One of the hardest things about RESPs is choosing the right investment and managing the allocation between stocks and bonds. There are so many RESP investment options and it becomes especially challenging when families have more than one child. When families have a few children, who are perhaps a few years apart in age, it becomes very challenging to set the right asset allocation for the investments inside the family RESP.
Why is it important to set the right asset allocation?
Asset allocation is a large driver of risk. The more equity assets in a portfolio, and the less fixed income assets, the more risk. There is always risk when investing, whether that be in stocks or bonds, but stocks have always had a “risk premium”. That means they have a higher risk but also a higher return.
When managing asset allocation in an RESP we need to be very careful because were typically investing over a few different time horizons.
A 16-year old high school student is going to have a very different asset allocation in their RESP than a 4-year old pre-schooler. We want to make sure the 16-year old has money for post-secondary in two years and isn’t going to lose half of their education fund during a downturn. On the other hand, our pre-schooler has loads of time, so we can take on a bit more risk and hopefully grow their education savings over the next 14+ years.
It’s these different investment horizons that make investing inside an RESP especially challenging (even more so for self-directed RESPs where the individual investor is making all the decisions).
Typical investment horizons for RESPs include…