The Compound
529 Asset Allocation
10/28/2025, 10:04:11 PM
Economic Summary
- Begin shifting from an all-equity (S&P) allocation roughly five to seven years before college to balance growth with reduced downside risk during the spending period.
- Investors de-risk for three main reasons: emotional volatility (inability to tolerate swings), the desire to rebalance into bonds/cash or hedges, and the need to preserve capital for imminent spending.
- Most 529 plans offer fund choices (index funds, active funds, and target-date funds) rather than individual stocks; target-date funds let you pick a year tied to the child’s expected graduation.
- A tranche or reverse dollar-cost-averaging approach (e.g., moving portions like 10% every six months) gradually reduces equity exposure, allowing markets to run while limiting timing risk and emotional strain.
- There is no perfect strategy: a full, immediate shift avoids losses if the market falls, while gradual de-risking outperforms if stocks keep rising—outcome depends on market direction.
Bullish
- Starting de-risking 5–7 years before college reduces sequence-of-returns risk.
- Tranching (reverse DCA) eases emotional stress and smooths timing risk.
- Target-date funds automate allocation changes and simplify 529 management.
Bearish
- Keeping 100% in the S&P risks a large drawdown right before college spending.
- Slow tranching can suffer if the market crashes early in the de-risking window.
- Target-date funds may underperform if equities continue to rally (opportunity cost).