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Investing Your Money

By Harold Simansky
Educational Investment Advisor

If you’ve been reading this series of articles from the beginning you have hopefully figured out how much you need to save your children’s education and maybe even identified the right savings vehicle for your needs (like a 529 Savings Plan). The question facing you now becomes: “What is the most appropriate way to invest our money – how much should go into stocks, bonds, cash, international investments, or something else?” In many ways, this issue of “asset allocation” is the most important investment decision you make. Here are a couple of tips.

Tip #1: Worry about the mix, not actual assets

A famous study released a couple of decades back found that the key factor in how investments will perform over time is the mix of stocks, bonds and cash you choose. As it turns out, this mix - or asset allocation - is even more important than most people think.

The study concluded that some 94 percent of an investment portfolio's performance is tied directly to asset allocation. This means that the individual stocks, bonds or mutual funds you pick are a far less important factor than, for example, the decision to choose stocks as a category rather than bonds or cash.

This finding, of course, flies in the face of how people tend to invest. Typically, investors spend an inordinate amount of time choosing among different stocks, stock mutual funds, bonds or bond mutual funds. The result is running from one "hot" fund to the next, while the entire portfolio suffers. And in the course of this painstaking activity, they miss the more important picture – which is, figuring out the right mix.

Tip #2: Consider your child’s age

The combination of stocks, bonds and cash that is right for your education savings portfolio depends on how old your child is right now and how many years of investing you anticipate. If your child is young, and you have many years of investing ahead of you, you can be more aggressive loading up on more stocks and less bonds. But if your child is only one or two years away from college, stocks are less appropriate for you and you will be better served by holding far more cash and bonds.

Given the importance of asset allocation, below are some recommendations for an appropriate mix. (These recommendations should be viewed as a general guide and not as the rendering of specific investment advice. In general, you will find they look very similar to asset allocations found in most “age-based” portfolios offered by 529 Plan providers.)

Current age of child

0-3

4-7

8-11

12-15

16-18

Stock

60% 40% 30% 10% 0%

Bonds

25% 50% 65% 90% 67%

Cash

0% 0% 0% 0% 33%

International Stock

15% 10% 5% 0% 0%

While some might consider these asset allocations conservative, overall they should serve you well when investing for your child’s education. If you are more conservative in your approach to investing, you might choose to hold more bonds and cash and less stock. Investors wanting a more aggressive approach could hold more stock – particularly international stock – and less bonds and cash.

Once again, the asset allocations suggested here are simply to be used as a guidepost to your investing choices. At the very least, they should prompt you to ask questions about the advice you may receive when allocating your assets and those of your child.

Article #8 -
Prepaid 529s: Another Option?


About the Author

Harold Simansky is the founder of Educational Investments, LLC, (www.educationalinvestments.com) a Registered Investment Advisory firm focused on helping families save for education. His book, College Costs How Much?! The Workbook to Help You Save for School, which explains the financial aid process, is available at www.CollegeCostsHowMuch.com. You can send him an e-mail at Harold@edinv.com.




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