During this time of uncertainty, many readers have contacted me for continued portfolio updates.  One group in particular –  parents –  are asking me what I’m doing with my RESPs.

What is an RESP?  At a high level, an RESP is an investment account for future post-secondary students and stands for Registered Education Savings Plan.  It can be set up as an investment account that grows tax-free until the money is withdrawn towards education expenses (and taxed in the student’s hands).

The icing on the cake is that the federal government matches 20% of RESP contributions up to a maximum of $500/child/year.  In other words, you’ll max out government matching when you contribute $2,500/year/account.

The RESP portfolios for our children are set up with TD e-Series mutual funds which provide a low-cost way to index the market (some other ways to index your portfolio).  We contribute $2,500/account/year to get the maximum contribution from the government of $500/account/year.  So basically $5,000 contributed to the two RESP accounts gives us $6,000 annually to invest.

So what are we doing with our RESPs during this time?  Are we buying through this market correction and the following bounce?  

As evidenced in my last financial freedom update, I have been adding to our investment accounts throughout the first quarter.  RESP accounts included.  In fact, I have a tendency to hold a portion of cash in my portfolios, and this is likely the lowest percentage of cash in these accounts since inception.

The original plan was to be aggressive for the first 10 years (90% equities 10% bonds) for each child with increasing fixed income as the University tuition nears.  I copied the table from my original RESP strategy article below.

I have since adjusted the first 10 years to have close to 75% equities and 25% bonds. I like to keep things simple, and having it set up this way will still provide solid long-term results, while enabling me to keep it simple with 25% in each of Canadian equity, US equity, International equity, and Bonds.  

As of today, my oldest child is 12 and my youngest 9.  I have increased the bond allocation of my oldest child but staying fairly aggressive with the youngest account.  We aren’t quite at 40% bonds for the 12-year-old yet, but getting there.  During the March 2020 correction, I actually transferred a bit from bonds to equities and plan to transfer back in the near future.

Index 0-10yrs 10-14yrs 14-17yrs 18yrs +
Canadian Equity 30% 25% 20% 10% 0%
US Equity 30% 25% 20% 10% 0%
International Equity 30% 25% 20% 10% 0%
Canadian Bonds 10% 25% 40% 35% 0%
GIC’s 0% 0% 35+% 75%
Money Market Fund 0% 0% 0% 25%

First (oldest child) RESP Portfolio (started 2nd quarter 2008)

Investments Units Held Price Per Unit Market Value % Holdings Book Value
TD CDN Money Mkt 109.213 $10.00 $1,092.13 1.81 $1,092.13
TD CDN Index-e** 550.631 $24.33 $13,396.85 22.190 $11,977.29
TD US Index-e** 200.205 $70.19 $14,052.39 23.280 $5,895.73
TD CDN Bond Index-e** 1604.558 $12.30 $19,736.06 32.690 $18,583.70
TD Int’l Index-e** 981.163 $12.33 $12,097.74 20.040 $10,465.20
Total as of May 01, 2020 $60,375.17   $48,014.05

Second RESP Portfolio (started 3rd quarter 2011)

Investments Units Held Price Per Unit Market Value % Holdings Book Value
TD CDN Money Mkt 109.25 $10.00 $1,090.25 2.660 $1,090.25
TD CDN Index-e** 425.247 $24.33 $10,346.26 25.20 $9,247.20
TD US Index-e** 151.251 $70.19 $10,616.31 25.86 $5,975.24
TD CDN Bond Index-e** 781.375 $12.30 $9,610.91 23.41 $9,060.06
TD Int’l Index-e** 761.988 $12.33 $9,395.31 22.880 $8,372.43
Total as of May 01, 2020 $41,059.04   $33,745.18

The investment return for both portfolios has been fairly close throughout the years.  I ran the numbers through Excel’s XIRR function (here’s how to use XIRR to calculate investment returns) from inception to May 1, 2020.

While 2020 has been a correction year so far, the long-term results remain encouraging.  For the oldest child, we started the portfolio in early 2008 near the peak of the market so there was a point in early 2009 where the market value of this portfolio was significantly below book value.  It’s comforting to see that re-balancing with new money every year has brought positive longer-term results.  Since its inception, this portfolio has returned 7.0% annually.

The second RESP portfolio was started near mid-2011, which fortunately was during a small market correction.  Since the last update, I managed to bring the % holdings of each of the mutual funds to “near” target amounts by releasing some of the cash that I have a tendency to hoard.  New cash this year was deposited directly into each mutual fund, instead of moving money into the money market prior to re-investing into the funds. Since inception, this portfolio has returned 6.50% annually.

So in conclusion, I find that indexing provides a steady, systematic, and low-stress way of investing.  With another 5 years until post-secondary education for my oldest child and 8 years for my youngest, the accounts should have enough to cover most of their undergraduate degrees if they decide to move away from home, and perhaps even pay for a post-graduate degree should they stay home.

That’s our RESP update for 2020. Even with a “major” market correction, indexing continues to provide a steady, hands-off, way to invest for long term results.  Stay safe out there!

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