Author Topic: Length of typical recession and potentially investing college funds  (Read 941 times)

GoCubsGo

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I've been building a college fund for my children the past 6-7 years. This money has sat out the bull run as I didn't want to jeopardize the account value (very painful to do).  The last couple years have finally allowed CD rates in the 2% range which is better than nothing, but still not great.  My retirement portfolio is 78%/22% stock bond, so I'm definitely invested in the market .

My kids are getting close to college enrollment age (2 years away for oldest, 4 years away for next child).  The amount of money I have saved is fairly sizeable (close to $200K).  The recent talk of yield curve inversions, high valuations and the potential for a recession got me thinking and I wanted to run a question by the forum.

My youngest won't start college for 4 years and assuming he goes to school for 4 years it will be in CD's for at least 8 years.  I've read somewhere before that the length of the average recession is fairly short (under 2 years?). Let's assume we did have a pro-longed 20% plus drop in the market due to a recession in the next 2 years.  I was thinking I could take a chunk of the CD money and invest in equities and potentially pay for a higher % of his college with the added returns.  Absolute worst case scenario is that I would lose all that money and have to pull it from my retirement funds which would add a year or so to my FIRE date.  Best case is I pay for more of his schooling.

Any thoughts/data on the typical length of recessions and how quickly on average stocks recover from their lows in recessionary events? 


ChpBstrd

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Re: Length of typical recession and potentially investing college funds
« Reply #1 on: August 26, 2019, 11:47:41 AM »
Because the money is needed within a few years, bonds and cash are the right places to put it. If you had 10 years to go, my answer would be different.

Also, just because we’ve lived through a series of V-shaped recoveries does not mean they all work that way. The market could flop and then tread water for a decade, or flop and then keep going down, or double-flop, etc.  Look at the histories of stock markets outside the US to obtain a broader understanding of risk.

secondcor521

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Re: Length of typical recession and potentially investing college funds
« Reply #2 on: August 26, 2019, 01:06:23 PM »
There is all kinds of data out there on recessions, how long they last, how quickly or slowly things recover, etc.

I'm posting just to point out that you may want to look at your kids' college investments as not one big chunk, but about 8 smaller chunks, one for each semester.  Your youngest child's senior year chunks will be invested for about 8 years, but his freshman chunks will only be invested for about 4 years.  You may decide to invest the 4 year chunks differently than the 8 year chunks.

With three kids (junior in college, freshman in college, senior in high school), what I do is treat each college chunk separately.  I estimate how much it will cost and when it will need to be paid.  Personally I just use a simple algorithm of next X years of expenses in bonds and the remainder in stocks.  I then know which semesters are invested in which way.  I can then look at how long I have between now and when each bill is due, and I can back calculate how much I need in stocks or bonds today to fund each future semester.  I then total those current amounts up and get a total stock/bond allocation as well as how much I need in each kids' account.

GoCubsGo

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Re: Length of typical recession and potentially investing college funds
« Reply #3 on: August 26, 2019, 02:20:49 PM »
Thanks for the replies.   I guess the double flop would be the scenario that would harm me the most as buying in after substantial drop and then moving sideways wouldn't kill me.

secondcor521-  I wish I had done something similar when I was in the accumulation phase of this account.  I generally have no issue with risk both in equities and real estate (I've flipped multiple homes).  Something about the college account made me more risk adverse and I wouldn't feel comfortable jumping in equities with the current P/E ratios.  That said, if the market got a big haircut, I think I might be comfortable with that risk if I can make a case for it with research.

 

YttriumNitrate

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Re: Length of typical recession and potentially investing college funds
« Reply #4 on: August 26, 2019, 02:25:36 PM »
Because the money is needed within a few years, bonds and cash are the right places to put it. If you had 10 years to go, my answer would be different.
Since his youngest is four years from college, there are 8+ years until his youngest's last year of college. For that reason, I'd suggest putting at least a portion in the stock market.

moof

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Re: Length of typical recession and potentially investing college funds
« Reply #5 on: August 26, 2019, 06:10:28 PM »
$200k for 2 kids already.  Congratulations!  Good job man!  You never mention where you plan to send your kids and whether this is enough, of if you want it to keep growing.  I personally am aiming for $100k in today's dollars for our one kid, so I will extrapolate from there.  You could easily keep it in CD's and send your kids to a good state school without the need to take out any real debt.

I agree with the others that you should look at this as many smaller withdrawals, and as such might want to keep a modest portion of it in something like an S&P 500, maybe 20-30%.  If stocks are currently winning, cash them out for that tuition bill.  If stocks are losing, let it ride until the later withdrawals.  Bear in mind that your kids are better off than about 90% of all college bound kids, most are going to get loans or cause their parents to go deep in debt (or both).  If they only got 80% of their tuition instead of 100% because your bet went south they are still hugely ahead of their cohort, and more likely than not you will with with some stocks mixed in there and be able to help them even more (such as into grad school) than you would otherwise.

GoCubsGo

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Re: Length of typical recession and potentially investing college funds
« Reply #6 on: August 27, 2019, 08:14:31 AM »
So after a little research, I found the following:

Since WW2:

Bear Market (Greater than 20% stock market loss)
-Average loss is 30.4%
-Average duration until stocks recover is 21.9 months
-Only 3 of the 36 Bear markets lasted longer than 48 month (longest being 56 months)

The average stock market correction lasts 4 months and see equities drop 13%

My current $200K probably won't cover all my kids schooling costs.  We've told them we will basically pay for 4 years at the highest price state school in our state.  The rest is up to them (my oldest is looking at out of state only at around $50K per year).  She is already saving money, but will probably need to take loans.  I'd like to chip in more if possible.

If we get a correction in the next couple years, I will most likely take my son's portion and invest in equities.  I'm comfortable with that risk. I may not catch all of the upswing and may buy in before the bottom of the bear market but as long as it recovers in a normal time period I should get some solid gains which I will then cash out and re-invest the entire amount in CD's.

Feel free to shoot holes. 


ChpBstrd

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Re: Length of typical recession and potentially investing college funds
« Reply #7 on: August 27, 2019, 09:23:33 AM »
Just a note that while a recession is technically 2 consecutive quarters of negative growth, a bear market can last for years. E.g. a 2 quarter recession might accompany an eight or ten quarter bear market.

YttriumNitrate

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Re: Length of typical recession and potentially investing college funds
« Reply #8 on: August 27, 2019, 11:47:24 AM »
Just a note that while a recession is technically 2 consecutive quarters of negative growth, a bear market can last for years. E.g. a 2 quarter recession might accompany an eight or ten quarter bear market.
I've heard that definition used before, but it always seemed odd that a 0.001% decline followed by a 0.001% decline would be a recession while a 0.001% decline followed by a 0.001% increase is not. Wikipedia states that that definition is just a rule of thumb (one of many) from a NY Times article in the 1970s. The National Bureau of Economic Research's definition of "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales" seems like a much better definition for a recession.

moof

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Re: Length of typical recession and potentially investing college funds
« Reply #9 on: August 27, 2019, 12:22:16 PM »
...
If we get a correction in the next couple years, I will most likely take my son's portion and invest in equities.  I'm comfortable with that risk. I may not catch all of the upswing and may buy in before the bottom of the bear market but as long as it recovers in a normal time period I should get some solid gains which I will then cash out and re-invest the entire amount in CD's.

Feel free to shoot holes.
Sounds pretty solid to me.  Counsel your kids well as to how long those loans will last and what sort of payments to expect.  Starting your career debt free is huge, so hopefully there is more to the expensive school than name recognition and distance from home.

My disclosure:  I have a 6 year old starting 1st grade shortly.  He has ~30k in his 529, all stocks.  I will be contributing another ~5k/year for the next ~5 years before I retire.  The rough estimate is that he will have a little in the ballpark of 100k in today's dollars at the end of high school in another dozen years.  I intend to shift it to something less aggressive as he gets close to needing it, but frankly I have not gone through the gut check you have yet.

As the saying goes "No plan survives contact with the enemy."  But if I see a balance that pokes above his projected college costs I will likely market time and shift it to cash/bonds.

At my kids age I was in a single parent household and my mom was on welfare while going back to school to get her teaching certificate.  My kid has it damn good by comparison, so I try not to stress about it too much.  I managed to get through college mostly on my own with only $14k of debt (lots of student jobs), so having a ~100k tailwind should give my kid a good running start to life.
« Last Edit: August 27, 2019, 12:24:19 PM by moof »

feelingroovy

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Re: Length of typical recession and potentially investing college funds
« Reply #10 on: August 27, 2019, 07:02:14 PM »
How hard would it be to cash flow some of the costs if it turns out the market hasn't recovered by the time you need it?

I am in a similar situation. My kids are 1 and 3 years from college. We have saved so far 90k in 529s and 30k in a  "high" interest savings account.

We too have told them we will cover 4 years of in-state costs.

So we are not quite there yet, but should have it saved in 3 years. We are adding $2k/month and should have some big work bonuses next year.

I have been wondering the same thing about whether those later years for kid #2 should go into the market. The 529s are in age-based aggressive portfolios. I don't know at this point how much is still left in stocks as they automatically switch it up.

I too have been feeling more conservative about these funds than for our retirement funds. I think it's because there is a clear deadline for when we need the money back out.

But I have also considered the fact that I should still be able to cash flow much of the college costs if it turns out the market is down when I need it.