Best investments for college savings
Make sure your educational investments grow with your children
With college tuition rising faster than inflation, stocks are the best investment to help your education-savings portfolio keep pace long-term.
As your child nears college age, the downside risk of stocks becomes more significant, for the simple reason that university bursars won't defer tuition bills just because you lost money in a crash.
Bonds and cash should begin to play an increasingly significant role when Junior hits high school.
Keep your investments simple, and stick to mutual funds that have solid three- to five-year track records and low expenses. You can even opt to have the fund company make automatic monthly withdrawals from your bank account to force you to save.
Most planners recommend that you base your asset allocation on your child's age. If your child is eight or younger, you can keep 60 to 95% of your money in stocks. You can choose a balanced fund, which holds a prescribed ratio, usually 60-40, of stocks to bonds. Or you can choose your own mix of funds and invest proportionately. For help in finding the right mix for your savings goal, try our Asset Allocator.
When your child is between ages 9 and 13, your portfolio should get more conservative, not by moving money out of your earlier investments but directing more of your new contributions to bond funds and tamer stock funds.
For example, if you were putting 90% of your contributions into stock funds, and 10% into bond funds, switch to a 50-50 allocation. If you want to curb the volatility that stock funds can create, put your contributions into equity-income funds, which invest in stocks paying high dividends and tend to ride market dips better.
When your child turns 14, start to shelter the returns you've earned so far. You can do this by moving your equity assets into money market and short-term bond funds over the next four years, so that by the time your child enters college, you are out of equities entirely and can cash out quickly.
If the bond portion of your savings has exceeded $10,000, you may consider purchasing government short-term Treasury notes directly from the U.S. Treasury, to avoid paying any management fees to a fund company.