By Dave Coen
Volatility is a hot topic in the financial world right now. No one likes unpredictability when it comes to money; and volatility is just that—erratic and unpredictable. If you invest in any way, shape, or form, you may be wondering how worried you should be.
Here’s a quick reminder: volatility, while not fun, is normal. We hit the jackpot in 2017 with historically low volatility, and its resurgence has been hard to stomach. And rightly so. When you know you will need every penny to pay for college, it’s disheartening to see your accounts drop drastically just because the markets decided to go haywire.
But other than wringing your hands, is there anything you need to do about the uncertain markets? If you are saving for your children’s college education, here are 6 things that can help protect your money from the volatility monster.
1. Are You An Investor Or A Saver?
One of the first things you need to decide when talking about volatility is whether your family wants any volatility in your college plan or not. There are different college planning vehicles, and there is a big difference between savings and investing. If you want savings, then the type of “tank” you choose to put money into will need to have low to no risk, even if the returns might not be as high as they could possibly be in a “risk tank.”
In a “safe tank,” there might be more concern with the return of your money than the return on your money. It might not be of use to you to aim for a better rate of return if you end up with less money in the account when you need it than what you originally put in.
Have a discussion with your financial advisor about what your family’s best option is, and that will be one of the determining factors as to where to put your hard-earned savings. Remember that which kind of tank you put your money into for college savings could have an effect on your EFC when you complete the FAFSA forms. If you decide to use the “investing tank,” then you will probably end up being subject to volatility.
2. Timing Is Everything
If you are investing for the long term, volatility may be something you need to ride out, but if you need to access your money soon, either to retire or to pay your children’s tuition bills, you may need to take action. The number of years left before you need to start accessing the funds you have been diligently saving is called time horizon. The longer the time period between now and your goal date, the more time you have to recover from a loss. At each stage in the journey, your strategy may need to be tweaked. Work with your advisor to determine how you are progressing toward your goals and make changes, if necessary.
3. Reduce Risk
If you are getting closer to needing that nest egg, your risk level should be decreasing. When you are 20 years away from a goal, you can invest for growth, taking more risk because you have time on your side. But if you need the money in two years, it’s time to take a more conservative stance to protect your principal. If you think the chance of a decline is greater than the chance of growth, consider transitioning your money to less risky investments.
4. Allocate Appropriately
Are you relying too heavily on the stock market or do you have eggs in multiple baskets? If all your investments are in the same basket, volatility is cause for concern, but if your money is diversified correctly across many different asset classes, then you have already taken a step toward safeguarding your money.
Additionally, how you invest and the savings vehicles you use should be based on your family’s needs and goals. As market volatility picks up, this is the ideal time to revisit your portfolio with a professional to make sure it aligns not only with your time horizon and risk level, but also your unique situation and financial needs.
5. Sequence Counts
Sequence of returns is fancy financial talk for the risk of receiving lower or negative returns early in a period when you’re making withdrawals from your investments. If the market starts falling right when you need to access your money, you may run out of funds sooner than you thought. The good news is that if you’ve already addressed risk and diversification as tools to reduce volatility in your portfolio, you’ve already reduced sequence of returns risk. Another way to defend yourself against this risk is to create alternate accounts to increase your stability and flexibility.
6. Evaluate Your Buckets
If you are thinking about starting a college fund, take a moment to evaluate savings strategies to determine the ideal one for your specific goals and unique life situation. Think of your money going in two directions—into a “safe bucket” and into a “risk bucket.” Your safe bucket includes your emergency fund or other liquid, accessible funds to help you cover an unexpected expense or major purchase. This bucket provides a cushion so you don’t have to resort to credit cards or loans and keeps your money safe from risk. Your risk bucket includes your long-term investments that are not easily accessible and are focused on growth.
When you are trying to figure out how much of your paycheck to put aside for college, look at your overall financial picture to figure out how to divvy up the money. For example, if you don’t have an emergency savings account or you recently depleted it to take care of a car repair, it would be wise to replenish that bucket before throwing everything into a college fund. Otherwise, when you experience one of life’s many financial obstacles, you could end up with debt that has interest rates that are much higher than the rate of return on your investments.
Are You Ready For Volatility?
Whether you’re ready or not, it’s here, so take action to protect your hard-earned money. At College Planning America, we want to help you prepare for your child’s (and your own) future with confidence, regardless of what the market does. To get started, email me at dcoen@sageviewadvisory.com or call 800-814-8742!
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought. “A diversified portfolio does not assure a profit or protect against loss in a declining market.”
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