The Most Difficult Account For Investors To Manage

I recently made a bold change to de-risk my portfolio, which now consists of just 35% globally equities and 65% short-term bonds.

This wasn’t in response to tariffs and global trade wars, or my gut feeling about stock markets crashing in the near term.

No, this was a predetermined change in a specific account type to more appropriately align the investments with the expected time horizon of withdrawals.

I’m talking, of course, about our kids’ RESP portfolio! 

(I’m still 100% invested in VEQT in my RRSP, LIRA, TFSA, and corporate account – in case you’re wondering how I invest my money).

An RESP is the most difficult account for investors to manage. First of all, the time horizon for contributions and growth is relatively short (17-24 years, in most cases). Second, the withdrawal period is *really* short (typically 4-6 years). And third, you actually *want* to run out of money at the end – meaning you’ve withdrawn all of the funds for your kids’ post-secondary expenses.

Imagine the lifetime of your RRSP being condensed to making contributions between the ages of, say, 43 to 60, and then withdrawing all of the funds from ages 61-65 – intentionally exhausting the account (or risk incurring a tax hit or leaving the funds trapped and unspent).

That’s what it means for parents who are managing RESP funds for their child(ren).

In my experience working with clients and hearing from readers, most parents do not hold an appropriate asset mix in their RESP accounts. Either their investments are too risky (like me, having far too much equity exposure for far too long), or their investments are dreadfully conservative and held predominantly in bank deposits, GICs, and monthly income mutual funds.

Worst of all, there is no strategic thought to shifting this asset mix over time – particularly as their children get into their high school years and beyond.

For all of these reasons, I highly recommend following the incredibly useful approach developed by PWL Capital’s Justin Bender for self-directed RESP investors.

The key to managing your RESP portfolio is to have a predetermined glidepath – a rebalancing schedule that you can blindly follow during the contribution and withdrawal years.

In this plan, Justin recommends starting with a portfolio of 90% equities and 10% bonds. Each year you gradually decrease the equity exposure by 5% so that by age 17 you have just 5% in equity and 95% in bonds. At age 18, presumably your child’s first year of post-secondary and of RESP withdrawals, shift the portfolio again to include an allocation to cash or money market funds (25% at 18, 33% at 19, 50% at 20, and 100% at 21).

During the contribution phase, make life easier on yourself and this rebalancing strategy by contributing the entire amount at once in January ($2,500 per child) and adjusting your asset mix for the year at that time.

In a family RESP with multiple children, Justin’s comprehensive article suggests the same approach, but splitting each child’s share of the RESP into different (but similar) ETFs to help parents keep track of each child’s glidepath and share as they age.

For instance, our oldest daughter is in her age 16 year and her share of the RESP account has 25% global equity in VEQT and 75% short-term bonds in VSB (Vanguard).

Our youngest daughter is in her age 13 year and her share of the RESP account has 40% global equity in XEQT and 60% short-term bonds in XSB (iShares).

Finally, follow the rules but feel free to make the strategy your own. For example, you may have noticed that I’m not following the exact recommended age glidepath from Justin’s article, but instead chose the asset mix for a 10 and 13 year old (rather than for a 13 and 16 year old). 

I’ll start shifting a portion of the account to cash in two years to help queue-up the first semester’s withdrawal needs for our oldest daughter.

Final Thoughts

RESPs can be a really challenging account type for investors to manage, especially on their own. It’s not as intuitive as, say, your retirement accounts where young parents might be perfectly comfortable investing in 80-100% equities, knowing that their time horizon is long and they want to maximize growth during their working years, but also into and throughout retirement.

To a risk-seeking investor it just doesn’t seem right to hold a 60/40 portfolio for their child who is under the age of 10.

And in your child’s high-school years, reality still might not have set in that they will be withdrawing from this portfolio in the near future. Pair that lack of awareness with a rising stock market and it certainly won’t feel good to take risk off the table and move to short-term bonds and cash. You want to squeeze every drop of return from the market before that happens.

The problem is, as we’ve seen earlier this year, markets can turn negative in a hurry and you could suddenly be faced with a 10-20-30% drop in value at the worst possible time.

In my mind, the RESP is all about maximizing the matching government grants (20% free money!) rather than trying to hit a home run with your investments. Because of the challenging time horizons of your contribution and withdrawal phase, I’d rather err on the side of being a bit too conservative so that I can avoid or minimize regret.

Remember, the phenomenon of loss aversion states that we feel the pain of a loss twice as much as we’d derive pleasure from an equivalent gain.