What is the best investment strategy for money that I have invested in stocks for my children's college payments?
I have enough saved for both children for four or more years of college. However, it's all within my stock investments. What would be the best way to invest this money to earn the most, but be available for the tuition payments due each fall and start of the new year? Some sort of ladder?
The U.S. stock market is currently just below its all-time zenith and is very close to its highest levels throughout history including the 1929, 1999-2000, and 2018 tops. Therefore I think a good prudent strategy is to gradually sell a little of your U.S. stocks and U.S. high-yield corporate bonds every day from now over the next several months, especially when prices are highest, to raise cash for tuition payments. You can put this cash into short-term U.S. Treasuries; the 28-day Treasury is currently yielding 2.44% which is an effective yield of 2.75% if you are in a high-tax bracket in New York City or California since U.S. Treasury interest is free of state and local income taxes. Many other people would probably recommend increasing your allocation to high-dividend shares but these will likely lose almost as much in a major bear market.
Yes, a ladder strategy could be an option. You could either do a CD-ladder or a bond ladder. However, if you want the money works the hardest, changing from stocks to all bonds/CD just won’t do. Thus, you can allocate 1- or 2-year worth of tuition in the money market fund one year prior to kids heading to college and continue to invest the rest in the stock market. You can also repeat the same process while kids are in colleges. In doing so, you sidestep the low-yield position for all four years.
Of course there’s a trade-off: You may lose some earning potential for the year, but you will not selling investment to raise tuition bill at the worst time. Best!