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Inside the Market The three stages of RESP investing and the funds to buy for each

 Gordon Pape is a well known investing and personal finance guru and author, 2009

Tory Zimmerman/The Globe and Mail

A reader recently wrote to ask what he should put in a Registered Education Savings Plan (RESP) for his children.

"We have a discount brokerage plan for our kids which is currently invested in two pipelines, one REIT, and one mortgage insurance firm, Genworth," he wrote. "Are we on the right track?"

Here's the problem. RESP portfolios are tricky because they need to evolve as the child gets older and approaches college age. There is no single portfolio that would be suitable for the entire period from birth to university.

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The securities mentioned by our reader would be okay for a child in the 10 to 14 age range because they are relatively low risk and provide good cash flow. But they are too conservative for the RESP of a younger child.

I suggest there should be three stages for RESP investing. The first covers the period from birth to age 10. At this point the focus should be on growth. The time horizon is quite long – the money won't be needed until the child is 18 or 19 – so more risk can be taken. This does not mean gambling on penny stocks – the goal is to build the fund, not to put it in jeopardy from the get-go. But the emphasis should be on capital gains rather than low-risk income securities.

With a self-directed RESP, you can invest in any type of security. Our reader is using stocks but if you would prefer mutual funds I would suggest a portfolio that looks something like this. The funds have been selected from the Recommended List of the Mutual Funds/ETFs Update newsletter, edited by funds expert Dave Paterson.

Fidelity Canadian Large Cap Fund – 25 per cent
Trimark Canadian Small Companies Fund – 10 per cent
Mackenzie U.S. Large Cap Class – 25 per cent
TD U.S. Small Cap Equity Fund – 10 per cent
CI Black Creek Global Leaders Fund – 20 per cent
CI Global Health Services Fund – 10 per cent

Stage two would be from age 10-14. Here you want to reduce risk to some degree, while at the same time continuing to build the RESP. The following selection of mutual funds would work at this stage.

Fidelity Canadian Large Cap Fund – 25 per cent
Mackenzie U.S. Large Cap Class – 25 per cent
Fidelity Canadian Balanced Fund – 15 per cent
Steadyhand Income Fund – 15 per cent
Mackenzie Ivy Foreign Equity Fund – 20 per cent

The final stage is from age 15 to the start of college or university. Now the emphasis must shift to capital preservation. The last thing you want is to see all those years of savings wiped out by a cataclysmic market crash. You could put all the money into GICs but if you want to stay with mutual funds, here's a mix to consider:

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Phillips, Hager & North Short Term Bond and Mortgage Fund – 40 per cent
Trimark Floating Rate Income Fund – 20 per cent
Steadyhand Income Fund – 20 per cent
CI Signature High Income Fund – 20 per cent

Some of these funds require high initial minimum investments so if the RESP isn't large enough, substitute less expensive comparable funds.

Remember, the key is to gradually reduce risk as the student gets closer to college age. That means monitoring the portfolio on a regular basis and making changes when appropriate.

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