Investing your hard-earned money for your child’s (or grandchild’s) education when the market is strong feels great! But when market volatility hits, not so much.
In the first quarter of 2018, the market fell sharply—registering a correction (a drop of 10%) for the first time since early 2016. After a 9-year bull market, it reminded investors that stocks don’t always go up.
No one knows which way the markets will move in the future, but you can limit your exposure to risk.
Follow these 3 steps for the best chance of investment success in the face of market volatility.
A great way to insulate your portfolio against volatility is to choose an asset allocation that makes sense for your goals.
Diversification helps you avoid 2 investment traps:
- Investing too conservatively: If you hold all your assets in cash, you risk being unable to keep up with inflation. You also miss out on the potential for your portfolio to grow.
- Investing too aggressively: On the other hand, if you invest everything in stocks, the market could tank, just when you need the money.
A mix of investment types allows you to create a portfolio with the appropriate amount of risk for you. A long-term investment plan should include a mix of:
- Stocks, which can help your portfolio grow when the market is strong.
- Bonds, which can provide stability during market downturns.
- International investments, which can give you access to markets that may be generating positive performance when others are falling.
As your withdrawal date (or your child’s high school graduation date) gets closer, it’s a good idea to shift your investments away from potentially volatile stocks and into more stable investments (bonds and cash), which leads us to the next step.
2. Automatically adjust your asset allocation
You can adjust your asset allocation every year on your own. Or you can choose an age-based option, which will adjust automatically.
Age-based options are designed specifically to help you invest for college. These options shift from stocks to bonds as your child gets older and closer to the first year of college.
Your plan offers 3 age-based fund options, depending on your risk tolerance: Conservative, Moderate and Aggressive.
For instance, if your child is younger, you’ll start off in a portfolio with more stocks than bonds and transition to one with more bonds and short-term investments by the time he or she is ready for college.
3. Invest consistently
It’s not that comforting to invest when the markets are up and down, especially if you check on your accounts too often. It can seem as if you’re losing the money you’re contributing. In turn, you may feel the urge to move to lower-risk investments or to stop saving altogether.
This type of reactive behavior might save you from the worst trading days, but it could also keep you from investing on the best days. In many cases, timing the market for reentry simply results in selling low and buying high.
Instead, focus on what you can control – investing consistently. Consider setting up recurring contributions that will move money from your checking account to your 529 account automatically.
Contributing to your NYs 529 College Savings Program Direct Plan on a regular basis is a notable way to reach your college savings goals.