age-based 529 college funds

[xyglyx]

I currently have my son's entire 529 account in an age-based index fund (CA 2018). He will enroll in college 10-11 years from now. Like all age-based funds, over time the asset balance shifts from stock-heavy to bond- and cash-heavy to lower risk as the child gets closer to college. To do this, I assume the fund periodically sells some of its stocks at the then-market price and uses the proceeds to buy bonds and cash equivalents. (Maybe I'm wrong about that and it works differently?)

Lately I have been thinking. Since stocks have fallen so much recently, it's probably not a good time to be selling them off, if one has faith the stock market will bounce back some time in the next decade. To the extent my 529 fund sells any of its stocks in the short term, it would seem to "lock in" their losses and eliminate any chance of recovering value in those stocks in the future. Assuming this is true, does this mean I should get out of the age-based portfolio and switch over to a fixed-allocation one---for example, one that has 70% equity (stocks) and 30% bonds, and that doesn't change over time? The reasoning being, it would give more time for the stocks to regain value, whereas the age-based fund might sell much of its stocks off while they are still depressed.

Anyone have any thoughts on this?

[Like2Plan]

Originally Posted by xyglyx

I currently have my son's entire 529 account in an age-based index fund (CA 2018). He will enroll in college 10-11 years from now. Like all age-based funds, over time the asset balance shifts from stock-heavy to bond- and cash-heavy to lower risk as the child gets closer to college. To do this, I assume the fund periodically sells some of its stocks at the then-market price and uses the proceeds to buy bonds and cash equivalents. (Maybe I'm wrong about that and it works differently?)

Lately I have been thinking. Since stocks have fallen so much recently, it's probably not a good time to be selling them off, if one has faith the stock market will bounce back some time in the next decade. To the extent my 529 fund sells any of its stocks in the short term, it would seem to "lock in" their losses and eliminate any chance of recovering value in those stocks in the future. Assuming this is true, does this mean I should get out of the age-based portfolio and switch over to a fixed-allocation one---for example, one that has 70% equity (stocks) and 30% bonds, and that doesn't change over time? The reasoning being, it would give more time for the stocks to regain value, whereas the age-based fund might sell much of its stocks off while they are still depressed.

Anyone have any thoughts on this?

Are you sure they automatically sell off the assets--or do they delay it depending on market conditions?
In VA, something interesting happened with one of the evolving 529 funds. In Jan 2009, the Highlands fund (I believe it is 25% stocks and 75% fixed income) was supposed to evolve to 100% fixed income. They announced they were going to delay it due to market conditions (I'm not sure how long).

If you had a fixed allocation, you could control the timing. I think 70% equities is too much exposure for someone headed off to college in 10 years. (The most I would do is 50% in a stable market and I would reduce that incrementally the closer to college. )

[xyglyx]

That's a good question. I recently spoke to a Fidelity representative about this, and while I didn't specifically ask whether they have the option of delaying the selling of stocks in a down market, she made no mention of such an option though she knew I was worried about precisely that (their selling stocks while the prices are depressed).

What you said about the Highlands fund is interesting. At least some fund managers are thinking about the issue!

[simpletron]

there are other ways than selling one asset and buying another to shift the asset allocation. Fidelity could buy more bond/cash instead of stocks with the new contributions. also remember the shifts also happen slowly over time. for CA 2018 it will take 3 years to shift to looking like CA 2015, or on average, stocks drop by 3.66%/year, bond and cash increase 2%/year and 2.33%/year respectively.

I just realized that CA 2018 has 101% of cash, bonds and stocks.

[xyglyx]

Those are good points. Thank you.

For now, I have decided to keep the CA 2018 fund, but channel new contributions into a non-age-based fund. Some months from now, depending on market conditions, I will decide whether to start contributing to the age-based fund again.

[jIM_Ohio]

They could just allocate new money to cash and bonds- there is more than one way to rebalance.

If you signed up for a fund which is managed a given way, trust the management in good times and bad.