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Here’s the right way to approach college savings and risk.
Question: I’ve heard that any money I need for a specific expense doesn’t belong in the stock market. By that logic, isn’t it a bad idea to invest the money I’ve saved for my kids’ college education?
Answer: You aren’t alone in your reluctance to invest college savings. According to a report by Sallie Mae, 30 percent of parents choose to stash their college savings in a savings or checking account earning little or no interest.
You’re absolutely correct that you shouldn’t invest money you need for a specific expense. However, that common recommendation applies mainly to near-term expenses.
My suggestion is to approach college saving in a similar way to saving for your own retirement. While your child is more than a decade away from college, you have time to ride out the market’s ups and downs and therefore can take on a bit more risk.
For example, my daughter is 15 years away from college, so her college savings account is invested in a relatively aggressive portfolio. While it’s certainly possible, it’s highly unlikely (based on historical performance) for stocks to produce negative returns over a 15-year period.
On the other hand, just as you should do as retirement gets closer, as your child gets closer to college age, their portfolio should gradually shift to a more conservative fixed-income or even cash-based portfolio. If you save for college in a 529 savings plan, there typically are investment options available that will do this gradual reallocation for you.
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