Different asset mixes meet different needs
The right asset mix for you should balance your child's age and your comfort with risk.
529 investments & the new tax law
Under the new tax law, 529 plans now allow for federally tax-free distributions for K-12 expenses. However, 529 plan age-based investments are generally designed for college savings and may not be appropriate for K-12 time horizons.
Finding your asset mix
Choosing investments isn't a one-size-fits-all kind of thing. However, there are certain broad principles that apply to picking an asset mix.
Your asset mix should align with your personal situation: how much time you have until you'll need the money, and how much risk you can take and still sleep at night.
Age-based options meet these needs because they're based on your child's age (and, by extension, when he or she will be going to college) and your choice of an aggressive, moderate, or conservative risk level.
Here's how these pieces of information are used to create an asset mix.
1. When do you need the money?
If you've just had a baby, you've got 18 years to let your money compound—and to ride out any temporary downturns in your account balance. So you can afford to take on a little more risk in the hopes of getting higher returns.
If you're starting to save when your child is already in high school, however, you won't have much time to wait for the market to bounce back if it should hit a rough patch. You also won't have as much time to benefit from compounding. In this case, you're better off in an asset mix with lower risk.
2. How much risk are you comfortable with?
Some people can easily ignore day-to-day changes in account balance that sometimes come with more aggressive investments. Instead, they focus on their overall progress toward their goal. Others stay awake at night fretting about what their investments will do tomorrow.
It won't do you any good to constantly worry over your investment decisions, and it probably won't be much fun either. So choose only a level of risk you know you can stand.
Putting it together
Our experts take decades of data on market returns and behavior to find the asset mix that makes the most sense for each combination of age and risk.
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Choose investments for your goal
The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments.
Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
An aggressive portfolio is subject to a relatively high level of investment risk. Because risk and reward are related, an aggressive investor can also expect returns that are, on average and over time, higher than those of someone with a moderate or conservative portfolio.
A moderate investment is neither very aggressive nor very conservative. Because risk and reward are related, a moderate investor can expect returns that are, on average, neither very high nor very low.
A conservative portfolio is relatively safe from investment risk (although there's no guarantee it won't lose money). Because risk and reward are related, a conservative investor can also expect returns that are, on average and over time, lower than those of someone with a moderate or aggressive portfolio.
The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.
When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In the example above, you'd earn over $800 in the 18th year.