As I recall, the first year of parenthood is kind of busy.
Many adjustments, little time to devote to grand strategies for investing in a registered education savings plan, or RESP. And, little money. Young parents need an RESP option that is undemanding in fees and requirements on how much you have to contribute.
A first-time dad recently got in touch with questions about RESPs that touch on both these themes. “We are starting to look at RESP options and are wondering what might be a good strategy to follow,” he wrote. “We plan on making monthly contributions of $200 and would like to invest in something with low purchasing cost due to frequent contributions, and some sort of index strategy that is moderate risk over the next 20 years.”
Suggestion: Consider setting up an RESP account at an online broker and using it to invest regularly in an asset allocation exchange-traded fund, also known as a balanced ETF. These products are ideal for busy people because they provide instant exposure to bond and stock indexes covering Canada, the United States and markets outside North America.
My sons are in their 20s and long past the RESP stage. But if I were setting up an account for them right now, I’d go with the growth version of an asset allocation ETF. That usually means 80 per cent stocks and 20 per cent bonds. There are also asset allocation ETFs that are classified as balanced, which typically means a more conservative 60-40 stocks-bonds split.
Fees for these products are light – expect a management expense ratio in the 0.2- to 0.24-per-cent range, which induces the cost of holding the underlying ETFs in the portfolio. The cost of buying these ETFs would be zero, if you choose the right brokerage.
National Bank Direct Brokerage and Desjardins Online Brokerage recently eliminated all commissions for stocks and ETFs. You could buy units of an asset allocation ETF biweekly or monthly and not pay a cent in trading costs. Questrade and Virtual Brokers charge nothing to buy ETFs, but the usual commissions apply when you sell. Qtrade Direct Investing and Scotia iTrade offer free trading for a limited number of commission-free ETFs, including asset allocation ETFs from the iShares family. Asset allocation ETFs are also available in the BMO, Horizons and Vanguard lineups.
One of the appealing things about asset allocation ETFs is that you can rotate into more conservative versions as your kids get closer to starting their postsecondary education. My own RESP strategy was to dial back the aggressiveness somewhat when our boys began high school and then take the risk out completely in the Grade 12 year by moving into guaranteed investment certificates. At that point as a parent, your job is to preserve what you’ve built through years of RESP contributions.
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Rob Carrick