16 Mar The stock market and your college savings

Q. My son is 10 and we have a 529 plan. We use the age-based portfolio and I’m a little nervous about today’s stock market. Tell me why I should stay in this allocation rather than move more conservative.
— Dad

A. When evaluating how you should invest, one of the biggest considerations should be your personal time horizon for those monies.

You said your son is 10, so that means you have a time horizon of eight years or more for the 529 plan.

For that reason, short-term market corrections may have little impact on this account, long-term, said Michael Cocco, a certified financial planner with AXA Advisors in Nutley.

Any downturns could even work to your advantage.

“If you are providing ongoing contributions to this account, during market pullbacks, one can argue that certain stocks may be `at a discount’ and any new monies you are adding to the 529 plan could be buying into your investments at a lower share price, which may potentially lower your overall average cost per share, Cocco said.

Consistently investing a set amount of money into an investment at pre-determined intervals is a concept known as “dollar cost averaging.” This is a popular strategy for some people looking to invest for the long-term.

Cocco said sometimes investors will come to him after a correction and say, “The stock market has been so bad that I am adding in money each month to my account, yet my account keeps going down. I am going to stop adding any new money until things get better.”

He said that’s not an appropriate decision.

“If the market has a pullback — and it happens more than you think — the money you invest will likely purchase more shares of your investment of choice at a lower price point,” Cocco said. “You ultimately want to buy low and sell high, and not the other way around.”

Cocco said that although dollar cost averaging seeks to lower the average price paid for an investment over time, he notes that it doesn’t guarantee any profit and will not act as a protection against loss in declining markets. If you are interested in this strategy, you should consider your ability to consistently invest funds, particularly in declining markets.

You said your 529 is invested in an “age-based” portfolio.

Typically, Cocco said, age-based portfolios are automatically rebalancing to adapt the investment mix to match up appropriately with the remaining time horizon.

“In the child’s younger years, it is more aggressive because the time horizon is long,” he said. “As they approach college, it becomes more conservative as the time horizon shortens, because if there was a steep market correction one to two years before you expect to use this money for your child, you may not have the time to wait for the market to recover.”

Having your 529 plan monies invested in this age-based portfolio is another way to try to mitigate the risk that comes with investing, he said.

Cocco said no one knows when the up years will come or when the down years will come, which is why “staying the course” is often the best strategy, with an eye on investing for your time horizon.

“I always tell my clients that in these periods of volatility, let’s not let short-term market fluctuations interfere with our long-term strategy,” he said.

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This post was first published in March 2017.