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. You’d choose an age-based option based on your risk tolerance: conservative, moderate, aggressive. These options shift from stocks to bonds as your child gets older and closer to the first year of college.
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 529 account on a regular basis is the surest way to reach your college savings goals.
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
Diversification does not ensure a profit or protect against a loss.