The GoodNest Guide to Investment Strategies & Portfolio Allocation for Your Child

Since 1928, the S&P 500 has lost money in 26 of 98 calendar years, about one year in four. Yet in every one of the 81 overlapping 18-year periods over that same stretch, an investor who simply held on, dividends included, ended up with more than they started with. That’s according to annual return data kept by NYU finance professor Aswath Damodaran. Same market, same crashes. The only difference was how long the money stayed invested.

That’s the single most useful idea in investing for a child. The right mix of investments depends less on how old your child is than on when each dollar will be spent. Money for a tuition bill 17 years away can ride out the market’s worst years. Money for a bill due next fall can’t. This guide is the hub for GoodNest’s articles on investment strategy. It covers how to split a child’s savings among stocks, bonds, and cash, how to think about risk, how to change the mix as deadlines approach, and the investment rules that come with 529 plans, custodial accounts, and Trump Accounts. If you’re just getting started, begin with The Ultimate Guide to Building a Generational Nest Egg for Your Child.

What asset allocation means

Asset allocation is how you divide a portfolio among different kinds of investments, mainly stocks, bonds, and cash. The SEC’s Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing calls it a very personal choice that depends largely on two things: your time horizon and your ability to tolerate risk. Each of the three building blocks does a different job.

• Stocks are shares of ownership in companies. They’ve had the highest long-term returns of the three and the biggest swings along the way, which makes them the growth engine of a long-term nest egg.
• Bonds are loans to governments or companies that pay interest. They’ve usually been steadier than stocks, with lower returns, which makes them a cushion as a goal gets closer.
• Cash equivalents, such as savings deposits, certificates of deposit, Treasury bills, and money market funds, are the safest of the three. The SEC’s guide says their main risk is inflation: prices can rise faster than they earn.

Here’s how those building blocks have behaved since 1928, using Damodaran’s data for the S&P 500 with dividends, 10-year Treasury bonds, and 3-month Treasury bills, plus a mix of 60% stocks and 40% bonds rebalanced each January.

“Average a year” is the compound annual return from the start of 1928 through 2025, with dividends and interest reinvested. The mix holds 60% S&P 500 and 40% 10-year Treasury bonds, rebalanced each January. Calculated from Aswath Damodaran’s annual return data. Past returns don’t predict future ones.

The table shows the basic trade-off. Stocks grew about 10% a year on average, but they lost money in 26 of 98 years, and in 1931 they fell 43.84%. Treasury bills never had a losing year, yet they barely outran rising prices. Consumer prices rose about 3% a year over the period, based on the Minneapolis Fed’s consumer price index table. After inflation, that works out to roughly 6.8% a year for stocks, 5.2% for the 60/40 mix, 1.5% for 10-year Treasury bonds, and 0.3% for Treasury bills. The mix landed in between on risk, too: its worst year cost 27.33%, compared with 43.84% for stocks alone.

Allocation also means spreading money out within each building block. The SEC’s guide points out that a total stock market index fund owns stock in thousands of companies, far more diversification than a handful of individual stocks can offer. Most families can build a well-diversified portfolio from just a few broad funds.

Time horizon: the question that matters most

Your time horizon is how long you’ll be investing before you need the money for a particular goal. The SEC’s guide uses a child-sized example: an investor saving for a teenager’s college education would likely take less risk than one with decades to go, because a shorter horizon leaves less time to wait out a downturn.

History shows why. The chart below counts every overlapping holding period since 1928, starting each January, and shows how often each investment ended up with less money than it started with.

• All stocks (S&P 500)
• 60% stocks, 40% 10-year Treasury bonds

Each bar is the share of all overlapping periods from 1928 through 2025, starting each January, in which the investment ended with less money than it started with, counting dividends and interest. The mix holds 60% S&P 500 and 40% 10-year Treasury bonds, rebalanced each January. Calculated from Aswath Damodaran’s annual return data. Past returns don’t predict future ones.

See the numbers

Holding periods that lost money, 1928 through 2025

Held for	Periods	All stocks	60/40 mix
1 year	98	26 (26.5%)	21 (21.4%)
3 years	96	15 (15.6%)	9 (9.4%)
5 years	94	11 (11.7%)	4 (4.3%)
10 years	89	5 (5.6%)	0 (0%)
15 years	84	1 (1.2%)	0 (0%)
18 years	81	0 (0%)	0 (0%)

Over a single year, stocks lost money 26.5% of the time. Over 10 years, losses fell to 5.6% of periods. The worst of those, 1929 through 1938, lost 1.67% a year, and 1999 through 2008 also ended in the red. Over 15 years, only one period lost money: 1929 through 1943, down 3% in total. Over 18 years, none did. Even the worst stretch, 1929 through 1946, gained 2.03% a year.

The 60/40 mix helped most over middle-length horizons. It lost money in 4.3% of 5-year periods, compared with 11.7% for stocks alone, and in none of the 10-year periods. Over 18 years, though, stocks came out ahead of the mix in 67 of 81 periods, so the cushion had a cost when there was plenty of time.

Two cautions keep these numbers honest. First, history isn’t a guarantee: no 18-year period has lost money since 1928, but that doesn’t make it impossible. Second, a child’s time horizon shrinks every year. A newborn’s college fund has about 18 years, but when that child turns 15, the same money has about three, and stocks lost money in 15.6% of 3-year periods. That’s why the mix should change as the deadline gets closer, the idea behind Building a Target-Date Glide Path.

Risk tolerance: yours, not your child’s

The SEC’s guide defines risk tolerance as your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. In a child’s account, the risk tolerance that matters is yours. You’re the one who will open the statements in a bad year and decide whether to hold on.

It helps to take the two halves of that definition one at a time:

• Willingness is emotional. Picture the account falling by more than a third in a single year, as it would have in 2008, when the S&P 500 lost 36.55%. If you’d be tempted to sell, a somewhat gentler mix you can stick with will likely serve your child better than an aggressive one you abandon halfway down.
• Ability is financial. Ask what would happen if the money came up short when it’s needed. A family with other savings, flexible plans, or a younger child can absorb more ups and downs than one counting on every dollar for a tuition bill two years away. Your own finances count here as well, which is why The “Oxygen Mask” Rule of Parental Finance puts your retirement savings first.

Sticking with a plan is worth real money. Morningstar’s Mind the Gap US 2026 study estimates that the average dollar invested in U.S. mutual funds and ETFs earned 8.7% a year over the 10 years through 2025, about 1.2 percentage points a year less than the funds’ own 9.9% return. Morningstar traces that gap to the timing and size of investors’ purchases and sales, and it cautions that even sensible habits, like investing part of every paycheck, can open some of it. The gap was 0.4 percentage points a year for the least volatile fifth of funds and more than 2.0 points for the most volatile fifth. Its suggestions sound a lot like good habits for a child’s account: trade less, invest on a schedule, and hold fewer, more widely diversified funds. The Psychology of Generational Wealth and Automating the Nest Egg show how to build those habits.

Taking too little risk has a cost, too. The SEC’s guide notes that for long-term goals like college, most financial experts agree you’ll likely need at least some stocks. In Damodaran’s data, $10,000 held for a typical 18-year period, the median of all 81, grew to about $60,500 in stocks, about $44,000 in the 60/40 mix, and about $18,150 in Treasury bills. For money that won’t be touched for well over a decade, playing it too safe can quietly cost the most.

Match the mix to the money’s job

Most children’s savings aren’t one pot of money. They’re several pots with different deadlines, and each deserves its own mix. The same 15-year-old might have college money due in three years, a custodial account meant for a first apartment in their mid-20s, and a Roth IRA that won’t be touched for 45 years. If you haven’t settled on which accounts to use, The Ultimate Guide to Building a Generational Nest Egg for Your Child maps the options. Here’s how the common goals usually line up.

Each account brings its own rules about what you can hold and when:

• 529 plans offer a menu of portfolios, usually including age-based options that adjust on their own, and they limit how often you can move money that’s already invested. The Complete Guide to 529 College Savings Plans covers the details.
• Custodial accounts can hold almost any investment, but the money legally belongs to your child, and your control ends at the account’s termination age. Plan the mix around that date as well as the goal. Custodial Brokerage Accounts vs. Parent-Owned Taxable Accounts weighs keeping long-range money in your own name instead.
• Custodial Roth IRAs can only take contributions up to your child’s earned income, but money left in until retirement has the longest horizon of all. See The Custodial Roth IRA.
• Trump Accounts have investment rules written into law. Under IRS Notice 2025-68, until January 1 of the year your child turns 18, the account can hold only mutual funds or ETFs that track an index of mostly U.S. companies, such as the S&P 500, don’t use leverage, and charge no more than 0.1% a year. Treasury’s July 1, 2026 announcement named a default fund, the State Street SPDR Portfolio S&P 500 ETF (SPYM), plus four other low-cost U.S. stock ETFs (IVV, VTI, SPTM, and ITOT) that parents would be able to choose once Treasury makes investment elections available.

That last rule matters for allocation. The SEC’s Investor.gov page on Trump Accounts sums it up: investment options are limited to low-cost funds that track broad U.S. stock indexes. A Trump Account therefore stays in U.S. stocks through the teenage years, whatever the market is doing. If you want your child’s overall savings to grow more cautious as college nears, the shift has to happen in the 529 or another account. The 530A Trump Account Explained covers the rest of the rules.

Build the core with low-cost index funds

An index fund doesn’t try to pick winners. It buys the stocks or bonds in a market index, such as the S&P 500 or the total U.S. stock market, and usually charges little for doing so. For a child’s portfolio, that mix of broad diversification and low cost is hard to beat, and the long-term scorekeeping shows why.

S&P Dow Jones Indices tracks how actively managed funds do against their benchmarks. In its SPIVA U.S. Scorecard Mid-Year 2026, 90.49% of large-cap U.S. stock funds trailed the S&P 500 over the 15 years through June 2026, and 92.61% trailed it over 20 years. Only 36.52% of the large-cap funds that existed 20 years earlier were still around at the end. A child’s 18-year horizon is exactly the kind of span where those odds play out.

Costs compound just like returns. The SEC’s guide to understanding fees follows a $100,000 investment growing 4% a year for 20 years: with a 0.25% annual fee it ends at about $208,000, with a 0.50% fee about $198,000, and with a 1.00% fee about $179,000. The same math works on a child’s scale. In our own hypothetical example, a $10,000 gift invested at birth and earning 7% a year before fees would grow to about $33,516 by age 18 in a fund charging 0.05% a year, but to about $28,543 in a fund charging 1%.

A simple core can come from one to three funds: a total U.S. stock market or S&P 500 index fund, perhaps a total international stock fund, and a broad bond fund for the cautious slice. Inside a 529, look for the plan’s index-based options and compare expense ratios. Inside a Trump Account, the law already caps fees at 0.1%. Index Funds vs. Stock Picking for Minors goes deeper on the evidence and on choosing funds.

Shift the mix as the deadline gets closer

A glide path is a plan for moving money from stocks toward bonds and cash as a goal approaches. The SEC’s guide says the most common reason to change an asset allocation is a change in time horizon, and it describes lifecycle funds, also called target-date funds, which make that shift automatically as their target year nears.

529 plans have their own version. According to Saving for College’s guide to 529 investment strategies by age, all direct-sold 529 plans offer some type of age-based portfolio, which generally starts out in stocks and shifts toward fixed income as the beneficiary nears college. Its example of a moderate approach looks like this:

• From birth to age 5: 80% stocks and 20% bonds.
• Elementary school: 60% stocks and 40% bonds.
• Middle school: 35% stocks and 65% bonds.
• High school: 20% stocks and 80% bonds.
• Age 18 and older: 75% bonds and 25% short-term reserves.

The same guide notes that a family wanting a more aggressive start could hold 100% stocks for the first few years, and that plans often offer conservative, moderate, and aggressive versions, so you can match the path to your own risk tolerance.

You can also build a path by hand from a plan’s static portfolios. Saving for College’s explainer on 529 investment changes notes that you can move money that’s already invested twice per calendar year, while changes the plan makes inside an age-based portfolio don’t count against you. It also suggests moving to a more conservative mix sooner if you plan to use the 529 for K-12 tuition, since most age-based portfolios are designed around college.

Whichever route you take, the last few years deserve extra care. A common approach is to start moving each year’s college money toward short-term bonds and cash about five years before it’s needed and to have the next year’s money out of the market entirely. Liquidating Safely walks through that final stretch.

Where bonds and cash fit

Bonds earn their place by being steadier than stocks. In 2008, when the S&P 500 lost 36.55%, 10-year Treasury bonds gained 20.10%, and the 60/40 mix lost 13.89%. That cushion is why glide paths lean on bonds as a deadline approaches.

But bonds aren’t automatically safe. Bond prices fall when interest rates rise, and 2022 showed how much that can hurt: 10-year Treasury bonds lost 17.83%, nearly matching the 18.04% drop in stocks, so the 60/40 mix fell 17.96%. Only the 3-month Treasury bills, a stand-in for cash, came through with a gain. The lesson for a child’s account is that bonds make a good cushion for money needed in a few years, but money you’ll spend within about a year belongs in cash equivalents, such as a savings account, a money market fund, Treasury bills, or your 529’s most conservative option.

Cash has its own risk. Over long periods it barely keeps up with prices: since 1928, Treasury bills have earned only about 0.3% a year after inflation. That makes cash the right home for next year’s tuition and the wrong home for a newborn’s nest egg. The Role of Bonds and Fixed Income covers which kinds of bonds fit which jobs.

Rebalance without overthinking it

The parts of a portfolio grow at different speeds, so your mix drifts over time. Rebalancing brings it back to your target. The SEC’s guide gives an example: if you aimed for 60% stocks and a rising market pushed them to 80%, you could sell some stocks, buy more of what’s underweight, or send new contributions to the underweight side until the mix is back in line. Some experts rebalance on a schedule, such as every six or twelve months, and others only when an asset class drifts past a set percentage. Either way, the guide says, rebalancing tends to work best when done relatively infrequently.

How you do it depends on the account:

• In a 529 plan, an age-based portfolio handles both the glide path and the rebalancing. If you’ve built your own mix from static portfolios, Saving for College suggests rebalancing at least once a year. Moving money that’s already invested counts toward the two changes allowed each calendar year, but choosing where new contributions go is a separate decision, so steering them toward whatever is underweight is often the simplest fix. Check your plan’s rules.
• In a custodial account, selling investments at a gain creates taxable income in your child’s name. In 2026, the first $1,350 of a child’s investment income is tax-free, the next $1,350 is taxed at the child’s rate, and income above $2,700 can be taxed at the parents’ rate, under Revenue Procedure 2025-32. Rebalancing with new money first, and favoring funds that pay out little taxable income each year, helps keep that income low. Navigating the 2026 Kiddie Tax Thresholds explains the rules.
• In a Trump Account, there’s little to rebalance before the year your child turns 18, since every eligible investment is a U.S. stock index fund.

Small gifts, fractional shares, and young investors

Children’s accounts often grow in small, uneven amounts: $25 from a birthday card, $100 from a grandparent over the holidays. Fractional shares make those amounts easy to invest. As FINRA’s guide to investing in fractional shares explains, buying pieces of shares by dollar amount puts the whole gift to work instead of leaving cash idle, and it lets you rebalance by precise amounts. FINRA also flags a catch: at the moment, fractional shares can’t be transferred to another brokerage firm, so moving the account later may mean selling them first. In a custodial account, that sale could be taxable.

Small purchases can also make the market feel real to a child. Owning a sliver of a company they know, alongside the index funds that do the heavy lifting, can turn a statement into a conversation. Keep individual stocks to a small slice of the portfolio, though, and treat them as a lesson rather than the strategy. Fractional Shares covers the mechanics and the teaching ideas.

Investing with your family’s values

Some families want their child’s money invested in a way that reflects their values, often through funds that weigh environmental, social, and governance (ESG) factors. The SEC’s investor bulletin on ESG funds notes that these funds can have broad discretion in how they apply those factors and may weight them differently, so two funds with similar labels can hold quite different portfolios. Its advice is to read the prospectus and the latest shareholder report, which lists the fund’s top holdings, and to compare its fees and expenses with other options.

Values-based funds can fit any account that lets you choose your own funds, though not every 529 plan menu includes them, and a Trump Account is limited to the eligible U.S. stock index funds described above. ESG Investing for the Next Generation covers how to weigh values, costs, and diversification.

Putting it all together

Here’s the whole strategy as a checklist:

• Name each goal and its date. College, a first car, a down payment, and retirement each get their own time horizon.
• Give each goal the right account. Match it to the account’s tax rules and to who controls the money, and when.
• Pick a mix for each goal. Use an age-based 529 option, or set your own split from the time horizon and your risk tolerance.
• Build the core from low-cost, broad index funds. Compare expense ratios before you choose.
• Automate contributions. Investing on a schedule takes timing decisions off the table.
• Check in once or twice a year. Rebalance if the mix has drifted, using new money first.
• Start shifting college money about five years out. Have next year’s tuition in cash equivalents a year ahead.
• Revisit the plan when life changes. A gap year, a scholarship, or a different school changes the time horizon, and the mix should follow.

Gifts from family fit neatly into this plan. When grandparents, aunts, uncles, and friends want to give for a birthday or a holiday, GoodNest can collect their gifts, often alongside a small keepsake. Guests give from your child’s GoodNest page and send the money straight to you by Zelle, Venmo, or PayPal. GoodNest never holds or invests it, so you decide where each gift goes: into the 529 for a far-off goal, into whichever part of the mix has fallen behind, or into the cash bucket when a tuition bill is close. Building Your Village shows how to rally family around those goals.

The bottom line

Investing for a child comes down to a few decisions made well and then left alone. Decide when each dollar will be spent. Give long-horizon money a stock-heavy mix and short-horizon money a cautious one, build the core from low-cost index funds, and shift the mix gradually as each deadline approaches. Then automate, rebalance once or twice a year, and resist the urge to react to headlines.

The history behind those rules is striking: since 1928, stocks lost money in about one year in four, but in none of the 81 overlapping 18-year periods. Time is the advantage a child’s account has over almost every other investor. For the bigger picture, from mindset to accounts to family gifts, return to The Ultimate Guide to Building a Generational Nest Egg for Your Child.

Frequently asked questions

What is a good asset allocation for a child’s investment account?

It depends on when the money will be spent more than on your child’s age. Money that won’t be needed for 10 years or more has historically done best mostly in stocks, money needed within a few years calls for more bonds, and money needed within about a year belongs in cash equivalents. As one example, Saving for College’s moderate 529 path starts at 80% stocks for a newborn, drops to 35% in middle school and 20% in high school, and holds no stocks at 18.

Should a newborn’s college fund be 100% stocks?

It can be a reasonable choice for the first few years, and Saving for College notes that some families start there, though many age-based 529 options begin closer to 80% stocks. Since 1928, stocks haven’t lost money in any of the 81 overlapping 18-year periods, but money added in later years has less time to grow, and the mix still needs to shift toward bonds and cash as college approaches.

How often should I rebalance my child’s portfolio?

Once or twice a year is plenty for most families. The SEC notes that some experts rebalance every six or twelve months and others only when an asset class drifts past a set percentage, and that infrequent rebalancing tends to work best. In a 529 plan, moving money that’s already invested counts toward the limit of two investment changes per calendar year, so directing new contributions toward the underweight option is often easier.

Are bonds a safe place for college savings?

Safer than stocks, but not risk-free. In 2022, 10-year Treasury bonds lost 17.83%, nearly as much as the 18.04% drop in the S&P 500. Bonds work well as a cushion for money needed in a few years, but money you’ll spend within about a year belongs in cash equivalents, such as a savings account, a money market fund, Treasury bills, or your 529’s most conservative option.

Can I choose how my child’s Trump Account is invested?

Only within narrow limits. Until January 1 of the year your child turns 18, a Trump Account can hold only low-cost mutual funds or ETFs that track an index of mostly U.S. companies and charge no more than 0.1% a year. Treasury named an S&P 500 ETF, SPYM, as the default and four other U.S. stock ETFs that parents would be able to choose once investment elections are available. Bond and money market funds aren’t eligible during that period.

Sources

• Aswath Damodaran, NYU Stern School of Business, “Historical Returns on Stocks, Bonds and Bills” (annual data from 1928 through 2025, updated January 5, 2026).
• U.S. Securities and Exchange Commission, Investor.gov, “Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing” (accessed October 2, 2026).
• Federal Reserve Bank of Minneapolis, “Consumer Price Index, 1913-” (annual averages, accessed October 2, 2026).
• Jeffrey Ptak, Morningstar, “Mind the Gap US 2026” (August 6, 2026).
• Internal Revenue Service, Notice 2025-68, guidance on Trump Accounts (December 2025).
• U.S. Department of the Treasury, “Treasury Announces Investment Lineup for Trump Accounts” (July 1, 2026).
• U.S. Securities and Exchange Commission, Investor.gov, “Trump Accounts” (accessed October 2, 2026).
• S&P Dow Jones Indices, “SPIVA U.S. Scorecard Mid-Year 2026” (data as of June 30, 2026).
• U.S. Securities and Exchange Commission, Investor.gov, “Understanding Fees” (accessed October 2, 2026).
• Kathryn Flynn, Saving for College, “529 Plan Investment Strategies Based on Your Child’s Age” (updated May 9, 2025).
• Kathryn Flynn, Saving for College, “How Many 529 Plan Investment Changes Can You Make Per Year?” (updated October 12, 2021).
• Internal Revenue Service, Revenue Procedure 2025-32, inflation adjustments for 2026 (2025).
• FINRA, “Investing in Fractional Shares” (June 26, 2025).
• U.S. Securities and Exchange Commission, Investor.gov, “Environmental, Social and Governance (ESG) Funds: Investor Bulletin” (February 2021).

This article is for general educational purposes only and is not investment, tax, or legal advice. Historical returns come from the sources cited and don’t predict future results, and investing involves risk, including possible loss of principal. Asset allocation and diversification don’t guarantee a profit or protect against a loss. 529 plan menus, custodial account laws, and Trump Account rules vary or may change, so confirm the details with your plan, your firm, or a qualified professional. GoodNest does not provide tax, legal, or investment advice and does not hold or invest funds.