Any college savings tips?

Question

My son is 1 month old. I have established a 529 account. I have bought EE bonds from the Treasury. I have also made significant purchases in gold and silver. Each month I put in a static amount. What am I missing?

Answer 1

Personally, I would stay away from Gold and Silver. The precious metals market is best served as an inflation hedge. IMHO, precious metals are overpriced right now. I think the prices of gold and silver will fall as the stock market starts accelerating again. I am not saying to rush out and sell what metals you have bought. I think you should limit the amout that you buy in the future.

A 529 account is an excellent investment, especially if the state you live in gives 529 accounts special tax treatment. Personally, I have chosen not to invest in a 529 at this point. The problem is that if your child doesn't go to college, the money has to be used for educational expenses. If you are OK giving the money to another relative or using it yourself, not a big deal. If you don't want to give the money away or use it yourself, then you have to pay a penalty to get it out (10% I believe).

EE bonds are a good investment in limited quantities. Savings bonds are liquid assets that can be cashed pretty much anywhere. The interest rate they pay tends to not be very attractive. I'd recommend only investing $10K or $20K in bonds. Treat them like stocks. When the interest rates are attractive, buy them up. If the rates are low, put your money elsewhere. You might be better served by purchasing short term Treasury Bills or Treasury Notes from the government. They usualyl pay a little better interest rate. T-Bills mature in weeks. T-Notes mature within 5 years. The catch is that T-Bills and T-Notes are sold in $1000 increments. You can buy them online in an auction from TreasuryDirect. It works pretty similar to an online trade account. I believe you can also have a bank buy them on your behalf.

Personally, I've opted to invest in a standard taxable mutual fund accounts. Whether you invest in a taxable account or a 529 plan, I would invest in a mixture of stocks and bonds. 18 years is a good amount of time, but time can run out if the market goes south. About 85% of my college fund goes into a 60% stock 40% bond mutual fund. The remaining 15% is invested in a REIT (Real Estate Investment Trust) to diversify a little more (be careful with Real Estate funds as they are very volitile). Right now, I think that large companies are cheap compared to historical prices. I'd consider picking up an S&P 500 index fund or a Growth or Value fund that invests in Large Cap Stocks.

Make sure to alter your asset allocation as you get closer to college. 60/40 stocks to bonds is great for 20 years from now, but the closer to college you get, invest more in bonds and cash (money markets/untra short term bonds) and less in stocks.

You can also invest in a "retirement" type mutual fund as if you were going to retire in 20 years. This type of fund will change your asset allocation automatically as you approach the goal date.

It seems you got your bases covered pretty well. If your child is only 1 month old, I would direct more of your assets toward stocks and bonds and less toward savings bonds. Precious metals is going to be a crap shoot. You might score big or you might break even in 20 years (personally, I don't like investing in commodities as it is volitile and long-term return tends to be low).

Good Luck!