If you want to contribute to a 529 college savings plan for a newborn child or grandchild, most investment professionals recommend that your portfolio should be heavily weighted towards stocks in order to have the best chance of keeping up with inflation. That’s why the age-based portfolios in 529 plans are more aggressively invested for young beneficiaries.
However, just about every age-based account opened for a young child in the last three years has declined in value, because of the bear market. Dollar-cost averaging can reduce the risk of a volatile market. Instead of making a single large contribution to a stock-weighted portfolio, you can make contributions in smaller chunks over time, retaining the extra funds temporarily in a money market fund.
If the stock market suffers another downturn, you would be acquiring a portion of your shares at the lower price. However, if the market moves straight up, dollar-cost averaging will cost you some of the upside.
The easiest way to use dollar-cost averaging with a 529 plan is to sign up for the program’s automatic contribution option. Either monthly or on some other scheduled basis, funds will be electronically transferred from your bank account into your 529 account. Most 529 plans accept automatic contributions with very low minimum contribution requirements.