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Allocating Assets and Selecting Investments
Determining
Your Risk/Reward Parameters
Exactly
how you allocate assets in your investment program depends on your child's age
and your tolerance for risk. Determining your "risk/reward parameter"
is a personal decision--only you know how aggressively or conservatively you
would like to invest. Generally, the more price fluctuation (risk) you are
willing to tolerate in the short term, the greater the chance of securing higher
rewards in the long term. Conversely, less risk often results in lower rewards.
Allocating Assets Based on Your Time Frame
Once you've determined your risk/reward parameters, consider your time frame. Equities tend to fluctuate in
the short term but often rise steadily over the long haul. Therefore, the longer
your investment horizon, the more equities you should consider adding to your
portfolio.
You may want to rebalance
your portfolio as your needs change throughout your college investment plan. For
example, if you have a full 18 years before your child's first semester, putting
a greater percentage of your funds in equities gives you a better chance of
earning higher returns than investing predominantly in fixed-income instruments.
Then, as your child's first semester approaches, you may want to shift a
percentage of your portfolio into conservative instruments such as bond funds or
money market funds. Although these investments may generate lower returns than
stocks, they'll provide more stability of principal--an important factor as
tuition bills come due.
The potential growth
associated with equity investing does come at a price: short-term volatility. So
given the vagaries of the markets, your investment horizon should be long enough
to ride out short-term fluctuations. As the due dates for college tuition bills
approach, you may want to gradually shift your investments into
more-conservative vehicles such as bond and money market funds, which tend to be
less volatile.
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