Stock market slip not likely to harm tax-free college savings plans
Though the University is big on financial aid, 16 percent of students nationwide use a 529 savings plan to help pay for their tuition. Students with those savings plans should not change their investment portfolios after the recent market dip, investing experts say.
Using the S&P 500 index, the stock market has dipped almost 8 percent from its January high. It is near market correction territory, which is 10 percent.
A 529 savings plan is a tax-advantaged college savings account that allows people to withdraw tax-free if the funds are used for college expenses.
James Altemus, a finance senior and officer in a student organization called the Finance Association, said he sat down with his organization and came to the conclusion that the stock market dip is just a correction and not a long term market bear market, when stocks drop more than 20 percent.
“For people that need money now that are withdrawing it from their 529, it affects them a lot,” Altemus said about the market dip. “Obviously they are trying to withdraw the max amount of money so they can use it to fund their tuition.”
Gabriel Pincus, the president of a Chicago-based fund management firm, said those with 529 savings plans should not increase the amount of low-risk bonds they have to higher-risk stocks. Instead, he said, people should continue using the same investment strategies they were using before.
“Market corrections generally happen after long periods of stock market growth,” Altemus said. “Over time people get hesitant, investing more money into a market that has grown so much in such short of a time span. It’s just simple psychology at that point.”
A market correction occurs when there is about a 10 percent drop in the markets, according to Investopedia. Pincus said such a drop usually happens once a year. This market correction was the worst in two years, according to Reuters.
Chief Investment Officer Tom Weary at Lau Associates, a wealth management firm based in Delaware, said the lack of market volatility last year was not typical.
“We had gone about 300 trading days without a back-to-back declines of half a percent,” Weary said. “It had been very quiet last year, and we needed to have a turn of volatility to remind people that wasn’t what stocks normally do.”
Weary and Pincus both said that the U.S. economy has done well recently, and the market correction was a reaction to that.
“The specific cause of this correction was actually good news. The U.S. economy is doing well,” Pincus said. “For long-term investors, a correction is simply a temporary blip in the overall rise of the market.”
Altemus, who studies finance, also spends 15 hours a week trading, which earns him extra income. Later, he plans to do it as a career. He said the market dip isn’t going to affect him much.
“Most of my trades are made on small movements in the market that happen multiple times everyday,” Altemus said. He said some people in TFA who are long-term investors are adding more bonds to their portfolio after the market dip.
When the February employment data came out, wage growth grew faster than expected at 2.9 percent over 2.6 percent, said Weary, who helps manage investment portfolios.
“People were looking for an excuse to sell,” Weary said. He added the volatility over the past few days indicates that the economy is stronger than what was indicated by the investors who sold, causing the correction.
Pincus said no one knows when a market correction will come, but they will come.
“I would strongly urge people to ignore the day-to-day movements of the market and focus on the bigger picture,” Pincus said. “There has only been one universal truth in the history of the stock market, it always goes up in the end.”