After probably too much thought, I have settled on an investment plan for our two 529 college savings plans (one per kid). My circumstances and preferences are unique and likely different than yours, but as usual I will share my process and final decision. Based on my conclusions from Part 1 and Part 2, here are the general requirements:
- Each 529 portfolio will be similar but separate from my retirement portfolio. Similar means a low cost, balanced portfolio of roughly 60% stocks and 40% bonds.
- I want the stocks to have a long holding period. I plan to front-load my contributions early on, and then not touch it for 10 years. After that, I will gradually shift the portfolio to short-term bonds and cash.
- Low maintenance is good. Zero maintenance would be even better, where I wouldn’t even rebalance annually.
- Since 529 plans are tax-deferred with tax-free qualified withdrawals, I have the ability to play a little bit with higher-turnover or higher capital-gains strategies. No tax paperwork until withdrawal time.
- My state has no special tax benefits for 529 contributions, so I should pick from any nationally-available plan.
I narrowed it down to my top three combos:
1. Utah Educational Savings Plan and DFA Global Allocation 60/40 Portfolio (DGSIX)
- The Utah Plan is a top rated plan, with many low-cost investment options and probably the best customization tools.
- Dimensional Fund Advisors (DFA) applies academic research to try and capture a more “efficient” portfolio to focus in on size and value factors. More here.
- The DFA Global Allocation 60/40 Portfolio is their all-in-one portfolio that includes domestic and international stocks as well as high-quality bonds.
- This allows me to “scratch the itch” of investing in a DFA fund without having to deal with any tax drag on performance or additional paperwork.
- DFA’s methods are more expensive than Vanguard’s cap-weighted indexes. The total expense ratio is 0.49% annually, vs. roughly 0.26% for a similar Vanguard portfolio. I may or may not experience enough extra return to offset the higher fees.
2. Ohio CollegeAdvantage Direct Plan and Vanguard Wellington Fund
- The Ohio Plan is a top rated plan with many low-cost investment options, some of which are relatively hard to find like the Wellington Fund and TIPS.
- The Vanguard Wellington Fund is an actively-managed fund that has a target allocation of roughly 65% stocks and 35% bonds. Run by Wellington Management, it has been around since 1928 and is run with a conservative, long-term view. There is plenty of information elsewhere on this fund. The stocks are usually dividend and value-oriented, and the bonds are actively picked for moderate income.
- This allows me to “scratch the itch” of investing in the Wellington Fund without having to deal with the tax concerns of owning an actively-managed fund (higher turnover, capital gains distributions).
- The Wellington Fund is very cheap for an actively-managed fund, but is still slightly more expensive than Vanguard’s cap-weighted indexes. The total expense ratio is 0.35% annually, vs. roughly 0.22% for a similar Vanguard portfolio. I may or may not experience enough extra return to offset the higher fees.
3. Nevada Vanguard Plan and Custom Mix of Vanguard Index Funds
30% US Total Stock Market Index
30% International Total Stock Market Index
20% US Total Bond Market Index
20% US Inflation-Protected Securities
- The Vanguard 529 Plan is a top rated plan with many low-cost investment options, some of which are relatively hard to find like TIPS.
- Simplicity. If you already have a Vanguard account, you wouldn’t have to add another monthly statement or online account login to your financial life.
- This portfolio would most closely match my existing retirement portfolio.
- The total cost would be 0.28%. This is a bit higher than other pre-made portfolios since I like to have a higher amount of international stocks and TIPS which are slightly more expensive than the traditional default options.
- I don’t like any of their pre-made static portfolios, so I would have to make my own and rebalance periodically.
In the end, I went with the DFA 60/40 fund. My reasoning is that I have the potential for some higher returns using their strategies, and if I don’t, the passive structure prevents returns that lag too far behind the overall market. The most likely result is a slight win or slight loss. Obviously, I hope for the former but I can tolerate the latter. However, I think any of the options above (or something similar) will also work out just fine.