If you want to be conservative in your investment approach, consider the strategy of dollar cost averaging. This is based on the principle that the market in the long term always rises and trying to time the market is next to impossible. Therefore, it is best to buy a fixed amount of stock or mutual funds each month. Some months you are buying high since the market is up, but some months you are buying at a bargain when the market is down. Over time this will average out and you will have taken advantage of low prices while not investing your entire nest egg when the market was too high. Combined with an automatic investment option this can be a really low maintenance way to invest.
You don't want to gamble with your child's future. While there is always risk in any kind of investment, make sure you are not being too aggressive when you are nearing the time you need the money. If you didn't learn your lesson from the dot-com implosion, don't speculate on so-called "sure bets" or "hot tips." Even relatively safe choices start to look too risky if you can't wait out a market downturn.
Part of being conservative with your investments is diversifying your portfolio. You don't want to keep all of your money in one stock or even one sector. Spread your money around to make sure a collapse in one part of your portfolio won't sink your entire investment boat.
Most 529 Plans offer a conservative age-based approach. When your child is young, the fund invests more aggressively in stocks and mutual funds. As your child gets older more money is shifted into fixed income investments like bonds. When your child is a few years from college most of the money is kept in safe money market funds. You don't want a disaster in the stock market to doom your child's chances of getting an education. As you near the time when you need the money, begin to move out of more risky investments.
Compared to the Coverdell ESA or a good 529 Plan, using an Individual Retirement Account (IRA) is not the best way to save for college since you may have to pay taxes on what you withdraw. However, there are some benefits that make building your IRA a smart idea. When it comes to determining financial aid, your retirement accounts are exempt from consideration. In other words, colleges can't touch these accounts when they try to determine how much money you can afford to pay for college.
Plus, you can withdraw money from an IRA before you turn 59 ½ and avoid the 10 percent early withdrawal penalty as long as the money is used for college expenses. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA or a SIMPLE IRA. If you want to learn more about these different IRAs take a look at the IRS's Publication 590. Remember that you might have to pay income tax on part of the money that you withdraw, but at least you avoid the huge 10 percent penalty. Speak with your accountant to determine if this is a good strategy for you.
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