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Shortly after my daughter was born, I opened a direct* 529 account for her through Ohio College Advantage. The entire process, not including the time it took to review the investment options, took about ten minutes.

The most time-consuming part of the process was deciding how her account would be invested. With the direct plan there are several options to choose from.

Ready Made Risk-Based Portfolios

The risk-based portfolios are just that, portfolios based on your tolerance for risk.

If you ever want to change your allocation you must do this manually. This isn’t a bad option if you want to start out more aggressive and then dial back some of the risk over time.

Sounds easy enough, crank up the risk while they’re young and flip a switch at some point before college to take some of that risk off the table.

The first, and arguably the most difficult thing about a strategy like this, is the psychological part of dialing back risk. If your child is a few years away from going off to school and the stock market is on fire, are you going to be unemotional enough to sell off a portion of the stock allocation when stocks are doing well? You know the good times will eventually end but it’s impossible to know exactly when. And it doesn’t always feel great to sell out of something that’s doing well and put your money into something that isn’t, even though doing so is exactly what you need to do to buy low and sell high.

Then you must decide on a new allocation you can live with for the remaining years before college. What does that look like? Is it 50% in bonds and cash and 50% in stocks? Is it more? Less? How do you decide?

If you’re going to choose one of the risk-based portfolios, be careful not to set it and forget it unless you are prepared to live with that allocation in good times and bad.

Ready Made Advantage Age-Based Portfolios & Vanguard Ohio Target Enrollment Portfolios

These two options are very similar but have a few key differences.

They are both professionally managed portfolios of stocks, bonds, and short-term investments. They automatically adjust the level of risk over time from aggressive to conservative as college age nears. They are the so called ‘set it and forget it’ options.

These can be a good choice because they remove the psychological barrier that can exist when it’s time to take risk off the table.

The Advantage Age-Based Portfolios try to outperform the market through a mix of active and passive management. Part of the portfolio is managed by professional investment managers and part is invested in passive index funds for diversification and to keep fees lower.

The Vanguard Ohio Target Enrollment Portfolios are invested in Vanguard index funds. The goal is to match the performance of the benchmark (i.e. the S&P 500) for each part of the portfolio. These funds have lower costs than actively managed options.

These are both good options if you do not want to take an active role in managing the allocation in the account over time. Which one you choose really comes down to how you feel about fees and your investment philosophy.

Active managers have a difficult job, to outperform the market. There are some really smart people out there trying to do this every day, but the data shows that most of them fall short the majority of the time. In the short-term it’s more like a coin flip, but over the long term the winner is typically the passive investor. According to Morningstar, over a 10-year period only 25% of all active funds beat their passive counterparts.

Create Your Own Allocation

The fourth and final option is to create your own allocation using a combination of the fifteen individual investment options available. There’s some additional work required here, like when choosing from the risk-based portfolios.

You first need ask yourself what allocation you’re comfortable with now vs. what allocation you’ll be comfortable with as your child nears college.

Second, you’ll have to remember that if you’re dialing back the risk prior to college you should have a strategy for when and how to do so. When it feels right is not a strategy.

The last step is to determine when you’ll rebalance back to your original allocation. Unlike the other portfolios, that are periodically rebalanced back to their original targets, a hand-picked allocation will fluctuate with market movements over time, and without a rebalancing strategy in place you may be left with more or less risk than you intended.

As with anything related to saving and investing, there’s no one size fits all approach to college savings, whether that’s choosing the investments or deciding how much or how often to contribute. If you need help or have questions about setting up a direct 529 account, please reach out to your TAAG advisor.

*CollegeAdvantage offers an ‘advisor sold’ plan option and a direct option. This blog refers to the direct plan option.