Investing Exchange brings couples together with financial advisers in an exchange of opinion over saving and investment strategies.
In this exchange, we meet a Toronto couple who want to set up an education savings plan for their newborn son. But while Lisa wants to guarantee they don't lose money, Chris wants to increase their child's savings as much as possible through higher-yielding, but potentially riskier, investments.
When it came to setting up a Registered Education Savings Plan (RESP) for our newborn son, Nathan, my husband Chris and I were on the same page. We knew that education was the most important gift we could give our son to set him on the path to success in life. We made an appointment with our financial adviser, Robert Mighton of the Royal Bank of Canada, three weeks before our son was born to discuss our options.
"The thing you have on your side is time," said Mr. Mighton, adding that he often has to convince clients to open RESPs for their children who are well into elementary school. "Because you're starting so early, the only money you need to worry about is $2,500 every year," Mr. Mighton said. That $2,500 would give us the maximum $500 grant from the government each year – an instant 20-per-cent rate of return. "If you multiply that over 18 years, that's all the money your son is going to need," he explained.
Although we agreed that opening an RESP as soon as our son was born was the best strategy, where we disagreed was on how to invest the funds.
It turned out, Chris and I have very different investment strategies. Chris prefers an aggressive investment portfolio that could yield more than 10-per-cent return a year. I, on the other hand, take a more conservative approach with my investments. I would rather hide cash under my mattress than place it at risk in the fluctuating market. I view investing in the stock market as the equivalent of playing Russian roulette with my cash.
Mr. Mighton recommended a type of balanced fund that automatically shifts the balance from equities to more liquid fixed-income vehicles and cash as the child grows. While the majority of our money would be invested in stocks (about 25 per cent Canadian stocks, 25 per cent U.S. stocks and 20 per cent international stocks) for Nathan's first years of life, those percentages would diminish as he ages and would be transferred into bonds and GICs. By the time he's ready to enter postsecondary studies, 100 per cent would be in bonds and cash.
Chris was intrigued. The aggressive portfolio in the first years of our son's life appealed to his desire to grow our money as much as possible. As an example, in the past two years, the bank's auto-rebalancing fund had a 17-per-cent and 9-per-cent return, respectively after a management expense ratio of about 2 per cent. "That's way better than the less than 2 per cent you get with GIC's," he quipped.
True – but I still felt it was risky. "Is 18 years really enough time? If the market tanks when Nathan is 10 years old, like it did in 2008, will we have enough time to recover?" Sure, the auto-rebalancing fund means there would be less money in stocks when he's 10 years old than there would be now at zero years, but there would still be some there. Did we really want to take the risk?
Then Mr. Mighton had a suggestion – one that would appeal to both of our financial personalities. "I don't believe you should take more risk than you want and get ulcers because you need to make more money," he said. So he suggested we put some money into GICs and some into the auto-rebalancing fund.
Mr. Mighton is experienced in dealing with couples with different financial strategies. His own parents were on opposite sides of the investment fence. His mom was a conservative investor like me, while his dad liked to take gambles with the market.
"You have to attend to each of your personalities," he said. "You, Lisa, have the ultra-safe thing going on. In a bad year, you're going to look like a rock star, but in most years, Chris will be gloating, saying 'Look what this has done compared to your 1.2-per-cent [GICs].'
"But this is why marriages work, because you're compromising."
While we would have to accept that the rate of return over the course of the investment's lifetime might be lower than what it could have been if we invested 100 per cent of our funds in the market, at least our relationship would be intact.
We agreed to split the RESP contributions in half: $1,250 a year will go into GICs and $1,250 will be put into the auto-rebalancing fund. The $500 grant that we receive from the government will also be placed into the fund. "I don't mind taking a gamble with the money we receive from the government because it's free money that I didn't have to work for," I said.
I would have the confidence in knowing that we have at least $1,250 in Nathan's account each year that may not grow but it's rock solid and helps me sleep better at night, and Chris would feel good about the potential impact that his $1,250 could have. Plus, I agreed he could have all the gloating rights if the money grows 19 per cent.