In 2002 tuition and fees at private universities in the US jumped an average 5.8% last year-far exceeding recent increases. State universities, which have been hard hit by state budget cutbacks, raised costs by a steep 9.6%. Meanwhile, college budget pressures have limited financial aid. This makes it that much more expensive for parents to afford overseas education for their kids.
To meet this financial challenge, it's essential to have a well crafted college savings strategy and the determination to stick with it. In this column, we outline a three-point plan for managing your college portfolio.
How much do you need?
College costs for overseas universities, in our particular case the US, vary widely, with room and board at public universities averaging Baht 550,000 a year while expenses at an Ivy League university exceeding Baht 1.5 million per year. For overseas students from Thailand you can easily add another 20% on top for airfares and other expenses. Over the past two decades, college price hikes have averaged 5% a year, so expect future increase to exceed inflation. To see how much you will need for a particular university in the US, turn to the on-line calculators at www.money.com and www.collegeboard.com
Chances are, the numbers that pop up will be dismayingly large. For example to save the full cost of four years at a top university in 2016 (13 years from now), you would need to start saving Baht 60,000 per month! to amass Baht 12.6 million. Of course, not everyone has that kind of extra cash to put away for a college fund. Still, you should try to save enough to get within a striking distance. So what's a realistic target? One way to tackle this is to divide the target amount into three portions:
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How long is the investment horizon?
Because you are aiming for a particular goal, assuming that you have a new born baby, your investment horizon is about 18 years away. It is also advisable to separate your college savings from your other investments. If you have 10 years or more to save, equities should remain the cornerstone of your portfolio. Despite their volatility, stocks are the only asset with the potential to beat college-tuition inflation.
Understandably, many of you may have a bad experience about investing in the stock market but there are ways and means to reduce risk to an acceptable level. For a moderate risk level, I would suggest keeping 60-70% in equities if college is 10 years away, with the remainder in bonds. Gradually trim the equity level to 25-30% by the 5 year mark. By the time you almost reach the final point, shift the bulk of your assets into short-term fixed income funds to preserve principal. For help in customizing a portfolio that suits your risk level, try visiting Education Planner and try out asset allocation tools.
The other piece of advice that I keep repeating is to invest for the long term, especially for your equity portion. Just to prove my point, please find listed below composite returns of the leading mutual fund managers during the past 5 years. Although, there have been some pretty wild swings during the past few years, but this is quite normal for equity based investments. Just try to ignore the short term volatility and keep focused on the long term goals and all will be well in the end. After all some of these managers have been producing something like 17% return per year during the past 5 years and that can't be bad. For full details please refer to Thai Equity Funds.
