Are you taking extra risk with your 529 savings?

There are a lot of things to worry about in the months before and after high school graduation. Did your child pick the right school? Are you ready to handle move-in day? And how will your family pay for everything?

If you started saving when your child was young, you're hopefully feeling a little more prepared for that last one.

But if you still have the same investments you picked back then—and if you used individual portfolios instead of an automatic age-based option—you should review your investment choices to ensure they still make sense.

How college savers choose investments

Vanguard recently analyzed over 1 million accounts in several 529 college savings plans* to understand how college savers approach risk when it comes to their investment choices.

Taking the right level of risk is a critical component of any investment plan. And it may be especially critical right before and during the time you withdraw the money.

So what did the data show?

About half (49%) of the accounts studied were invested in a single age-based option, which automatically adjusts to a lower level of risk as the beneficiary gets closer to college age.**

The rest of the accounts used either individual portfolios only (30%) or some combination of individual portfolios and/or age-based options (21%).

Taking too much risk?

There's nothing wrong with custom-building your own mix of investments, of course. But the research shows that people who choose this path tend to hold a lot of stocks.

This makes sense when kids are young—your main concern is getting your savings to grow, and stocks tend to be the best asset class to help you meet that goal.

That's why our age-based options—which are built on Vanguard's 40 years of investment research and analysis—allocate up to 100% of assets to stocks when beneficiaries are age 5 or younger, depending on the account owner's comfort with risk.

However, investors who go the "custom" route tend not to ramp down on stock holdings as fast as the age-based options do. For example, for beneficiaries age 16 to 18, our age-based portfolios hold a maximum of 25% in stocks—and that's only for people who are really comfortable with risk.

Investors in New York's 529 Direct Plan who customize their investments, though, appear to take on quite a bit more risk than that. For beneficiaries who are age 16, accounts invested solely in individual portfolios hold an average of 70% in stocks. In fact, almost a third of these accounts are completely invested in stocks.


Source: Vanguard.

Managing risk by ramping down stocks

Over time, stock returns (as well as returns for any other asset class) tend to rebound from losses.*** People who are still a decade away from college have longer to wait out any market downturns. But a parent who loses money when tuition bills start arriving may not have time to wait for a rebound.

If you choose to put your college savings in an age-based option, you'll have help managing your allocation to ramp down your risk. But if you want to choose your own mix of investments, you can still use the allocations of the age-based options as guidance on what level of risk is appropriate for your child's age.

With planning, you can help protect your college money from slipping away—so you'll have it when you most need it.

* New York's 529 College Savings Program Direct Plan, CollegeInvest Direct Portfolio College Savings Plan, College Savings Iowa, MOST—Missouri's 529 College Savings Plan, and The Vanguard 529 College Savings Plan.

**Data in this article provided by Ascensus Broker Dealer Services, Inc., as of June 30, 2015. Sources of analysis: Vanguard, Implications of disciplined investing for 529 college-savings plans (Stockton et al., 2016); Vanguard research series on 529 college-savings plan account owner behavior (analysis data as of December 31, 2014).

***Only about 4% of rolling 10-year periods have experienced negative stock returns. Data covers the period 1926–2015 and uses the Standard & Poor's 90 from 1926 to March 3, 1957; the S&P 500 Index from March 4, 1957, to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; the MSCI US Broad Market Index from April 23, 2005, to June 2, 2013; and the CRSP US Total Market Index thereafter. Source: Vanguard.

All investing is subject to risk, including the loss of the money you invest.

If you have questions about contributions made by payroll deduction through your employer, call 1-877-NYSAVES (1-877-697-2837). Please read the Disclosure Booklet and Tuition Savings Agreement before making an investment or sending money.

New York's 529 College Savings Program currently includes two separate 529 plans. The Direct Plan is sold directly by the Program. You may also participate in the Advisor Plan, which is sold exclusively through financial advisors and has different investment options and higher fees and expenses as well as financial advisor compensation.