When it comes to socking away money to cover college costs, Carmen has often recommended 529s, tax friendly education savings accounts, as a great tool. But 529s are restricted in that the money must go to education costs only. So what if Junior grows up and decides he or she doesn’t want to go to college? For parents out there who want to invest in their children’s futures but cannot commit to 529s, they have options.

It starts with diversification, said Joe Terranova, chief alternative strategist for Virtus. If there is a good amount of time between now and when your children will go to college – think over 10 years - he recommends investing in equities that have both value and growth opportunities. One thing to look for is a price-to-earnings ratio (PE) of 5 or higher. That’s a good sign the company is a stalwart and will come back when the market rebounds.

Terranova also stressed the importance of bonds – not just T-bills but municipal and corporate bonds as well. They are less risky than stocks and companies protect their bondholders before stockholders if there is a problem.

If you have a little less time before the college trips begin, Terranova said he would be more aggressive with investments in equities and put less in bonds, but more in corporate bonds than municipal.

And how about if you’re watching your college funds shrink right now? How can you protect what you’ve got left and play catch up? You can always try finding another asset that performs if the market goes down, but Terranova said the key is to stay the course. If you have been investing for the long run and diversified you shouldn’t be terribly down. Keep plugging away, he said, because things will turn for the better eventually.

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