A College Portfolio
I have Coverdell education savings accounts for each of my three children, ages 7, 5 and 1. All of the accounts are invested in Vanguard 500 Index fund. As my children get closer to college, should I transition to a bond fund?
You're on the right track. But while your children are still young, why not broaden your investments beyond a fund that follows Standard & Poor's 500-stock index? Lee Baker, a financial planner in Tucker, Ga., recommends placing 70% of your savings in Vanguard Total Stock Market Index (symbol VTSMX; 800-635-1511), which includes more small-company stocks than the 500 Index fund. To further diversify, Baker suggests putting 15% in Vanguard Total International Stock Index (VGTSX); 10% in Vanguard REIT Index (VGSIX), which invests in real estate stocks; and 5% in Vanguard Intermediate-Term Bond Index (VBIIX).
As each child starts his or her junior year in high school, place enough cash in a money-market fund to cover that child's first year of college bills, Baker advises. Rejigger what's left in the child's account so 30% to 40% is in bond funds. Keep the shrunken stock funds in the same proportions that existed earlier. Repeat the same step every year until all the assets are in a money-market fund. "The key is to be consistent," says Baker.
See our ABCs of Saving for College tutorial for more college-savings advice.
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