If you’re looking for a model RESP portfolio you can quickly setup for your kid’s post-secondary education, this post is for you.
Registered Education Savings Plan (RESP) is an excellent tool for parents looking to start saving and investing for their children’s education. And with the grant money from government, not taking advantage of the program is a big mistake
In this post, I’ll lay out a simple way you can start investing your RESP contributions on your own.
An RESP model portfolio
When I opened my child’s RESP, I understood the need to build a diversified portfolio while keeping investment costs low. Unfortunately, my options were limited given the available ETF options.
I started by buying a few ETFs to give the portfolio some exposure to the Canadian, U.S., Developed countries and emerging markets. Even with just a handful of ETFs, the on-going maintenance was a nightmare.
Each time I contribute new funds, I needed to work out which ETF to buy to maintain my desired asset allocation. This model RESP portfolio solves that problem.
By the end of this post, you’ll know how to setup a low-cost RESP model portfolio with minimal on-going maintenance using only one asset allocation ETF like the ones below.
All equity Portfolios:
- Vanguard All-Equity ETF Portfolio (VEQT): 0.25%
- iShares Core Equity ETF Portfolio (XEQT): 0.20%
- Vanguard Balanced ETF Portfolio (VBAL): 0.25%
- iShares Core Balanced ETF Portfolio (XBAL): 0.20%
What we need to build the RESP Portfolio
We need 2 things to set up the RESP model portfolio:
#1. RESP account at a brokerage
Obviously, you’ll need to open an RESP account to start investing for your child’s education. But just any brokerage will not do. We’ll get into what you should look at when choosing a brokerage in detail below.
#2. An Asset allocation ETF
Asset allocation ETFs, also called One-ticket ETFs, are a quick, convenient, and affordable way to build an investment portfolio. With a single purchase, you’ll have access to thousands of different securities at your desired asset mix.
More importantly, the on-going maintenance is seamless since the ETF providers handle all the rebalancing automatically.
Check this guide to learn more about how to start investing with asset allocation ETFs.
5 Simple Steps to Implement the Portfolio
We’ll go into details on each of the steps below but here’s a quick summary:
- Open an RESP account at a broker that let’s you buy asset allocation ETFs for Free
- Determine the ideal asset mix for your kids’ RESP portfolio by considering their age and your own risk tolerance
- Choose an asset allocation ETF that mirrors your desired asset mix from one of the ETF providers
- Buy the ETF and continue to contribute to the account periodically
- Reassess the portfolio risk as your kids grow and switch to more conservative asset allocations gradually
Step 1: Opening an RESP Account
To get started, you need to open a self-directed RESP account at one of the investment brokerages in Canada.
We need a brokerage or investment app that:
- Allows RESP accounts. Yes, RESP accounts are not supported by all brokerages. WealthSimple Trade or TD GoalAssist do not support RESPs for example.
- Lets you buy the “all-in-one” ETF of your choice
- A brokerage that is low-cost because we want to keep the investment costs low.
Why is choosing a low-cost brokerage important for RESP accounts?
Many parents spread their RESP contributions over 12 months. If you’re planning to contribute $2,500 to get the maximum CESG grant of $500 in a year, that means you’ll be investing $208.33 monthly.
Paying about $10 each month to place your trades will work out to an investment cost of almost 5%. We don’t want that.
So it is important to keep the costs low. Preferably, go with a broker that will lets you buy ETFs for free like Questrade.
We’ll go over how-to setup the model RESP portfolio using Questrade in this post.
Questrade is arguably the best online brokerage in Canada and they have everything we’re looking for in a self-directed RESP account.
To open an RESP account at Questrade, simply go to the link below. Navigate to “Self directed Investing” from the menu and select RESP under the Educational tab.
Then follow the instructions to fill the forms and provide all the required documents.
By going through the link, you’ll get $50 commission rebate when you open a self-directed account, or $10,000 managed for free in the first year for managed portfolios.
The entire account opening process and funding of the account should take a few days. Note that Questrade requires a minimum balance of $1,000 before you can start trading. While waiting, you can proceed to the nest step.
Step 2: Determine your ideal asset mix for the RESP Portfolio
The next step in building the model RESP portfolio is to decide on the asset allocation or asset mix of the investments you’ll hold in the account.
You should know that an RESP account is not like your typical bank’s savings account. You can hold a variety of investments depending on your risk appetite.
So how do you determine the best asset allocation for your RESP portfolio? What are the things to consider?
What is the right asset allocation for your child’s RESP?
Like other investment portfolios, the right asset mix or ideal asset allocation for an RESP portfolio will vary from one person to another.
The most important factor to consider is the time horizon. That is, how soon will you need to start withdrawing money for your child’s education. In other words, how old is the child?
Even within a family with individual RESP accounts for the kids, the RESP portfolio for a 15-year old kid should look different from that of a 3-year old.
You may have a higher allocation to equities, say 80 percent, in the RESP account of the younger child, but the same equities allocation will not be prudent for the older child.
In addition, you need to consider your risk tolerance or risk appetite. Risk tolerance deals with your ability to withstand losses in your portfolio without panicking.
Together, these 2 factors will suggest that you start with a more aggressive or risky RESP portfolio when your kid is young. Then gradually de-risk as the child grows and get closer to starting post-secondary education.
Model Asset Allocation
What all of this means is:
You can’t just set an RESP portfolio up one time and forget it. You’ll need to continuously evaluate whether it is appropriate for your child’s age or not.
The good thing is:
The reassessment does not have to be done every year. And by using an asset allocation ETF, the de-risking process will be stress-free and low cost.
Still not sure of the right asset allocation for the RESP portfolio? Here’s an handy guide from Owen Winkelmolen, a fee-for-service financial planner and founder of Planeasy.ca.
- Age 0 – 8 (Long-Term): choose an asset mix with higher risk since you have lots of time to make up for any losses in the short term
- Age 8-13 (Medium-Term): Switch to a balanced asset allocation
- Age 13 – 18 (Short-term): The funds in the portfolio will be needed in a few years. It is time to switch to more conservative and safe investments.
Specifically, the asset allocation may look like this depending on your personal risk appetite:
- Age 0 – 8: 100% equity
- Age 8 – 13: 70-80% equity
- Age 13 – 15: 40 – 60% equity
- Age 15 and above: 20-40% equity
- Start with an asset mix with higher risk ((higher allocation to equities) when your child is younger.
- Gradually switch your investments to a more conservative asset mix as they grow older (balanced funds, GICs for example)
Step 3: Choice of Asset Allocation ETFs for the Model RESP Portfolio
Three of the biggest ETF providers in Canada have a range of One-ticket ETFs to choose from depending on the level of risk you want in the RESP portfolio.
From step 2, you should have decided on a target asset allocation to start with. If yes, simply pick one of the available options from the 3 providers below:
Vanguard Asset Allocation ETFs:
Vanguard has 5 asset allocation ETFs as shown below. The ETFs were introduced between 2018 and 2019 and currently have an MER of 0.25%.
|VCIP||Vanguard Conservative Income ETF Portfolio||0.25%||20% Equity: 80% Fixed Income|
|VCNS||Vanguard Conservative ETF Portfolio||0.25%||40% Equity: 60% Fixed Income|
|VBAL||Vanguard Balanced ETF Portfolio||0.25%||60% Equity: 40% Fixed Income|
|VGRO||Vanguard Growth ETF Portfolio||0.25%||80% Equity: 20% Fixed Income|
|VEQT||Vanguard All-Equity ETF Portfolio||0.25%||100% Equity|
BlackRock (iShares) Asset Allocation ETFs: Also has 5 different ETFs to choose from with a Management Expense Ratio (MER) of 0.20%.
BMO and Horizons are two other providers of one-ticket ETF portfolios in Canada.
I’m investing with the all-equity fund from Vanguard, VEQT, because my son is still quite young (below 4). Though it has a higher MER than XEQT from iShares, 0.25% vs 0.20%, it was introduced earlier and I’d already setup the portfolio.
I don’t see the need to make a switch yet. But if I’m just starting today, I’ll probably go with XEQT.
Step 4: Buying the Asset Allocation ETF
The next step in setting up the RESP model portfolio is buying the asset allocation ETF you’ve decided on.
The steps to buy a security on Questrade is quite straight-forward. Here’s how the order page looks like.
To get to the screen, click on “Trade” on the menu and type in the ETF ticker to place the trade.
Tip: Usually, I’ll place a limit-order. But the ETF is very liquid so placing a market order can also work.
If you’re not sure what the difference between a market and limit order is, check this post on 65 definitions for beginner investors.
Click on the BUY button and confirm the trade. Congrats! You made your first RESP investment.
Step 5: Reassess the Portfolio Regularly
Like I mentioned earlier, you can’t just set up the RESP portfolio and leave it till it’s time for your kids to go to college.
You’ll need to reassess the portfolio’s asset mix as your kids get older. The good news is that making changes to the portfolio is simple.
For example, let’s assume you had $20,000 invested in the VEQT with 100% allocation to equities till your child clocked 8. To reduce the risk of the portfolio to 80% equities, simply sell the entire VEQT holding and buy VGRO.
That’s just 2 trades and they’ll cost about $9.95 with Questrade: $9.95 to sell VEQT and $0 to buy VGRO.
Here’s an illustration:
|Age||Asset Allocation ETF||Action|
|0-8||VEQT||Buy VEQT periodically commission free|
|9-13||VGRO||One-time sale of the VEQT holding ($9.95);|
One-time purchase of VGRO: commission free
On-going periodic purchase of VGRO: $0
Dale of Cut The Crap Investing has a great post in the link showing the Vanguard One-ticket ETFs to hold for different age groups.
On-going Maintenance of the RESP Portfolio
The biggest advantage of an RESP model portfolio built with asset allocation ETFs is the ease and convenience of managing it on an on-going basis.
You don’t need to do any complicated calculations each time you contribute new money to the account. With a portfolio with many holdings, you may need to work out which investment to buy to maintain your desired asset allocation.
That extra step is eliminated with this RESP model portfolio. It is like building your own One Minute Portfolio.
In summary, here’s what you need to do to maintain any portfolio built using an asset allocation ETF:
- Contribute new money to the account: You may even setup pre-authorized deposits to the account to save more time. This is ideal if you generally invest a fixed amount of money at regular intervals.
- Login to your brokerage account
- Place the trade: Buy enough units of the ETF to cover the cash you have.
Many of these ETFs have lower prices. Both VEQT and XEQT currently trade below $25. This makes them very accessible and lets you invest with smaller sums of money.
Managed RESP Portfolios
If all of these still look like too much work for you, or you just want the portfolio handled by professionals, you may want to consider a managed RESP portfolio.
With managed portfolios, you hand over the control of your portfolio to the professionals. The portfolio will be built and managed on your behalf according to an asset mix that will be recommended to you based on your financial goals, time horizon and risk appetite.
In exchange, you’ll pay a management fee. For example, Questrade’s managed account offering, Questwealth Portfolios, has a management of 0.25% or 0.20% for assets above $100,000.
With the underlying MER on the ETFs they invest in, the total cost will come to about 0.35-0.40%. That is still a bargain considering the price of their competitors or what you’ll pay for other actively managed fund.
A Quick Recap
To set-up a DIY RESP portfolio, you need to open an account at a low-cost brokerage, preferably one that let’s you buy ETFs for free like Questrade.
Next, decide on the risk you’re willing to take and choose an ETF that aligns with it. Then start contributing to your account and invest the money. You’ll probably spend less than 5 minutes on the portfolio each month.
But if you want a low-cost, hands-off RESP, then consider opening a managed RESP with one of the robo-advisors. Questwealth Portfolios from Questrade is a great option.
I hope you found this post useful and now have the information you need to quickly build a well-diversified and low-cost fund using the model RESP portfolio.
Let me know in the comments if you have any questions.
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