ABC Stocks asked me to post about my RESP strategy. As mentioned in my post on “Having a Newborn – Getting down to business“, I plan on opening a TD e-funds account (non aff) and buying cheap index based mutual funds.

Why TD e-funds?

What I really like about the TD e-funds setup is that they only offer low management expense ratio (MER) index funds. This is great for the investor who likes to “do it yourself”. Why not buy ETF’s instead? As I plan on putting small amounts at time, index mutual funds are cheaper than purchasing ETF’s via commission. In addition, the TD e-fund MER’s are so low that they are comparable to the MER’s on ishare ETF’s.

The Strategy

We’re going to implement a global couch potato based strategy where the RESP money will be split between 4 index funds and rebalanced on an annual basis. The 4 index funds will consist of:

  1. Canadian Equity
  2. US Equity
  3. International Equity
  4. Canadian Bonds

As for the actual percentages of each stock, that will change as time goes on to reduce risk and volatility. Lets assume that the RESP Plan will start withdrawing on year 18:

Index 0-10yrs 10-14yrs 14-17yrs 18yrs +
Canadian Equity 30% 20% 10% 0%
US Equity 30% 20% 10% 0%
International Equity 30% 20% 10% 0%
Canadian Bonds 10% 40% 35% 0%
GIC’s 0% 0% 35+% 75%
Money Market Fund 0% 0% 0% 25%
  • As you can see, from years 0-10 (Growth), the equity portion of the portfolio will be aggressive to hopefully maximize equity gains over the 10 years.
  • Moving into years 10-14 (Balanced), the portfolio takes a more balanced approach between equities/bonds to reduce risk without sacrificing too much in returns.
  • In years 14-17(Capital Preservation) is nearing withdrawal time, which means that capital preservation are among the top priorities. To do this, most of the portfolio will be in bonds/GIC’s. The equity and bond allocation will slowly be reduced to 0 over the three years while adding to the GIC allocation.
  • Years 18+ are the withdrawal years which means that capital preservation is the top priority which will be achieved via investing in a GIC ladder. This will allow money to be available every year that the child is in school. The annual lump sum will most likely be kept in a money market fund until the money is needed.

There is some planning to do with regards to the timing of the GIC ladder, but this is the general strategy. How does my plan look? Do you have any suggestions?

If you want to do some more reading on the TD e-funds, Canadian Capitalist also has a ton of information on them.

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