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Market Update

What Bad Returns at the Wrong Time Can Mean for College

The order in which returns unfold over time can either help or hurt.

I’ve written a couple of articles about how sequence-of-returns risk can affect portfolio values both for retirees making portfolio withdrawals, and younger investors who are putting money away for the future. The order in which returns unfold over time is important because it can affect the dollar value of a portfolio that has cash flows from contributions or withdrawals. In a nutshell, the periods when more dollars are invested will carry more weight in your overall results.

In this article, I’ll explain how even a year or two of bad equity-market returns can affect portfolio values for college savers and give some practical tips for dealing with this risk. I'll focus mainly on 529 plans, which we've covered extensively as one of the best vehicles available for families planning ahead to cover the costs of college education.