Setting The Right Asset Allocation For RESP Investments
Fee-for-service financial planner and founder of PlanEasy.ca
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 we’re 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).
- Catch-Up On Your RESP Contributions and Free Government Grants
- Canada Child Benefit: The Hidden Tax Rate
- Family Financial Planning: Tax Strategies for Families with Children
Typical Investment Horizons for RESPs
RESPs typically go through three different investment horizons, and they do that over a relatively short period of time. This is unlike retirement savings which remains a long-term investment for a very long time, sometimes decades. RESPs start out as a long-term investment but quickly shift into medium-term and then short-term.
Here are the three investment horizons for RESPs based on the age of the child:
Age 0-8: Long-Term
Lots of time to make back losses. Can choose a higher risk mix of investments in-line with personal risk profile.
Age 8-13: Medium-Term
Some time to make back losses but it depends how much. Choose a balanced mix of investments considering personal risk profile.
Age 13-18: Short-Term
No time to make back losses. Choose safe investments regardless of personal risk profile.
Setting A Target Asset Allocation By Year For RESP Investments
We can take this one step further and target a specific asset allocation year by year.
We’ll start at age 0 with an aggressive asset allocation of 90/10 (adjust this based on your personal risk profile) and we’ll end with a very conservative asset allocation of 10/90 at age 17.
Based on those two targets we can extrapolate our target asset allocation year by year. Based on these two targets we want to shift our asset allocation by approximately 4.7% each year.
Here is an example RESP plan for a family with one child…
Setting RESP Asset Allocation For Families
This can be done for a family as well but it gets a bit more complicated. We can set the same target asset allocation for each child based on age, but then we want to weight that allocation by each child’s age to make it fair for the older children who technically have more contributions (were not using actual contributions, were taking the value of the account and spreading it across the children based on number of available contribution years).
The idea is that a 6-year old should have twice the contributions as the 3-year old, so we want to weight the allocation more heavily for the 6-year olds target allocation and weight it a little bit less for the 3-year olds target allocation. The result is this nice blended allocation for the entire family.
Here is an RESP plan for a family with four children…
If this all seems like too much work, please seek out help from an advice-only financial planner. The last thing you want is to see your child’s education savings lose value just a few years before starting post-secondary. If you don’t feel like you have the right asset allocation then please seek out some unbiased help.
Disclaimer: This is for educational purposes only and should not be considered investment advice. Always speak with your financial planner before making changes to your investment plan.
Financial planner, personal finance geek and founder of PlanEasy.