In some ways, RESPs are basically completely different from retirement accounts comparable to RRSPs. They sometimes have a shorter time horizon, and they’re normally depleted inside 4 or 5 years as soon as your baby reaches post-secondary college. Usually, they’re additionally a lot smaller than retirement accounts, because the most you’ll be able to contribute is $50,000 throughout a beneficiary’s lifetime. However the identical rules of danger administration apply, and holding nothing greater than a Canadian dividend ETF in an registered training financial savings plan account could not present sufficient diversification.
READ: What’s an RESP?
For those who’re opening a brand new RESP for a child, then you’ve at the very least 18 years earlier than it is advisable begin withdrawing the cash. So you need to begin with the aim of constructing a globally diversified portfolio, which incorporates all asset lessons, not simply Canadian dividend shares. However the problem—at the very least till not too long ago— is that it may be troublesome to construct an environment friendly ETF portfolio once you solely have a small quantity to take a position. To get the utmost RESP grant, you solely must contribute $2,500 yearly, so the account is prone to be very small at first.
The excellent news is that Canada’s largest ETF suppliers—iShares, BMO, Vanguard and Horizons—all provide so-called “asset allocation ETFs” that present one-stop buying. These ETFs consists of six or extra underlying funds that maintain bonds and shares from all over the world, permitting you to construct a globally diversified portfolio with only a single commerce. If you wish to use ETFs in an RESP, these funds are perfect.
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Whereas your baby may be very younger, you’ll be able to afford a comparatively aggressive strategy, so long as you’re comfy with the volatility. For instance, the Vanguard Progress ETF Portfolio (VGRO) holds 80% shares and 20% bonds and may very well be an acceptable holding for the primary 10 or so years. For those who would favor one thing much less unstable, all 4 ETF suppliers provide a balanced model with 30% to 40% in bonds.
As soon as your baby will get near highschool age, it is sensible to dial again the danger considerably, because you need to ensure that a protracted bear market received’t jeopardize your baby’s training funding. That may probably imply progressively promoting shares of the ETF in placing the proceeds into money or fastened revenue (comparable to short-term GICs), to ensure the cash is on the market when it’s time to pay the schooling payments.
Dan Bortolotti, CFP, CIM, is a portfolio supervisor and monetary planner with PWL Capital in Toronto.
This text was initially printed on Mar. 22, 2019, and it has since been up to date.