Time to change your 529-plan portfolio?

  • Once this year is over, switches will be restricted to once a year.
  • Many age-based plans lost 20 to 30 percent of their assets.
  • Review your plan the same date each year to consider changes.

Many parents and grandparents took major hits to their college savings as the market melted down -- especially those who invested in agebased portfolios.

For the rest of the year, however, Congress is giving them a second chance to make corrections to their investment strategies.

In the recent market meltdown, many investors in age-based plans lost 20 percent to 30 percent of their investment in some cases two years in a row. And returns for the last year on an average annual basis remain ugly, despite the recent market uptick.

North Carolina's age-based plan performance over the past year is a good example. In the 12 months ending June 30, 2009, the state's aggressive age-based plan lost 24.2 percen, the moderate plan lost 17.64 percent, and the conservative approach lost 11.75 percent.

Just out!'s Top Performing Plans for Q2 2009
"The college funds that are age weighted became too aggressive to make their returns in the past several years," says Christine D. Moriarty, Certified Financial Planner and president of MoneyPeace, a financial planning firm in Bristol, Vt. "They swayed from their true goals. The old adage 'buyer beware' works with these funds. Know what you are buying. Do not simply buy at face value because of what the product says."

The theory behind age-based plans is to invest aggressively when the beneficiary the child who will be going to college is young, then shifting to more moderate investments at age 9 or 10 and finally getting more conservative at high school age. But there's a ton of variation in terms of what is aggressive, conservative and moderate, and even if you've got 10 years before college, a 24.2 percent loss is hard to take.

Uncle Sam to the rescue

In response to those losses, Congress is allowing 529 plan custodians to change investment options twice in 2009, but once this year is over, switches will be restricted to once a year. Limits on how often you can change investment options means you have to act with care when selecting 529-plan investments.

Considering the depressed state of age-based accounts, it may be time to consider building your own 529 plan investment portfolio. While building, implementing and monitoring such an approach requires more time than using an age-based plan, it gives you more control over your investment and allows you to craft a portfolio more finely attuned to your individual risk profile.

Declines in college savings portfolios are especially painful for parents and grandparents who have to build retirement and emergency funds, so dollars lost to investment declines are hard to replace. Extra pain resulted for investors who thought they were pursuing the safer course by shifting their money into more conservative investments and away from individual funds.

"The issue goes back to choosing your investment options correctly the first time and then staying with your decision and not reacting to what's going on in the market," says Bruce Hagemann, executive vice president and national sales manager for BBVA Compass Investment Solutions, in Dallas. "If you're conservative, you need to be conservative from the beginning," says Hagemann. "If you weren't, and took losses, there's not much you do about that at this point."


Setting investment goals

The key to success in any investment-related endeavor is setting clear goals, says Hagemann. If you know what you're trying to achieve and figure out a sensible way to get there by assessing your risk tolerance, you'll be in better shape to handle the difficulties of the market. Many 529-plan and other investment sites have questionnaires designed to help you make these decisions.

If you're unable to tolerate a lot of volatility in your college savings investments, it's better to invest conservatively, especially since you can't change your investment options as often as you can in other types of investment plans, such as retirement plans. On the other hand, if you are willing to take more risk in the hopes that your investments will provide larger returns, you'll likely be more comfortable with more aggressive investment options, at least when your child is younger.


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