To understand how RESPs are invested, let’s look at a candy shop
Let’s pretend for a moment that investing is a lot like picking out treats at a candy shop. There are so many possibilities—stocks, bonds, term deposits, mutual funds, etc. the list can go on and on. And just like each candy category breaks down further (the taffy table contains dozens of mouthwatering varieties), each investment category also has more options. With choices like what countries or sectors, or industry, the choices can feel endless.
How do smart people often invest the money in their RESPs?
Well, like most clever kids in a candy store, they don’t want to limit themselves to one type of investment when there are so many sweet-sounding investment choices up for grabs. Investors often choose between a mix of equities, bonds, and other asset classes. The rationale? You want to diversify because at any point in time, some assets can be doing well, some might be falling, and others doing a bit in between. Just like the choices in the candy store, it’s incredibly difficult to accurately time market performance. That’s why following a long-term strategy and a disciplined approach most often pays off.
How we invest for our customers’ Bright Plans:
Here at CST Spark, we invest your funds to help you save for your child’s education. Through our Bright Plan, we provide a diversified, age-appropriate portfolio of assets composed of low-cost, exchange traded funds (“ETF”s) that offers exposure to both equities across the globe and Canadian fixed income.
What’s special to Bright Plan is that we rebalance your investment as your child ages with the goal of maximizing growth early (with equities) and preserving your gains closer to graduation (with fixed income securities).
Just like brushing teeth after eating sweets, age-balancing RESP investments is important.
If you’ll let us take this yummy metaphor a bit further, what people want out of the candy shop changes as they get older. Toddlers are attracted to colourful lollipops, while adults might eye up the licorice and more natural candies. The investment mix for a child’s RESP should change based on his or her age, i.e. the investment mix at the age of one may not be the right combination at age fourteen.
So what kind of a mix are we talking about? There have been studies that indicate equities can be one of the best long-term performing investments available. But they can also go dramatically up or down over a short period of time (say hello to “volatility”). This means it’s beneficial to have a majority invested in equities when your child is young as there will be more time to manage the highs and lows of the market. And when your child is closer to needing the money, having more of your savings in lower risk assets will come in handy. Voila ‘fixed income’. Fixed Income tends to be less volatile and can give positive returns!
At CST Spark, we automatically age-rebalance your RESP. When your child is very young, a majority of the contributions and government grants are allocated to equities. Over the years, we gradually lower the equity exposure with a corresponding increase in fixed income. By the time your child is 18, and ready to enroll in post-secondary education and needs to pay for tuition and books, most of the funds will be in lower risk, short-term fixed income. Basically, no matter when you start an RESP with us, we will ensure your savings are invested in the appropriate asset mix (based on your child’s age) to help maximize your returns!
The do-it-yourselfers may want to try and figure out the right combination of assets for their child’s RESP savings on their own, but at CST Spark, we take this task of rebalancing off from our customers’ to-do lists, so they can focus on the important things—like sports’ team registrations, homework support and finding new, clever ways to hide vegetables in a variety of foods. (We’re well aware of how much goes into raising those future scholars!)
Don’t forget to factor fees into any investment decision
Another consideration when investing RESP money is how much you’re paying in fees. According to the Investment Funds Institute of Canada, major banks and fund companies take about 2% per year to manage your assets in their mutual funds (ouch!). At CST Spark, we keep our management fee to 1.5% per year (sweet!). This lower fee helps you save money each year and adds up to more dollars earned for your child’s education.
The bottom line
Getting the right mix of assets is sweet. Because you can invest in an RESP for 18 years (from when your child is a baby to when they head off to school), putting more of your investments in higher growth assets and gradually shifting towards a lower risk mix can help make the most of your RESP savings.
But if the idea of making investment-related decisions and re-balancing your own portfolio are keeping you up at night, why not leave it to the experts? At CST Spark, we use tried-and-true strategies for getting our customers the most from their RESP. As always, we’re happy to answer any RESP questions you have—straight up, no sugarcoating.
Bright Plan is only sold by prospectus and is available on www.cstspark.ca.
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