As a certified* lifelong money nerd, I’m a member of several personal finance Facebook groups. During the most recent market turmoil I noticed a question popping up over an over again. “Should I sell everything in my children’s 529 plan”? Or the very similar “The market is going down and my kids are going to college soon. Should I sell my college investments”?
Savings and investments for college are different than other investments you might have. Unlike retirement, the date you’ll need to start withdrawing money is relatively fixed and known. And unlike an emergency, you can likely foresee when you’ll need the money. The drawdown period is also short – four years (maybe – we’ll talk about that later). It’s not , the decades you likely will withdraw retirement money. This means your ability to wait out a market correction is more limited. This feels especially urgent if you only have one or two years left until your child goes to college. A significant market correction can wipe out your investments right when you needed them most.
Today, I’m going to talk about times in my investing life where I was faced with volatility, what my family did, and what I learned. I’ll also refresh you on my “Ostrich Strategy”. For fun, I’ll also calculate how it would have worked out today for two theoretical 2018 readers. And I’ll discuss some tips on planning for, and thinking about, savings (and spending!) for college in more helpful ways.
Saving For College In Volatile Markets – Been There Done That
Just a few years ago, I was facing college a year away along with a significant market downturn. In March of 2020, when the pandemic first impacted the US markets, we saw downturns like we hadn’t since the Great Depression. My oldest son was sixteen years old and a high school junior. At the time, of course, I didn’t know what college he would select. I didn’t know whether he would get scholarships. I just knew the market was crashing and college was literally next year. Spoiler alert – it all ended up fine. In fact my issue now is that there’s too much money in his 529.
I know how his college story ended (for now, at least?) but not for my younger two sons. My middle son is wrapping up his freshman year in high school and my youngest is finishing up first grade. The fourteen year old seems trending towards a different path than his older brother. He’s interested in bigger schools, schools farther from home, and in living on campus rather than with mom and dad. And my first grader is still a question mark who is learning to tell time, not thinking about college. So what are we doing with thier college investments given the most recent market volatility?
Nothing different. As per usual. In fact I haven’t even checked the balances on their accounts the past few months. This is per my quarterly net worth process, where I check all my accounts once every three months. Part of the reason I check in quarterly is what I learned during the Great Recession downturn. Watching my money vanish with no idea when it would come back made me nervous. It also made me anxious, and much more likely to want to take some kind of rash action.
Back in the Great Recession, my older two were just little boys. My oldest just started kindergarten, and my then youngest (now middle) was just a baby and toddler. They both had 529 plans that were rapidly losing money. It felt like every deposit only served to try and make up for what I had lost that month. It was really frustrating, especially because we didn’t have a lot of money back then. I was worried it could take a decade or more to recover. Especially since the market was below where it had been in the early 2000’s. But still, I persevered, didn’t look at the balances for a long time, and just left the investments on autopilot.
The Great Recession is when I developed my Ostrich Strategy of just ignoring the market and moving on with life. After I totally ignored the market a few years and just kept investing, I started checking in less often than I had before. I finally settled on looking in detail only four times a year, rebalancing once a year (if that). No matter what was happening with my investments, or how much doom and gloom the media shoved at me.
Let’s take a look at how that strategy works out in the real world. For this, we’ll look at two theoretical readers back in 2018.
Ostrich Strategy In (Theoretical) Action
As part of writing this, I looked back at some of the details of that Ostrich Strategy article. I wrote it in March of 2018 after some volatility in the market. It had started the usual drums of doom and gloom in the press. Let’s pretend I had two readers at that time – Sue and Jane – one who listened to me and one who did not. Sue Ostriched her way into keeping $10,000 invested in an S&P 500 index fund for her son, Bobby, to go to college. Bobby is going to college this coming fall and so she’s going to need the money soon. Sue never put any more money in this fund – she just left it in an S&P 500, allowed dividends to reinvest, and didn’t look at it for years.
Jane, on the other hand, read my article and thought “Hogwash! My son needs to go to college in just four more years and I’m getting nervous watching this money disappear”. Instead she listened to the press talking about how bad the market was. She pulled out the $10,000 she had for her son, Jack’s, college. She stuck it into savings to keep the money safe. Jack is also going to college in the fall, same as Bobby.
So how did their choices turn out?
To calculate how much Sue has now, I used this calculator from DQYDJ. I put in a start date of March 2018 ending May of 2022, $10,000, dividends reinvested. Her return, ignoring inflation, would be 62.937%. This means that today she would have $16,293.70 for Bobby’s college.
How about Jane? Unfortunately with SEO and Google being what it is, it’s hard to find a good list of savings account returns over the years. I was able to piece it together as follows. Please note this is approximate. It’s the result of cobbling together rates from various articles written since 2018:
- 2018 – 0.08%
- 2019 – 0.10%
- 2020 – 0.07%
- 2021 – 0.06%
- 2022 – 0.05%
That works out to an average of 0.072 per year. Let’s be generous though. Jane watches interest rates closely, and moves her money to accounts to always get a yield that’s five times the average. That would mean an average of 0.36% per year.
Today Jane would have $10,152.35.
So Susan has thousands more for college than Jane does. And how does our recent inflation change the picture?
Jane’s money is only “worth” $8,817.87 in 2018 dollars. Meaning she’s lost thousands of dollars of her original money, which she really wanted to keep “safe”, to inflation. Sue’s investment is “worth” $14,151.97 in 2018 dollars. Not only did Sue keep her money safe from inflation. But she’s earned several thousand dollars on her original investment. This money can go towards Bobby’s tuition, room and board, books, or other college expenses.
What else should you keep in mind as you navigate investing in a volatile market? Planning, preparation, and setting yourself up for success is key.
Plan When Markets Are Calm, So You Can Be Calm When Markets Are Crazy
Ever hear the saying “Prior Planning Prevents Poor Performance?” When it comes to saving and investing for college, prior planning is key. Two helpful planning concepts I’ve written about in detail in the past are your Investment Policy Statement and your College Compact.
Since I’ve written about them in detail before, I’ll only do a brief recap here. An Investment Policy Statement is essentially an agreement with yourself on your personal investment strategy. It’s intended to outline what you have, what you invest in, when you’ll rebalance, how you’ll monitor it, and importantly, under what conditions can you change your strategy. This helps keep you calm at both ends of the financial spectrum. It keeps you from jumping into something going to the moon and beyond! (see: Crypto) and to keep you from jumping ship when things go south.
The College Compact, on the other hand, is a concept where you make an agreement on what you will and won’t pay for when it comes to college. It doesn’t matter whether you plan to pay for everything, nothing, or something in between. This document is intended to make sure you’re clear on an actual goal for college saving and investments, and a payment strategy you can share with your kids. Instead of a vague “I want to pay for something but don’t know what” goal.
Evaluate Your Risk Tolerance and Risk Capacity
If the recent market gyrations were enough to make you nervous, you may need to think a bit about what that shows about your risk tolerance and your risk capacity. You may be invested more aggressively than ideal for you and your situation.
People talk a lot about risk tolerance, but less so about risk capacity. Risk tolerance is something personal – how much risk are you willing to take? How much money are you willing to lose? Some people can’t stand losing any money, others are willing to lose it all for the chance to win big (aka gambling), most people are somewhere in between. Many investors are willing to lose some money for the opportunity to make more money, but not willing to lose everything.
Risk capacity, on the other hand, is how much risk you can afford to take given your goal and timeline to get there. If college is next month and you need all your investments to cover the cost, your capacity to take on risk is very low. You need an ultra safe investment because you can’t afford to lose even a penny. On the other hand, maybe college is ten years away and you need significant returns in order to achieve your goal of paying for half your sons college expenses from investments. Your risk capacity may be high because you’ll need to invest more aggressively in order to achieve what you want.
Fact Check: When Do You Really Need The Money, Anyway?
Sometimes we focus on the first year of college as if it’s when we’re going to need everything we’ve saved and invested. Well, college is usually thought of as four years long – but in more than half of cases, it’s longer. So the money you’re thinking of as being needed “next year” may be actually needed two, three, or even five or six years from now.
Depending on how you were planning to use the money you set aside from college, you might be able to use this to your advantage. Say you were planning to divide the investment evenly among the four years. Well, if you want to give more time for your investments to recover, you can take out less in Year 1 and more in Years 2-4 (or 5, or 6…). You can also use this fact to help you remain calm during a market correction.
Adjust Your Plans And Strategy Along The Way
One thing I’ve learned again and again in my investing life is that you need to remain flexible and willing to re-evaluate and change your goals along the way. You just never know what will happen – whether it be a global pandemic, a personal emergency that causes a huge reduction in income, a giant promotion that puts previously unimaginable goals in reach, or any number of other things.
So while goals and objectives for your investment are important, so is staying flexible. If a market correction means you can’t fund as much for college as you wanted – that’s OK. Things happen. It’s not worth beating yourself up for taking more risk than you “should have.” You can’t go back in time and change anything.
Instead – focus on the future. Do you need to adjust your goal? Or instead do you invest more every month to reach your goal? Do you need to plan to take out loans, or have your child take more loans than expected? Can you cover the shortfall from a different account? Or do you need to plan to pay more from your income? Perhaps cutting back elsewhere in the budget to cover? It could be a combination of all of these. The important thing here is to focus forward in a productive way, rather than backwards in regret.
The Bottom Line
I would not personally sell my investments, whether they be for retirement or college or any other goal, as a result of market gyrations. I’ve seen so many ups and downs and multiple “black swan events” in my investment lifetime, that I’ve lost count. I expect we will see more. And they will be totally unexpected and have never happened before. Just like the last one, and the one before that…
I’ll continue practicing that ostrich strategy, planning ahead so I can stay calm when markets go crazy, investing in accordance with my risk tolerance and capacity, remembering when I really need those college funds, and being willing to adjust my plans and goals along the way.
After all, if we’ve all learned anything the last few years, it’s to expect the unexpected.
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