Managing a College Investment Fund

Saving for a child's college years is often an important part of a family's overall saving and wealth-building plan. When I review a client's individual wealth plan, I often find that college funds are neglected once they have been set up.

With college tuitions averaging just over $7,600 for in-state students, the sooner you begin to set money aside, the longer it has to grow. It is not enough to simply set up an account when your child is born and dump money into it every month, however. Whether you choose a registered 529 or Coverdell plan or a regular savings account, you have choices over the types and mix of investments in the fund. The type of investments you choose determines the risks and potential rewards of the savings plan and this changes at different stages of your child's life.

15-10 Years From College Entrance

When you have at least 10 years before your child goes off to college, your mix of investments in the fund can include more long-term investments, such as stocks, equity-based mutual funds and ETFs. Over time, the stock market delivers larger returns than bonds or interest-based products. With longer time horizons, the college fund can withstand any temporary downturns in the market that could decrease the balance of the fund in the short term.

An easy way to include exposure to the stock market in your child's college fund is through ETFs (exchange-traded funds). These funds consist of stocks, bonds and other market offerings and often mirror the investment returns of market indices, such as the S&P 500. They are similar to mutual funds but often carry fewer fees.

The benefit of investing in an ETF over individual stocks is that the fund smoothes out the risk of individual stock movements.

9-3 Years From College Entrance

As your child gets older and you begin to get closer to the time the college fund will be needed, it is important to begin to lock in some of the investment return in the fund and lower the overall risk. The closer you get to needing the funds, the less time the fund has to recover from market downturns. Part of the fund should be invested in guaranteed investments, such as government bonds and GICs (guaranteed investment certificates). These investments are locked in and will not drop below the original investment. Although they are not likely to return as much of an increase as equities can, they begin to anchor the college fund in safety.

2-0 Years From College Entrance

Once there are less than two years until your child goes off to college, it is time to convert most, if not all, of the fund to safer locked-in investments. Review the balance of the fund and compare to average tuition and living costs. If the fund will be used over multiple years, you can stagger the maturity dates of your fixed-income investments. For example, if your fund now consists of GICs, you can have 1/4 of them mature just before first year tuition needs to be paid, 1/4 mature the next year, and so on. The longer the locked-in investment period for each GIC is, the higher the interest rate. Staggering the maturity dates maximizes the return while guaranteeing that the money will be there each year when needed.

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