I have had two private emails regarding a post that I had in response to another poster's question. Since it is buried, I have been urged to post it here. I modified it to fit outside the context of the original message, but here is my message:
In my opinion, prepaid plans are the best way to fund college. Any form of stock allocation is risky business for college investing. My original post was about what happened if you had invested in stocks for college (lump sum) in 1929 or 1966. Someone pointed out that DCAing would have had better results. The conversation begins after that:
First of all, yes, my data assumes a "lump sum" at the beginning of the period and NOT DCAing along the way. You are correct that if you started (or continued) DCAing during those periods you results would have been better.
Of course, that also assumes that you are smart enough to know when the DCA gig is up and it's time to "lock in" your gains.
For instance, if you had started DCAing 1919 and your kid started college in 1930 (or any time during the 1930s) you'd be in trouble. You would have felt smart and rich going into 1929, just like many on here felt about a year ago.
The 1966 thing wasn't so terrible because it was gradual, but things went from bad to worse as the inflation era wore on. Here again if you DCA'd in the late 1960s-early 1970's, you'd have felt real smart and wealthy in early 1973. But by the time Juniorette tried to enroll in Big Bucks University in September, 1974, your college nest egg would have been halved and she might be going to beauty school.
The prior post asks about not adjusting for inflation. You HAVE to do adjust for inflation. What investment did better? The answer would have been a prepaid plan, with the guarantee, if it existed! It didn't then, but does now!
My overall point is that I believe on a risk/reward basis, prepaid is the only way to go (provided your state has a plan that will truly prepay for the college(s) that you expect your kid to go to). Asset allocation plans should be limited to retirement planning because retirement does not require the full monty to be spent in 3.5 years. Also, retirement can be delayed or other options are available. When Junior hits 18, however, if he doesn't go then because the stock market bombed out, the chances that he'll never go are very great.
College is too short a time period (again, except MAYBE for kids under 3) to risk a market failure near the end. And, if Junior IS lucky enough to arrive at 9th grade (or so) with your stock college nest egg intact, move it to fixed income or prepaid (same thing, under a different wrapper) ASAP so you don't end up like 1974.
Too many people who can't or won't save truly enough to fund college are counting on historic stock market returns to make up for the shortfall. History would suggest that the recent 20 year bull market, at best, is not likely to continue with double digit returns, and perhaps not even keep up with the cost of college inflation. Remember, the peak birth year of the "echo baby boom" (baby boomers own kids) was 1990. All those kids now 9-15 years old, or so, will be entering college soon. Competition will be keener than ever and colleges have NO incentive to keep the lid on costs with more than enough "customers" demaning their services.
So, the question boils down to: Is it worth the gamble that an aging bull (stock) market will outpace almost certain heafty ongoing college cost increases? Before prepaid, the answer was "well, it's probably the best one can do". Prepaid changed all that