Registered education savings plans are all about helping kids get a post-secondary education. But it's the parents who buy them who are being taken to school by the plunging stock market.
The main lesson: Basing an RESP on investments tied to stocks is a risky proposition.
Wealth adviser Susan Latremoille suggests parents think of their RESPs as they would their retirement savings. "To me, it's exactly the same situation with students as it is retirees," said Ms. Latremoille, a vice-president at Richardson Partners Financial Ltd. in Toronto. "There's a finite date where there's going to be a need for cash. The money has to be withdrawn and you don't want to take any chances that it will be withdrawn at a loss."
To keep money as safe as possible from stock market declines, Ms. Latremoille changes the mix of investments she uses in an RESP as the child who will use the plan gets older. Here's her thinking:
FOR A CHILD WHO IS CLOSE TO ATTENDING COLLEGE OR UNIVERSITY
Ms. Latremoille uses what might be called a three-year rule here. If a child is to start his or her post-secondary schooling in three years or less, she advises parents to put all their RESP contributions in ultra-safe investments and to avoid the stock market altogether.
Among the lowest-risk investments available are money market funds, guaranteed investment certificates and short-term bonds issued by the federal and provincial governments. Ms. Latremoille likes the idea of splitting your contributions into three chunks that would be invested in bonds or GICs maturing in the next one, two and three years.
Rates on short-term bonds and GICs are low - just 3 to 4.5 per cent at very best. But you'll have the security of knowing that as your child heads into college or university, maturing bonds and GICs will be there to provide funds for withdrawal from the RESP.
FOR A CHILD WHO IS COMING UP TO HIGH SCHOOL
Ms. Latremoille argues that some stock market exposure is important at this point to help grow the savings in an RESP at rates that are above and beyond what safe investments pay. A default mix of stocks and bonds would be 50/50. More conservative types would add a little on the bond side, while more aggressive types would add extra stock market exposure.
Really conservative investors might want to stop putting money in stocks or mutual funds that invest in stocks four or even five years before a child begins a post-secondary education, Ms. Latremoille said.
FOR A BABY OR A CHILD IN ELEMENTARY SCHOOL
Here, you can relax a bit about the stock market's tendency to hit the wall every so often because you've got about 10 years or more until your child graduates from high school. That should be enough time for market gains to more than offset losses.
Remember: Prior to 2008, the Canadian market posted five straight years of very good gains.
Don't get too carried away with stocks, though. Ms. Latremoille recommends 80 per cent exposure to stocks, with the remaining 20 per cent in safer bonds.
