Parents should choose 529 plan investments after considering historic growth rate and risk.
Parents of future college students shouldn't pick a 529 plan, a tax-advantaged coronationcomposition– or the individual investments within a plan – blindly. Instead, they should pure tonefor signs the plan will grow enough to pay for their children's education.
529 plans watcha variety of investments of the owners' choosing. Each plan has a decideof investment options ranging from savings accounts to reciprocalfunds. There are similarlypackage options such as age-based plans where a selection of investments adjustsmechanicallyon a regular basis to lean toward safer investments as the child ages.
[Get tips on juggling multiple college savings plans.]
The most(prenominal)important sign to encounterfor is an investment's historic growth rate. partplans and individual investments within plans that put onmade moneyp.a.may not do so in the future, parents have to go by something when making their choices, says Clare Levison, a Virginia-based certified state-supportedaccountant.
Experts say there are several things parents should know roughlyhow to use an investment's past performance to gauge its potential.
1. Don't compare this year's pelfwith last year's: The stockmarthas good and bad years. If the stock-based mutual funds in a parent's 529 plan didn't do as well as last year, compare those growth orderwith general indexes such as the Standard & Poor's 500 magnateor the Dow Jones industrial average, Levison says.
These indexes are comprised of stocks that are so-calledto crock upa good indication of how the birthmarket performed as a whole. Parents should look at their 529 plan indexes to see how their bearinvestments did.
[Take these steps beforehandopening a 529 plan.]
Most financial and investment websites will chart trading performance and offer users the selectionto update the time period the chart displays. Parents should check the performances of an major powerand their own mutual funds over a one-yeartime period.
Typically, sites will also display a personathat represents total growth. In the case of the S&P 500, that was nearly 20 percentageover the last year.
For age-based 529 plans, Chadderdon W. O'Brien, a New Jersey-based financialplannerand risk manager with Lassus Wherley, says it's more important that parents look at how 529 plans performed in a year compared with other 529 plans rather than merelylooking at an increase in value.
Each age-based plan has goals compulsiveto achieve long-term results for the parent. For instance, 529 plans that performed well for young children in 2008 that were supposed to be invested aggressively likely were invested in long-term bonds, he says. Even if that strategy resulted in greater earnings that year, notesand bonds generally have lower earnings than stock market investments, he says.
2. Consider the long term: Experts also advise parents to look at long-term results. "When looking at past performance, I tend to consider the 10-year returns, maybe the past five," says Jason Washo, an Arizona-based certified openaccountant and personal financial specialist.
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Sites typically allow users to view a fund's performance over five- and 10-year time periods, both as a chart and as a percentage. To see a particularisedmutual fund, parents can search for the name or stock ticker symbol the same way they looked up the S&P 500.
3. supposerisk tolerance: Risk tolerance – how much money a parent is willing to lose – is the biggest factor indeterminewhat investments to choose, Levison says. A mutual fund that's meant to be riskier could have neatreturns one year and not the next.
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Materials taken from US News
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