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RESP Portfolio Update – December 2013

It’s been about a year since my last RESP portfolio update and probably would have been longer if it wasn’t for a reader request for a quick update. The RESP portfolios for our children are setup with TD e-Series mutual funds which provide a low cost way to index the market.  We contribute $2,500/account/year to get the maximum contribution from the government of $500/account/year.  So basically $5k contributed gives us $6k to invest.

We went with index mutual funds instead of index ETFs because of the freedom of adding small amounts at a time without having to pay a commission for every purchase.  Since opening the accounts, there have been some advancements in ETFs and discount stock brokerages (here is an updated comparison). If I were to setup an RESP account today, it would be a tough to choose between this and no-commission ETFs.

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

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%

Portfolio totals as of December 6, 2013

First RESP Portfolio (started 2nd quarter 2008):

Investments Units
Held
Price Per
Unit
Market
Value
%
Holdings
Book
Value
TD CDN Money Mkt 400.53 $10.00 $4,005.30 17.47 $4,005.30
TD CDN Index-e** 228.59 $21.91 $5,008.45 21.85 $4,638.48
TD US Index-e** 151.737 $33.84 $5,134.78 22.40 $3,132.94
TD CDN Bond Index-e** 211.48 $11.12 $2,351.61 10.26 $2,412.36
TD Int’l Index-e** 589.70 $10.95 $6,424.33 28.02 $5,237.24
Total as of Dec 6, 2013 $22,924.47 $19,426.32

Second RESP Portfolio (started 3rd quarter 2011):

Investments Units
Held
Price Per
Unit
Market
Value
%
Holdings
Book
Value
TD CDN Money Mkt 251.84 $10.00 $2,518.41 23.50 $2,518.41
TD CDN Index-e** 129.93 $21.91 $2,846.85 26.57 $2,552.91
TD US Index-e** 46.66 $33.84 $1,578.94 14.73 $1,024.91
TD CDN Bond Index-e** 88.90 $11.12 $988.60 9.23 $1,027.24
TD Int’l Index-e** 254.18 $10.95 $2,783.28 25.97 $2,100.43
Total as of Dec 6, 2013 $10,716.08 $9,223.90

We started the first 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 results.  This portfolio is up about 18% since inception (not including annual contributions or Canadian Education Savings Grant).  While the % holdings on some of the mutual funds appear to be on track, there is way too much cash.  I hope to deploy the cash in the coming year.

The second RESP portfolio was started near mid 2011, which fortunately, was during a small market correction.  Since last year, I managed to bring the $ holdings of each of the mutual funds to “near” target amounts.   I had a hard time adding to the US index as it’s been making highs all year.  Like the first portfolio, there is too much cash and will be re-balancing in the new year.   This account has returned 16% since inception (not including annual contributions or Canadian Education Savings Grant).

If you have setup an RESP, who is your provider?  What is your investment strategy?

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 24 comments… add one }
  • Paul T December 9, 2013, 9:37 am

    Just curious about your allocations. If you’re following the RESP %’s strategy you mentioned in the article, why would you have any money in a Money Market fund? You shouldn’t need cash like holdings for at least another 5-7 years based on the age of your children.

    I’m basically using the same table for our RESP, but without the MM funds. Although I do find it hard to stick with the allocations, I figure that when we contribute again in Jan, we can get back to our target allocations (the US portion has grown much faster than the others)

  • Richard December 9, 2013, 11:18 am

    Holding 20% of the portfolio in cash is a lot! Do you expect the 10-year return on cash to be higher than the US stock market? (not to mention others like the Canadian market that has an even better dividend yield)

    If you’re waiting for a correction, a 10% drop on the S&P 500 from today would bring it down to 1626. Investing any time before May 7th this year would have gotten you a better price (not counting the dividends you would receive along the way). If we have a 10% correction right now someone who bought at the start of the year would still be up by over 11%, compared to the pennies you can get on cash.

    I started an RESP account as well last year. The returns to date are 50% on the amount contributed and 26% on the book value.

  • FrugalTrader FrugalTrader December 9, 2013, 11:27 am

    Of course you are all right, there is way too much cash and should be invested and re-balanced. I have never claimed to be the best index investor. :) It’s very difficult for me to buy when the index is high, but in this case, it has worked against me as the SP500 has gone to the moon. Another reason for the high amount of cash is that I have neglected these accounts a bit. Planning to fix in 2014!

  • Richard December 9, 2013, 11:35 am

    If you’re used to buying individual stocks this type of approach might make sense. An overvalued index likely has a lot less risks than an overvalued stock because it’s not as likely to suffer permanent losses or disappear altogether. So for long-term investors it very rarely makes sense to stay out of the market completely.

  • Paul T December 9, 2013, 11:35 am

    @FT, my RESP is probably my best performing account. I rigorously stick to my target allocations 30/30/30/10 without even thinking about it. Because there is a fixed %, and I stick with it, I find it easier to invest than in my other investment accounts. When I don’t have to “think” about what to put the money into, I just do it.

    30/30/30/10 for a few more years, then start moving into cash :)

  • Richard December 9, 2013, 11:44 am

    Paul, do you have a set allocation for your other portfolios? It’s easy for me because I always use new cash to return to my chosen allocation. I might decide to change that allocation any time but I want to make that decision and then implement it, not let it happen to me. I also strongly doubt that I’ll ever decide to hold 20% in cash.

  • Paul T December 9, 2013, 12:02 pm

    @richard, I try and hold about the same as my RESP in my other accounts. I’m targeting about 5% bonds with the remainder evenly split across CA, US, INTL. But I always seem to have some cash kicking around (usually dividends). But the recent uptick in the us markets, added with the drop in CA has made my US portion pretty high. Time to re-balance I guess :)

  • Geoff December 9, 2013, 12:40 pm

    I have a similar portfolio as you, but have canadian equity at 20% and bonds at 20%.

    So I have more cash than you, but am ok with that as I started this in 2008 like you did when many people were talking about the end of the world for stocks, so having 80% of my son’s education fund in stocks seemed a lot more risky at the time than it proved to be. Perhaps I’m not as brave as you – now I just kind of like that it adds some security.

    Other than that, we have similar portfolios and similar goals, and we’ll see how it goes. Rather than looking at the index costs regularly, I have it on a set it and forget it schedule which I’m not touching until his 10th birthday in 4 years.

  • fiscally fit December 9, 2013, 2:31 pm

    the cash issue is always interesting. I always look at my net worth updates and see too much cash and have to repeat back to myself tha there is a reason haha

  • igra December 9, 2013, 3:12 pm

    I’ve automated our contributions. Every two weeks the following amounts are bought:

    $25 of TDB900
    $35 of TDB902
    $40 of TDB911

    Every year on our childrens’ respective birthdays I rebalance gradually increasing bond portion by 5%. For portfolio started in the fall of 2011 current bond (TDB909) allocation is 15%.

    So far the annualized return for the portfolio started in 3Q2011 is 19.33% (market value $11,358.31 as of Dec. 6).

    The only money that go into Money Market fund are the CESG and I switch those into trailing asset class the next day after the money arrive.

    Everything is pretty much on autopilot. No thinking, no need to make any decisions until kids are past about 14.

  • Bob December 9, 2013, 6:16 pm

    Looking to open an RESP account for my son but not sure which approach I should go with…

    Should I go with TD or Questrade? Thinking of doing index approach but also a bit tempted to go with dividend growth companies and DRIP. Suggestions?

  • FrugalTrader FrugalTrader December 10, 2013, 9:02 am

    @Bob, you could also index with Questrade with low cost ETFs (commission free too).

  • Francois December 11, 2013, 12:59 am

    I admit I have not read all your past articles about RESP, but there are many advantage to RESP, beyond just saving for education. You point out the 500$ contribution from the Government of Canada, but in Québec, you get an additional 250$ form the Québec Government. For low income family, the Government of Canada gives 500$ the first years, regardless of your contribution (even if you put 0$, the government gives 500$), and 100$ per year afterward for the next 15 years. So, low income family should all set up a RESP account and have that free 2000$.

    Because of the governmental contribution, it’s often better to contribute to RESP first and your retirement account only after you have contributed the maximum to the RESP. Your kid will have to pay income taxe on the money he gets from the RESP when he uses it later, but ONLY on the interest made and on the governmental contribution. In the end, the money the principal put in the account is still your money when your kid reach 18. This means several things: 1) you can give the principal to your kid, 2) you can keep it for you. In this case, if you have any space left to contribute to your RRSP, you can use the principal from the RESP and contribute to your RRSP. Chances are that your are in a higher tax bracket at 45 when your kid is 18 then you were at 27 when he was born and thus, save more taxes. So putting money in the RESP first make sense, you can still use it later. 3) if you are tangled into a divorce, the principal you paid in the RESP is still considered your asset, not the kid’s asset, you may have to share it with your former wife or husband.

    If your kid does not go to post-secondary education, you will have to reimburse the governmental contribution and pay taxes on the interest made, with a 20% additional taxe, unless you have room to transfer the interest in your RRSP. Remember that trades and other post secondary education are acceptable as well, not jus the university. You can also wait a few years after high school in case you kid changes his mind and do some post-secondary education later on.

  • Geoff December 11, 2013, 12:02 pm

    @ the comment above “Because of the governmental contribution, it’s often better to contribute to RESP first and your retirement account only after you have contributed the maximum to the RESP.”

    My only comment is that there are no scholarships or student loans for retirement; so I think if you really have to choose, set money aside for your retirement and try to help your child in other ways (like with their homework).

  • Cloud December 13, 2013, 6:29 pm

    I opened up an RESP trading account for my kids (family plan, kids are 3 yr old & a 1 yr old) as their primary RESP account. The plan has been to buy stocks of companies that my kids will grow up being exposed to (in my attempt to get them interested or gain some knowledge in the world of finance; as well as capital gain).

    I currently mix equities with ETF’s (with the majority in stocks) and will eventually move to conservative investments as they get closer to going to post-secondary schooling. I figure that my kids will require a minimum of $100-150k each when they go to school, so I need to be more aggressive with this investment right now if I want to help them pay a good chunk of these costs.

  • peppercorn January 31, 2015, 9:29 pm

    Interesting! I started my son’s just after your first child, in August 2010, and have over 21k by investing in dividend stocks. I haven’t contributed yet for this year, but have done very well by investing in dividend stocks on questrade… even though I did make some mistakes in the beginning and lost probably $500 within the first 2 years. Ah well… there’s still time!

    Thank you so much for posting, and for all of the information on RESP’s you have, I have found it incredibly useful, and helpful, when there isn’t a whole lot of info out there.

    • FrugalTrader FrugalTrader May 14, 2015, 9:06 am

      Congratulations on your success thus far, and thanks for the kind feedback.

  • Le Barbu May 13, 2015, 12:24 pm

    RESP is 100% Canadian stock (ZCN) because we consider this account as a part of our entire portfolio. We hold no bonds, and RESP is not tax advantaged for foreign holdings (US and international stocks are in RRSPs). When kids will be post-secondary, we will not even need this money because mortgage will be repaid in full and scolarship is cheap in Quebec. I will pull that money and top-up the TFSAs. My biggest consideration then will be to do this with no penalty and no taxes!

  • FrugalTrader FrugalTrader May 14, 2015, 9:05 am

    @Le Barbu, if your kids educations are covered, then why not top up TFSA now before using RESP?

    • Le Barbu May 14, 2015, 12:30 pm

      Hi FT, thanks to comments

      My rational to do this? I just want to get the gov subsidies (30% because I’m in Québec) so, every year I contribute for 5k$ (2×2,500$) and get 1,500$ from fed. & prov. In about 5 years, I’ll find a way to withdraw as much as I can every year (20k$/ kid without penalty) and fill our TFSAs. Is there a flaw here I didn’t see?

      The other consideration is if I fill TFSAs now and I get a windfall (bonus, inheritance, whatever) I cannot go back with RESP but TFSA room is still available. Right now, my plan is to fill RRSPs and RESP* every single year and repay my mortgage @ 3.49% with the remaining cashflow. I got a HELOC @ 2.85% that I use to buy as much ZCN as I can. Actually, mortgage is down to 85k$ and HELOC at 95k$

      *to get the max subsidies

  • FrugalTrader FrugalTrader May 14, 2015, 1:15 pm

    That is a very generous bonus! We get $1k for every $5k deposited (for 2 kids). The only thing i’m not clear on is the withdrawal amount. Can you simply withdraw $20k/kid/year?

    • Le Barbu May 14, 2015, 1:47 pm

      @FT, because the bonus is that generous, thats why I took the bet on the future withdrawals. I know about the 20k$ but I may be a little hassle to do it. Like we say, we’re gonna built the bridge when we have to cross a river. In some cases, we also have to dig a river when we are in need to build a bridge!

  • Paul T May 14, 2015, 1:41 pm

    @Le Barbu, I don’t think it’ll be as easy as you think. Most Financial institutions won’t let you withdraw any money without proof of attendance of a qualifying post secondary school.

    Check out Big Cajun Man’s blog for his run ins with TD trying to get money for his kids attending University (I won’t link out of respect for MDJ, but you should be able to google it)

    • Le Barbu May 14, 2015, 1:52 pm

      @Paul T, I know kids have to be eligible for sure (proof of attendance etc) but there is a big amount available/year before to give a proof of expenses (scholarship, rent, food, books etc) . I will read that and see if I’m hurting myself right now.

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