Top Investment Risk Factors for College Savers
Morningstar mutual fund analyst Greg Brown discusses potential pitfalls, including overly conservative allocations, states' 529 tinkering, and a compressed drawdown window.
Top Investment Risk Factors for College Savers
Rachel Haig: In a time of rising tuitions, stretched state budgets, and volatile
markets, it's hard to blame college savers for being a little bit on
edge. Here with me to talk about the top risks facing college savers
is Morningstar mutual fund analyst Greg Brown. Thanks for
joining me, Greg.
Greg Brown: Thanks for having me.
Rachel Haig: So, you've done a lot of Morningstar's 529 researches. What would
you say are some of the top risks facing college savers right now?
Greg Brown: Well, I think one of the biggest risk, and it may not seem like a risk
at first, is that college savers, you know, maybe have a temptation
to get too conservative in a time when after coming out of the 2008
bear market and some problems we had in 2009. And then most
recently with some of the setbacks we've had few months ago, I
think there's a temptation for college investors to be a little more
conservative with their savings.
I think that's a particular problem for people that have young
children that they are saving for college for, because you really
have quite a bit of time to make up for any kind of market
corrections. And there's a lot of—one trend we noticed in the
college savings market is a lot more CD options, a lot more money
markets, a lot more ultra-safe. And that's responding to the market
environment, and people demanding those, but I think people just
have to be a little "cautious" because really the college tuition rate
is going up quite quickly and those really can't keep up with
Rachel Haig: So, you are saying people have in a big way overcompensated for
the losses they may have seen in 2008, 2009?
Greg Brown: Yeah. And I certainly feel the pain and there is a lot of uncertainty
in the market right now. I just think there's a natural tendency to be
—there is a potential to be overly conservative at a time when it
may not be the best time to do that.
Rachel Haig: Have you seen the state plans leaning in a more conservative way
too or is this more on an individual level?
Greg Brown: We have seen some of the age-based options become more
conservative as a result of the 2008 market crash particularly,
Ohio's age-based options. Now, their top plan and I'm not trying to
knock them, but I think they were contemplating being
conservative. In 2008, they didn't actually ratchet back the equity
exposure in their age-based options until after the market crashed.
So, now they're a little bit more conservative in the 14 to 18 age
bands and they are incorporating new research, basically, the event
that happened in 2008. But I just, I question the timing.
Rachel Haig: Do you think that part of that is that they are trying to cover
themselves for investors in case something like that happens
Greg Brown: I think so, yes. I think so. I think there is an element of political
risks that are involved in these 529s for state treasurers. They are
run by states. And so state treasurers have to worry about their
constituents, and when there is big correction like that a lot of
people get really nervous. I mean this is sort of sacred money—this
is for their kids to go to college. So when you see big losses like
that it's really painful. And it can be a real problem for the states.
And I'd argue that there is a potential for them to become overly
conservative for that reason, too.
Rachel Haig: What other risks are you seeing right now in the college saving
Greg Brown: Well, one risk that we're seeing that is picking up a little bit more
is for the states to tinker with the underlying investment option. So
529s are made up mostly of mutual funds and the underlying roster
of those mutual funds is subject to quite a bit of change, because
states use consultants most of the time. The consultants need to
always recommend new choices and the states need to—they quite
often update those plans.
A good example is Oppenheimer's plans. They had some trouble,
some pretty serious trouble with their fixed income investments in
2008. And, as a result, the states added a lot of index-oriented
options. There was some continuous tinkering going on. So, a risk
certainly and I think, it's become more apparent is just, what you
get today may not be what you are going to get, two or three years
down the road.
So it's really important—especially for investors that choose age-
based options. It's not just to set and forget it. You have to—at the
very least, you have to look at it once a year to make sure that the
investments that an investor looked at initially are still there to
One way to mitigate that a little bit is to focus on index-oriented
plans. Those tend to be a little more stable, because one S&P 500
fund is the same as another one. So there is really no reason for
them to constantly tinker with these plans.
Rachel Haig: Right. And then, of course, another challenge that college savers
have to deal with, that retirement savers don't have to deal with, is
the more compressed drawdown period. They only have four years
usually to use the money, or at least, when they'd want to use the
money. What are the added challenges that that pose?
Greg Brown: That's really a good point. The drawdown period is certainly more
compressed, and so, the easiest way to look at that is, you just
simply have less time to recover from a market setback. So, if
another 2008 happens right before your child is in college, it can
be pretty detrimental if you have 40%, 50% or 60% in equities.
That can spell some pretty bad damages for the 529 portfolio.
So, it is important. It's a very debated subject of how much equity
to have as that child gets to be 16, 18, and then in college. I'm not
going to state any of that stuff here. It's not quite the right forum,
but it's important that an investor is comfortable with it. Just make
sure they look at it. The end points are really important, both as the
child gets into college and also, to a lesser extent, when a child is
first born. If there is 40% in bonds, is that really what the investor
wants or would they want something like a 90%, 100% in equity.
So, yes, it's certainly a lot different than target date funds, so there
is a lot less time to make up for losses. So it's completely
reasonable if it's in someone's risk tolerance to reach college
savings and then put most of that money 90% or even 100% in
something safe like fixed incomes or even a money market. Some
investors may decide to do that, especially if they are close to their
goals. So it's certainly a different paradigm, 529 college savings
And to be honest, I don't know if all of the 529s out there have
taken that into full account. I think a lot of target dates have been
shoehorned into 529s without kind of looking at those compressed
periods. So we'll probably see some changes in the age-based
options going forward.
Rachel Haig: Well, those are all certainly good things to think about. Thanks for
talking with us today.
Greg Brown: Sure. No problem.
Rachel Haig: For Morningstar.com, I am Rachel Haig.
Top Investment Risk Factors for College Savers
One of the major problems faced by electricity consumers in today’s modern world is that the electricity supply we use is subject to surges from time to time, which result in spiking of decrease in voltage that can be damaging to your household electrical appliances. These spikes simply waste our valuable electricity in form of producing excessive heat, resulting in overheating of the electr...
A stock may be either over priced or under priced; the NSE BSE market can be either bearish or bullish. Furthermore, there are hidden and unknown factors as well that act as a hindrance for many to determine the trends as well as finding the practical value of any stock in India....
Acne may affect some of us more emotionally and deeply than what is apparent on the skin surface. Our faces define us as individuals and are the presenting feature with which we interact with those around us. By affecting the face, acne can directly affect self-image by making us look and feel unattractive — which leads to embarrassment, lack of self-confidence and lowered self esteem....
People need to change the way they invest, not just because of economic fluctuations, but also because they need more financial security as they grow older....
The investment is an activity that can generate many currencies if done the right way. Any type of investment will always have the risk so it is very important to advice and train before investing in any security....
To save money you have to read and understand your policy. Reading policy will also save you headache....
If you wish to reach New York, you need to board the flight to that city and not to Pullman, Washington. Unless you know your destination and the route, how can you reach there?...
Most myelodysplastic syndrome risk factors are discovered through clinical trials, numerous patient testing, and researches. These risk factors have assisted doctors to find more effective treatment methods for MDS patients - and also helped to educate the public on ways to avoid getting MDS....
Minimize the risk of losing lives due to severe hemorrhage in the field with combat tourniquets. Medical emergency tourniquets stop bleeding by causing temporary occlusion of the blood vessels. Tactical, combat, and one handed tourniquets are available from Chinook....
The Garmin archive tells of this true story about a young, active father of two small children who cared enough about his family to keep himself fit and healthy. He was an avid runner and looked forward to running a marathon....