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Education savings plans have increased in popularity over the past decade or so. As people have struggled with savings for their children’s education, so too have they struggled with where to invest the money they set aside every week, month or year. But interestingly, they struggle less when it comes to the mutual funds that are part of an education savings program than they do with their own savings and their retirement savings in particular. Since most people will start with smaller numbers when saving for a child’s education, the natural start is with mutual funds; balanced funds in particular.

It is not so much about knowing where to invest than it is about how to invest.

And this makes sense. Balanced funds offer tremendous growth opportunities in the mid- and long-terms. A balanced fund that takes a tactical approach to investment management will do its best to get a lead on the markets, whether it is in bonds or equities or a tactical approach to both. Ideally, however, tactically managed balance funds will provide active investment management, something that many people cannot enjoy with investment values of $100 per month.

More importantly however is that people who decide on balanced funds are more inclined to “sit” on them during periods where market values erode, such as what was seen up until 2009. This becomes a strategic approach, then, so that it is not so much about where to invest than it is about how to invest.

Unfortunately, many investors who witness the type of portfolio erosion that most investors witnessed from the end of 2007 through to the first quarter of 2009 get nervous. They hate to see the type of devaluation that they undoubtedly witnessed. And where their education savings are concerned, the time horizon for that investment may not be as long-term as, say, their retirement savings; Junior will be going to college in two years and cannot wait the fifteen years that I can wait to see that education savings plan recover.

So they pull the plug. They drop that terribly depreciated balanced fund and decide against all wisdom, all historical evidence and advice that where to invest is actually in income-producing securities. Not high yield investments, either because all companies are going the way of GM, Ford and Chrysler or because they have become turned off anything corporate altogether. So instead of those high yield investments, they choose government bonds or, worse yet, term deposits.

And we all know where those rates are. They are low, they provide so little income that the purchasing power erosion combined with rising tuition costs will have a negative compounding effect on the actual purchasing power of the original investment. In addition, as those government rates start to rise to compensate for inflationary pressures, the value of those bonds will decrease (of course, TD’s will retain their par value, but at virtually 0% interest, they provide next to no liquidity… there is no getting out until the maturity date).

So where is the true logic in bailing at what could be ultimate low in that balanced fund’s market value?

That’s the thing, there is no logic. Emotions overtake logic.

This past year has illustrated that history has a way of repeating itself. And of course, those who bailed at the ultimate low have seen that markets do recover.

Statistically, people who invest in education savings are more apt to sit tight. And this is a good thing, as history has proven time and again.

In regards to knowing where to invest in an education savings program, realize that Balanced funds clearly provide the best overall option, particularly for people with lower dollar figures to invest (which would probably be most people). Not only do many balanced funds provide enough of a tactical investment management approach, allowing the fund managers to shift from one asset class to another in times of market turmoil, but they are normally managed by the best and brightest — and most of us are nowhere near as intuitive as they when it comes to investing.

And for those with larger amounts to invest. Consider a strategic asset allocation model.

Because knowing where to invest is often secondary to knowing how to invest.