Investing for long-term goals, like saving for your child’s (or grandchild’s) education, can be more challenging when market volatility increases. In fact, it can leave you counting sheep instead of nodding off to sleep.
While there’s no way to foresee how markets will act in the future, there are ways to lower the risk that volatility can cause. Following the 3 steps below can help you reduce risk and keep you on track toward your education savings goals—even in the face of a significant down market.
1. Diversify
A sound way to help defend your portfolio against volatility is to choose an asset allocation that’s a good fit for your goals. A diversified allocation helps you avoid two investment traps:
- Investing too conservatively. If you hold all your assets in cash, you risk being unable to keep up with inflation. You also limit your portfolio’s potential to grow.
- Investing too aggressively. On the other hand, if you invest everything in stocks, the market could severely decline when you need your money the most.
A mix of investment types allows you to create a portfolio with a risk level that’s comfortable for you. A long-term investment plan should include a combination of:
- Stocks: to help your portfolio grow when the market is strong.
- Bonds: to provide stability during market downturns.
- International investments: to give you access to markets that may be generating positive performance when others are going a negative route.
As your withdrawal date (or, in the case of college saving, 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 bonds and cash. With a 529 plan’s age-based option, this is taken care of for you.
2. Consider an investment that automatically adjusts your asset allocation
Here age-based options really come into play. If you’re not inclined to adjust your asset allocation annually, an age-based option can be a great choice.
Age-based options, designed specifically to help you invest for higher education, shift from stocks to bonds as your child gets older and closer to high school commencement.
For instance, if your child is younger, and you select the corresponding age-based option, you’ll start off in a portfolio with more stocks than bonds that will gradually transition to one with more bonds and short-term investments. This will reduce your investment risk as tuition bills come into focus.
Your NY 529 Direct Plan offers 3 three age-based investment options, which you can choose based on your risk tolerance: Conservative, Moderate, and Aggressive. Learn more about the differences. It’s important to note that federal laws governing 529 plans allow you to move funds you've already contributed to a different portfolio twice per calendar year, or if you change the beneficiary.
3. Contribute consistently
It’s sometimes uncomfortable to invest when the markets are unstable, especially if you check your accounts often. It can seem as if you’re losing the money you’re contributing, and you may be tempted to move to lower-risk investments. Or maybe even stop saving altogether.
Unfortunately, market market-timing thoughts like these often result in selling low and buying high. They may save you from the worst trading days but could also keep you from investing on the best days.
Unfortunately, market market-timing thoughts like these often result in selling low and buying high. They may save you from the worst trading days but could also keep you from investing on the best days.*
An AIP boils down to less stress too. Knowing you’ve already contributed toward your child’s education allows for more time and flexibility to focus on the other priorities in your life.
Here’s another bonus. If you do take the 3 steps of diversifying, reallocating, and investing regularly through an age-based 529 account, you‘ll likely enjoy better ZZZZs too!
*Up to $10,000 is deductible annually from New York State taxable income for married couples filing jointly; single taxpayers can deduct up to $5,000 annually. May be subject to recapture in certain circumstances such as rollovers to another state's 529 plan, nonqualified withdrawals, or withdrawals used to pay expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. In addition, withdrawals used to pay expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school are subject to recapture of any New York State tax benefits that accrued on contributions. Tax and other benefits are contingent on meeting other requirements. We encourage account owners to consult a qualified tax advisor.
