including college investors, prospered. Over the last 10 years an aggressive portfolio could have easily doubled, or even tripled in value. With risk comes reward, over the long term.
The problem with college funding, is the term is too short for many to handle the risk.
While as of June 2020, the stock market has rebounded dramatically, many families were understandably scared at the end of March. Many portfolios had declines of 35% or more when the COVID panic happened. This means a family with $10,000 in December 2019 went into 2020 feeling good and then saw their assets drop to $6,500 or less, almost overnight. Now if the child had 5 or 6 years until college, most could easily ignore it. And if the family had a good perspective on risk, it could have even been embraced and leveraged. But what if the $10,000 was needed for fall 2020 tuition?
Even aged-based funds were not immune. Some aged-based funds for 15 and 16-year-olds, (who were only a few years away from college), were down as much as 15%-20%. While this is neither good nor bad, it is often unexpected by many parents.
Now as it turns out, the COVID rebound has been as quick as the downturn, with many portfolios being only a few percentage points lower than what they were at the start of the year.
So, what should you do if you were shaken by COVID?
- Have more than one source for funding if you are taking on risk, in case another COVID-type event happens – this may allow you to ride it out. Roth IRAs are a good choice (See MNice’s article on the Roth and education funding).
- Explore all options before selling in a panic.
- Aged-based funds. They can reduce risks for you, just be aware of the tradeoffs.
- Diversify. Make use of the less-risky investment options in your 529 Plan, like government bonds, or stable-value-type funds.
Those parents that sold out of fear when their portfolio was $6,500 are probably feeling worse now than in the middle of March. No one can predict the future, and the stock market may still have some rough patches in front of it but set it and forget is not a great strategy for most people, especially when it comes to college funding. We all operate with some level of emotion, and it is not a bad thing. Pretending we don’t, however, IS a bad thing. Investors need to have a basic understanding of risk and return. They should understand why they are taking on risk, not simply ignoring it – use your HEAD!
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