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College does not give every parent a future in abject poverty. Yes, it's expensive, but you can financially survive college with some advance planning.
If you start early, the best investments historically have been in the stock market. If you've got seven or more years, take a long look at equity-based mutual funds or other stocks. Still, you may be wary of anything but the safest investments. Unfortunately, low risk, guaranteed income investments are usually the ones with the lowest total return.
Here are a on walking that tightrope between safety and performance ?
Face reality. Know how much you need to pay for college. If you decide on a no-risk investment, the best return you can expect historically is about 8%. That assumes you'll purchase A-rated, long-term corporate bonds. At that rate, if the interest is tax- and commission-free, your investment will double in about 9 years. A $1,000 investment will grow to slightly more than $5,000 by the time your 1-year-old reaches 21.
The key to successful investing for children is to make it an important part of your budget. Choose your investment and contribute the same amount month after month, which is known as dollar-cost averaging. The cost of the stock, mutual fund or bond fund will average out to be less than a one-time lump sum investment.
For example, a $1,200 investment ($100 a month) each year that pays an average annual rate of 10% would accumulate to $60,191 in 18 years. That's enough for most colleges, especially if that's supplemented with a small loan and/or scholarship.
If your child is a newborn or up to age 6, keep all of your funds in aggressive funds or stocks, such as growth funds or 'small cap' stocks. Less aggressive investors can rely on funds tied to indexes like the Vanguard US 500 Stock Index (through Friends Provident's Premier Plan).
With 14 to 17 years before your child starts college, you can accept a higher level of risk and aim for maximum growth. Your portfolio might include 30% in an aggressive growth fund, 30% in an international fund and 40% in a growth-and-income fund.
If your child is 7 and you're just starting to invest, you may not want to take the most aggressive approach.
With a decade before your child starts college, you can still emphasize growth, but you may want to moderate your risk somewhat by shifting some assets into income funds. Therefore, your conservative growth portfolio could put 30% in an international fund, 30% in a growth fund invested in quality companies, 30% in a growth-and-income fund, and 10% in an intermediate-term corporate bond fund.
If you're beginning to invest just four years or so before your child goes to college, you must sacrifice the possibility of stock market gains for the certainty of "targeted" investments, especially designed to pay for college.
The emphasis should be on income and capital preservation increases in order to lock in gains made earlier. However, you'll still want some growth to help keep the portfolio ahead of inflation, both now and during the four years your child is in college. Therefore, 10% of the portfolio might be put into an international fund, 20% in a growth-and-income fund, 20% in a balanced fund investing in stock and bonds, 30% in an intermediate-term corporate bond fund, and 20% in short-term bonds or certificates of deposit.
For more information on Education Fee Planning, view our Education Fee Planning section. You can also contact our Advisers by either
filling up our online Contact Us form or writing to us at Contact@TA-Asia.com.
The comments above represent the views of Adriane G. Berg and should not be taken in themselves as a recommendation to invest.
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