Some Thoughts on Investing For Your Kids

As I mentioned before, I started saving for my children’s college education as early as I possibly could – in mid-2005 for my son and in mid-2007 for my daughter. In each case, I opened up a 529 plan with myself as a beneficiary as soon as we knew the child was coming, then I changed the beneficiary to the child as soon as the child arrived – this allowed me to start saving prenatally.

What’s a 529 plan? “A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. It is named after section 529 of the Internal Revenue Code.”

Since my investing goal was a pretty long term one – college is at least fifteen years away for them, even now – I chose an aggressive portfolio for the investing – 90% stock index funds and 10% bonds. I then set up an automatic investment plan – $100 a month for each of them.

Notice the start dates, though – mid-2005 and mid-2007. In each case, my investments for their college education caught the full force of the recent stock market downturn. I’d log on every month or two to check on the investments to find that the balance had gone down, even after the contributions.

If it were simply an investment for my own retirement, I could internalize it with no problem. I can stomach losses for my own future, because I’m secure in my own knowledge that over the long run, the tendency of a diverse stock investment is to go up.

But I would look at the terrible 529 investment return, look at the pictures of my kids on my desk, and I’d feel guilty.

Pictures of my kids on my desk

“I’m putting aside money for their future like I should be, but it’s falling through my fingers like sand. Their future is slipping away,” I would think to myself as I looked at the pictures, and I’d be sorely tempted to change that investment around to put the money into something more conservative.

It is incredibly easy to let emotions get in the way of rational choices when you’re a parent. You see your children so full of happiness and love, yet still dependent on you for so much, and you want desperately to ensure that they’re safe and that a bright future awaits them.

But emotional investing is the most dangerous kind of investing. When you invest with your emotions, you try to time the market. You sell late into panics and buy late into rallies. You often undo many of your earlier good choices. And, in the end, you’re left with much less than you would have had otherwise.

Instead, if you’re investing for the long term, you’re far better off removing your emotions from the equation as much as you can. Set up an automatic investment plan, sit back, and wait. Make adjustments only because you’re moving closer to your target date, shifting to more conservative options as the big day arrives (or, even better, invest in a plan that does this automatically for you). Look at the balance if you’d like, but don’t let a few poor balances cause you to make radical changes.

In short, be patient.

I look at those two pictures on that desk and I see two young children who rely on me to make many decisions and choices for them. I invest for them, of course, but I also do things like prepare their meals, help them get dressed, and regulate how much candy they can eat and how many DVDs they should watch. As much as I love them and want to maximize their safety, sometimes the best choice isn’t the one that my heart yearns to make.

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  1. Maureen says:

    Awww. Your kids are adorable! Good for you for planning ahead for them.

  2. Luke says:

    Trent, I’ve been equally worried about my kids’ 529 plans here lately. I’m invested in the same allocation mix you are, but my kids are older, and I got a later start. I worry that there won’t be enough, even if the market recovers fully before my oldest is college age. But, we’ll stay the course. At this point, cashing out and going conservative is not an option.

  3. “But emotional investing is the most dangerous kind of investing.”

    You really nailed it there.

    The unfortunate thing is that so many other parents don’t have the knowledge/confidence necessary to stick it out.

    They’re bailing out and moving their 529 accounts into bond funds/money markets at exactly the worst time.

  4. Baker @ ManVsDebt says:

    This is something I struggle with as well. My daughter is only 1, but we really feel bad about not having a 529 going for her yet. Our current plan is to keep the focus on our debt, before saving for either retirement or college. And retirement would certainly be above college.
    Thinking about this really motivates us to accomplish our other goals, so that we can get on to saving for her future!

  5. Johanna says:

    The author of another blog I read had a very scary experience with her young daughter being stalked by a pedophile – she thinks he may have been “inspired” by pictures of the girl that she had posted on her blog. So – as cute as they are – please be careful when posting pictures of young children online.

  6. et says:

    I’d like to mention (as a parent of a child already graduated from college) – if you think your child will still need financial aid (or possibly qualify for scholarships/grants based on financial need) in addition to your savings, it may be advisable to put savings in the parent’s name rather than the child’s. When financial aid eligibility is calculated based on the FAFSA, the percentage of the parents’ $ assumed available for paying for college is (I believe) around 3% but the percentage of the child’s is around 17%. I don’t know whether the 529 accounts are separately considered (they came along too late for us to use), but you might want to look into that sooner than later.

  7. aura says:

    Hey Trent,
    I have had a 529 for my son since he was 2, now he is ten, it is losing money, too. I decided to continue putting the $25 per month, despite the economy because it is probably a good deal now. Although I stopped the contribution in Nov til this month I restarted. I feel wary too. Am I throwing my moolah down the toilet? I don’t think so, I think setting this money aside for him will pay off, and there is still 8 years to go until college and I think the economy will be turning around in a couple of years, but I do worry if that money will come right back.

  8. Good for you for getting started so early and setting such a great example for your little ones. You’re already ahead of the game, even if the investments have taken a hit.

    We haven’t invested anything for the kids’ educations. But, since we can’t help monetarily, we’re definitely investing in helping them participate in activities and get amazing grades so that scholarships will be available to them when they’re ready for college.

  9. Jennifer Millmore says:

    How old is that high chair your daughter is in? It looks too old to be safe.

  10. SJ says:

    This reminds me of an American Dad episode.

    it’s easy to take things in stride when it’s just me… it’s a lot harder when it affects our loved ones =)

  11. mads says:

    Thank you so much for this information. We have been preparing for a new arrival and have tons of questions.
    Can you please provide more details on 529s – the different types and their differences, on whose name to start one (parent or child), which state to start one in (the state you live in or the state where you hope your child will study- what are advantages and disadvantages of each.) Will having a 529 reduce chances of getting scholarships etc? Can you refer me to a good site/book that will help us answer these questions. Thank you!

  12. Tony says:

    Great advice. I talk to so many people who have pulled all their retirement money out of stocks and low return guaranteed accounts or money markets. They are missing out on opportunities to buy shares at extremely low prices AKA dollar cost averaging.

  13. Courtney says:

    I’m curious as to why you chose a 529 vs an ESA….

  14. Brendan says:

    Trent,

    Pretty timely, I was going through the same thing when I recently reviewed the latest statement from my daughter’s 529 plan. She’s only 18 months and I’m not worried yet, but it does sting to see the amount lost in the account that is for her. But I keep the thought in the back of my head that these downturns are historically followed by great up swings and she’ll be well poised to benefit from that.

  15. AaronO says:

    I started an RESP for my 6 month old son about a month ago. His grandparents have contributed some money along with my monthly contributions. I chose an agressive mutual fund with a 10% return rate since inception (even with the -30s return rate the last year or so) I am hoping that I caught the market close to the bottom and will benefit from the upswing. With that being said, he still has 18 years to go so there will be many dips along the way.

    I was against saving for his education at first because I had to pay for my own education… I didn’t want him to be spoiled. But now that I know more about RESPs, I have options if he decides not to go to school or we have more children. Plus the government of Canada contributes up to 20% (to a certain amount) so it really makes sense to follow through with an RESP. I want the best for him and education should be a right and not a privilege. If it turns out that he doesn’t go to school or need it all, I can transfer it into an RRSP for myself.

  16. Money Beagle says:

    You’re doing the right thing. Our first child is on the way in a month. I haven’t opened the account yet but will do so once he/she is born. With any type of investing, it’s always risky. Still, the fact remains that you’re making progress and putting something aside that many people won’t have when they start college.

  17. I have always preached on the topic of emotional investing and its negative implications. You cannot get anything done if your going to be irrational. You really hit that topic well – patience is the key to a solid investment strategy. Any other way and you might as well throw money in the toilet!

  18. Being patient is the traditional advice given out by professionals. And why do they do that? First because they have no idea how to really ake money in the stock market. they are like everyone else and do the best they can.

    Second, they don’t want you to recognize that you don’t need them and can make investment decisions yourself.

    Third, they want a continuous stream of future money from you, so they can collect their cut.

    I’m not familiar with 529 plans, but unless there’s some special tax feature, is it really different than saving in a ‘regular’ account?

  19. ChrisB says:

    My wife and I decided to put our kids’ savings in accounts in our own names… more flexibility for them (what if college isn’t what they’re called to?), and more tax-advantages for them as well. Of course, it means a tax-*dis*advantage for us, but given our income (~$50k), and with four kids, we should be okay enough that we’re willing to pay.

  20. Karen says:

    Your not alone, Trent. My 2 year old’s 529 lost 40% last year since he was 90% in stocks. It was painful to watch but I sucked it up and put more in. He has 16 years to recover : )

  21. Yuliya says:

    Eric Tyson suggests only looking at accounts once a year or so. That would make it easier to not be emotional.

  22. FupDuckTV says:

    I personally have avoided 529 plans like the plague. Say after 12-18 years of investing for my children’s education, they up and say I’m going into the military or I’m not going to school. Crap, now I have all this money locked up in 529 plans. The advice I was given, (if you haven’t maxed out your contribution) put the money into a Roth IRA, that way you can draw out the principle without penitalty if you need it. (I’m not a financial investor, but I trust my money to Bernie Madoff).

  23. CathyG says:

    You really need to decide IN ADVANCE to choose a date when your child is close enough to needing that money to TAKE IT OUT OF STOCKS and put it into something safer. I won’t pretend to know what that timing is, but please make sure you do it.

    Our stocks took a long time recovering from the 2001 downturn so we felt like we needed to let them grow a bit more, but we lost the equivalent of 3 years of private tuition/fees in the past year, and we are now scrambling to find money to get our 2 girls through college – one is halfway through, the other is just starting next year.

    So please, while your kids are still toddling around: read around to find the advice which tells how many years prior to needing it is a pretty safe timeframe, make a calendar reminder for that date, then TAKE IT OUT and put it into safe cash investments.

    And then don’t look at the market again until they graduate. It might go up pretty high and you’ll feel like you missed out, but it might crash and take everything with it.

    Pleae learn from my hindsight.

  24. I just wanted to say that it was lovely to see pictures of your kiddos…I don’t think I’ve ever seen one of your daughter!

  25. viola says:

    Trent, if you’re really concerned about their future and can’t stomach the current turns in the market, invest in CDs and roll them over. Will your return be less? Yes. Will their future be safe? Definitely.

    The promise of higher return and taxable deduction is more attractive to you than the real security of low-return but safe options. That doesn’t make you a bad person, I’m just being honest.

  26. Nick says:

    Regardless of how well (or poorly) you invest this money for your childrens’ education, you are still going to be giving them something that many families across the country are simply unable to give their children.

    My dad was able to save money (and put aside money my grandparents gave for that purpose) into a savings account throughout my life. He moved over half of it into aggressive mutual funds when I was in Junior High. Junior year of High School was when 9/11 happened and, well, you can guess what happened with those mutual funds around that timeframe.

    We took a gamble and left it in those funds and used the portion that was in savings first, waiting for the funds to recover a bit before using them for tuition.

    I’ve never done the math to analyze those decisions (mainly I was too young to understand) and I don’t really care to because everything turned out alright in the end. The money left didn’t quite cover college, but we made it through with scholarships, luck, hard work, and a tiny bit of help from family. Other people I graduated with had over $100k in student loans and I felt blessed to simply graduate flat broke. (Literally – the last month’s living expenses were put on my credit card and paid off with my first paycheck.)

    My dad did the best he could with what he knew at the time and I’m thankful for that.

  27. Jamie says:

    Everything is going to be fine. My parents could never afford to pay for my college education at all. This fact only motivated me to work harder in high school. I ended up getting a full ride to a state university. Clearly you care deeply about your kids. Your love and involvement in their lives will help them succeed more than anything.

  28. My parents invested enough to cover the entire cost of my university education. I start in October. About two or three years ago, they sat me down and talked through my university fund and said that they were taking it all out of the stock market and putting it in fixed-rate bonds so it’d be safe and I could access it when they matured (which is evry soon now!) and was I OK with that? I personally think they left it a little late, but then I’m very conservative with investing. You just have to think about how long they have to recover their value.

  29. Patience is a virtue indeed. If I had a fixed amount of time like 15 years, I wouldn’t put it all in stocks. Maybe, if I could find a CD yielding 5% for 15 years I could put 50% in CDs and 50% in stocks. That way in 15 years my CD will be worth 10K ( assuming reinvestment at 5% annualy) and hopefully my stock index funds won’t go to zero..

  30. Michele says:

    I invest $2000 per year for each of our children (age 7, 4, and 2) in an ESA account. If I were to put in more than that, I would use a 529. I am probably more conservative than most, though. The majority is in CDs earning 4%-5% interest, with a small percentage (about 15%) in a stock mutual fund. I know I am losing out on potential returns, but frankly I don’t think 18 years is that long of a time horizon to weather the ups and downs of the stock market. I guess I’m one of the few people who actually did not lose money on my kids’ college education this year. Of course, I know it might not hold up in the next 11 years when my oldest goes off to school. But I am happy with 4-5% tax-free returns.

  31. joan says:

    I was putting money into my 401K, and the money just kept disappearing. Were there more stocks, No, there were fewer. So, how can money that isn’t there anymore, or stocks that aren’t there anymore rebound? Please explain to this blond how my 401K can ever regain the money it lost.

  32. Bill says:

    Way too much stress around all these struggles with saving…saving…saving. More creative approaches like attending community colleges,access to online courses and living at home can make huge differences amounting to tens of thousands in savings.

  33. I agree that it can be very frustrating investing money regularly only to see the balance stagnate or drop. But I really think you’re doing the right thing for you and your children. I think years down the line when your kids are getting ready for college you’ll be happy you stuck to your plan and invested regularly.

    -Gen Y Investor

  34. Sandy says:

    I’m super conservative when it comes to things financial. From the time my oldest (now 15 1/2)was a baby, I started buying savings bonds, our state also had a Tuition Gauarentee program we bought into til it closed additional contributions, we also opened CD’s making 4% for 60 months, plus we have stock from the company my husband works for. When I got the annual statement from the Tuition Guarentee program the other day, I perused the stock market, bond market, and money market funds and their returns over the years since inception. Funnily enough, my little savings bonds and CDs have made more than ANY of the stock and bond holding made. I feel real sorry for all of those who put their money on stocks, thinking it will never go down. Many friends of ours with kids close to college age like mine are really upset, as 3 years is too short to make all of that back up.
    For me, slow and steady wins the race. And my girls will have a good education without (hopefully) much in the way of debt at the end. Check out what your state might offer in terms of Guarenteed Plans, and eye up their CD rates if they offer them.

  35. Sarah says:

    I’m kind of shocked by all the people preaching putting the kids’ college tuition in bonds or CDs as the “safe” choice.

    Honestly, have you people heard of inflation? Do you not understand that college costs have outstripped even inflation by a substantial margin in the last twenty years or so? We are in a peculiar spot right now, but in general if you are lucky enough to be getting 4% on a CD you are actually losing money with respect to the growth in college tuition. It’s not “safe”; it’s effectively a *loss*, even if it doesn’t look like one because the numbers are going up on your statements.

    The college saving timeframe is an awkward one. I’m not sure anyone has the ideal strategy for saving for those costs. But people should not kid themselves that going into CDs or bonds is the “safe” choice, nobly eschewing greater possibility of gain for solid returns. Slow and steady doesn’t win the race when the finish line is receding faster than you’re advancing!

  36. Reflection says:

    Everyone needs to remember that with stocks, you don’t lose money until you sell as long as that stock doesn’t go to $0. Hopefully the 529 is fairly well diversified or invested in some sort of fund rather than individual stocks. If that is the case you may be seeing a decrease in value right now but if you sell and move to something conservative you are merely locking in your loss. If, on the other hand, you hang in there and continue to contribute you are essentially getting a discount on your shares. (What once cost you $100 now costs $50, that’s 50% off!) When the market recovers eventually (and odds are in the next 15 years it will do so) you have more shares and it allows your earnings to be much higher.
    Good for you for holding your ground and keeping your heart out of the decision!

  37. Sandy says:

    I can see yourpoint, Sarah, but MY point is…I now have the money in hand, whereas my friends who put it in the stock market for their kids education DON’T. They have lost way more than they can make up in a couple of years. While we have always earned a low rate, at least it is always in the plus column, year after year. Yes, inflation is always a concern, and college prices do rise. But, when the time comes to start writing checks out to colleges, we’ll be able to just cash in these options and do it. Our friends will just have to borrow more, as the stock market likely won’t give them all their money back so quickly. And then they will be paying not only what they lost in the market, but perhaps a high interest rate on the loans that they will have to pay off over time.
    As it is, also, we’ll have our mortgage paid off before my eldest in in college and the cash flow will be there for any additional costs that inflation creates. We’ll finish with 12 years worth of mortgage payments…not so bad, I think.
    There are many ways to do college costs…We picked what works for us (safe investments and prepaid mortgage + what the girls have saved over the years and parttime jobs). Good luck to everyone with kids! Choose what works for your family! My hope is that my girls can graduate debt free (and they will be contributing, too!)so that they will have choices in their futures. Not just a mountain of debt with their brand new degrees.

  38. You hit it– patience!

    As for the hit the accounts took, your kids look young enough for the market returns to come back a bit . . .

  39. Sarah says:

    “But, when the time comes to start writing checks out to colleges, we’ll be able to just cash in these options and do it.”

    Except that you won’t ordinarily have enough money, Sandy. If you can come up with the extra cash through other means–in other words, if you aren’t relying on the investments and their growth being enough for you–then you obviously have the luxury of not worrying so much about return. But that is not the scenario that most people are looking at. Why do you think the states closed those guaranteed tuition programs? They were too expensive for the state.

    The “safe” route is not a route which is effectively guaranteed to lose you money. Estimates of annual increases in college costs over the past few years have been 6-8%. Seriously, do you not understand that if you are getting a 4% return on your CDs (before taxes, if not in a 529!) you are effectively thus losing 2-4% on your college investments each year? Your strategy wasn’t the “solid, conservative” strategy, it was the “take a loss and hope we can make it up elsewhere” strategy. Your friends in stocks weren’t greedily chasing high returns, they were just trying to keep up with the rising costs.

    The fact is, there’s no good solution for college investing.

  40. Sandy says:

    Why are you so sure that we won’t have the money? I’ve never had the intention of 100% college funding in the bank on my daughter’s first day of college. THAT would be a luxury! No, I’m saying that we’ve had a plan, including CD’s, Savings Bonds, Tuition Guarantee Program, and some company stock. PLUS Cash flow from not having a mortgage, PLUS DD part time work and savings, PLUS the hope of a few Scholorships. If all that isn’t enough, then yea…we’d probably have to take out a loan. And if your plan is 100% stocks for your dear one’s education….GREAT!!! I hope that works for you! All I’ve said is that my friends who had that plan are squirming now, and I kinda feel sorry for them. But 10 years worth of saving a similar amount to what I’ve saved in conservative places, is gone…POOF! But, we still have the savings plus compounded interest.
    I’m not arguing with you, Sarah…I just chose a different path than what corporate America would have you believe is the only way to fund education…and it’s not the only way.

  41. “I’m secure in my own knowledge that over the long run, the tendency of a diverse stock investment is to go up.”

    well, this concept is flawed at least, and the fact is you never know about the future, neither the short or the long term. So, I’d be a little less agressive in the investments of my kids. Because stock markets are risky, yes, and they not always go up.

    Hope for the best for you and your kids always, but you should review your ‘secure knowledge’ once in a while.

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