Time to change your 529-plan portfolio?

Crafting a 529 portfolio

If you want to avoid age-based plans, you usually have at least two options in creating and managing your own 529 account:
  • Asset-allocation portfolios, which blend several mutual funds together to achieve a targeted mix of stocks, bonds and money market funds.
  • Single-fund options, in which each portfolio is invested in a single mutual fund whether that be a stock fund, bond fund or money market fund.

Typically, if you invest in an asset-allocation portfolio, you'll place 100 percent of your investment in one portfolio, just as you would place 100 percent of your investment in an age-based plan if you wanted to go in that direction. On the other hand, if you pick single-fund options, you'll probably want to choose more than one, so you'll need to decide what percentage of your assets go into each fund.

In Moriarty's opinion, there are some rules of thumb to keep in mind when crafting a college-savings portfolio because of the time-limited nature of college savings. "If your child is within two years of college, most of the money should be safely in bonds and cash."

"This is not the time because of the age of the child to invest in the stock market," she says. "For years I've said 'If you need money in three years, keep it in cash. If you need money in three to eight years, keep it in bonds. The rest can be in the stock market.' Yes, you may not make as much, but you do not have the time to make up the money if you lose it either."

In a portfolio offered by a 529 plan, the plan puts several funds together to achieve a particular investment purpose. For example, a conservative portfolio might have a stock fund, a bond fund and a money market fund. An aggressive portfolio might have a U.S. stock fund and a foreign stock fund.

The number of single-fund options depends on the plan, but you typically want to mix and match at least three or four funds to have a diversified portfolio. When selecting among single-fund options, aim for some diversity -- if you're looking at putting a stock portfolio together, you could pick a growth fund, an international fund and a value fund to give you exposure to different sections of the market.

Managing your 529 portfolio

Once you set up your account, whether it's composed of single-fund options or an asset-allocation portfolio, you should check it on a yearly basis to ensure it is accomplishing the initial goals you set and decide if any changes are needed as your child gets closer to college.

Look at performance, investment objectives and fees. See if your underlying funds have performed as well as or better than a market index during a particular period. You can generally find performance information on the Web site of your 529-plan sponsor and in reports mailed on a quarterly basis.

With an asset-allocation portfolio, you want to make sure the funds included in the portfolio have not been changed, and if any have they should be as similar as possible to the old ones in terms of investment objective. You don't want an international stock fund, for example, replaced with a bond fund. As for costs, the lower the better -- if either the percentage of your assets charged for fund operations or any fees charged by the 529 plan itself rise significantly, you may want to make a change.

As your child gets older, you may want to change your investments so that you don't lose a large sum of your investment a few years before you need to spend the money on tuition, room, board, fees and other college expenses. Remember that you can only change investment options once annually (after 2009), so consider setting up a specific date each year to review your objectives and the plan to decide whether to make any changes.

"The restriction on changing investments once a year was set up, I think, to keep parents from moving in and out of the market," says Hagemann. "This is like any other investment, where you need to look at your risk tolerance versus the length of time before you need the funds. The tendency can be to be more aggressive with investing, but I think with college funds it makes sense to be more conservative."


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