The frenzy of stock trading you see in movies about Wall Street might not seem to have much in common with your 529 savings, but if you own stock portfolios in your 529 account, you're indirectly invested in many of the same securities.
Here’s how it works:
What happens to the money I put in my 529 portfolios?
Whether you own an age-based option or individual portfolios in your 529 account, your stock allocation is invested in mutual funds from Vanguard, one of the world's largest mutual fund companies.
These mutual funds are diversified—they pool together money from many investors in order to buy hundreds or thousands of different stocks.
This can lower overall investment risk, because the negative performance of one stock can be offset by the performance of other stocks.
The professionals who manage mutual funds buy and sell the stocks in the fund, just like Wall Street traders.
Which stocks are in the mutual funds?
The stocks held by the mutual funds underlying your 529 portfolio are different depending on the fund.
For example, the goal of Vanguard Total Stock Market Index Fund is to track the performance of an "index" (grouping of stocks) called the CRSP US Total Market Index. This particular index measures the investment returns of more than 3,000 publicly traded stocks in the United States—basically the entire U.S. stock market.
The companies with the highest valuations have the biggest weighting in the index (and the fund). As of August 2014, the top stocks in the index were Apple, Exxon, Google, Microsoft, and Johnson & Johnson.
How does the fund manager decide which stocks to buy and sell?
When you invest money in your 529 account, the fund manager takes your money (along with that of everyone else who added money to the fund) and uses it to buy more stocks in the same proportions as in the index.
Conversely, if there's more money withdrawn from the fund than the money that was added to it, the fund manager will sell stocks—again, in the same proportions as in the index.
So unlike the traders you might see in movies, managers of index funds don't buy and sell in an attempt to get the highest returns. Instead, they stick as closely as possible to the index. As a result, the fund's performance should closely track that of the index—which is based on the returns of the stocks in the index like Apple and Exxon.*
How can I find out which stocks are in my 529 portfolios?
It's easy to see basic information about the funds in your portfolios, including a listing of the 10 stocks each fund holds the most of. Simply log on to your account and select the link for each portfolio you own. Then, under "Investment strategy," click each underlying fund and look for the "Ten largest holdings."
To get even more information, including a full list of the stocks in a fund, visit vanguard.com and type the fund's name in the search box.