This post is part of the Big RESP Series. See the entire series here.
See the previous post on resp withdrawals here.
When setting up a resp account it’s important to determine and monitor the asset allocation of the account. Typically the asset allocation is determined by the risk profile of the investor and the amount of time remaining until the money is required. Equities are considered risky assets but over a longer term they are fairly reliable. If you are making an investment and you need the money in two years then equities are not advisable because there is too much risk that their value will go down over those two years. Short term bonds or a high interest savings account is a better investment for money that is required in the short term. The idea is not get superior returns but to ensure that the money is there when needed.
So if equities are a good investment over the long term but not the short term, the question has to be asked – how long is the “long” term and how short is the “short” term. I would say that short term is anything less than five years and the long term is 15 years or more. Please note that this is strictly my opinion so don’t write it in stone!
Unlike retirement planning where you don’t know how long the portfolio will be in use for, RESP planning is a bit easier since you can make a pretty good estimate of the start date of withdrawals and the end date of withdrawals.
For this example I’ll assume that the student goes to school starting the year they turn 17 and finish up four years later.
I’ll go through different stages of the resp in terms of how old the student is:
|
Age range
|
Equity %
|
Bonds %
|
|
0-5
|
100
|
0
|
|
6-11
|
60
|
40
|
|
12-17
|
40
|
60
|
|
In school
|
0
|
100
|
Once they are starting school all the money will be withdrawn within five years so it should be in very safe securities such as high interest savings accounts, short term bonds or money market funds.
If you are a more conservative investor then you might want to do the following:
|
Age range
|
Equity %
|
Bonds %
|
|
0-5
|
60
|
40
|
|
6-11
|
50
|
50
|
|
12-17
|
25
|
75
|
|
In school
|
0
|
100
|
I would invest equally in Canadian, US and EAFE for the equity portion and in short term bonds ETF or a bond index fund for the bond portion. You can add other asset classes to the mix as well. This example is intended to show a simple asset allocation.
I’ve indicated the allocations at five or six year terms. If you are really keen and plan to rebalance every year then you can also adjust the allocation every year.
Obviously none of the above allocations are perfect for every investor so try to keep in mind the idea that money which is required in the short term should be invested in safe investments and try to adapt the above suggestions to your situation.
See the next post on RESP Individual and Family Plans.