A Registered Education Savings Plan (RESP) has three important phases where the asset allocation between equities, fixed income and cash equivalents is critically important.

Initial years

If an RESP is opened fairly soon after a child’s birth, the long time horizon allows for a heavy focus on equities for greater potential returns. Starting a plan with 75% or more in equities is quite common. But equally important is the risk tolerance of the person who opens the RESP, known as the subscriber. An aggressive investor might start with 90% of their plan in equities, whereas a conservative subscriber may start with 75% in fixed income, and the plan chosen could be perfectly suitable for each person.

The conservative investor, like all subscribers, can still take full advantage of the Canada Education Savings Grant (CESG). The first $2,500 of annual contributions triggers $500 in grant money, to a maximum of $7,200 for each beneficiary.

Middle years

Whatever the initial asset allocation happens to be, it’s common for subscribers to gradually reduce equities and increase fixed-income investments to some degree during the middle years of an RESP. It’s all about protecting your investments from the risk of a significant or prolonged market downturn when there is not enough time remaining for the markets and RESP to recover and grow. To illustrate, some subscribers with a moderate risk tolerance might have an RESP that’s approximately 50% equities and 50% fixed income when the child is about 8 to 10 years old.

Approaching graduation

Different subscribers’ asset allocations may vary greatly in the early years, but they’ll typically be quite similar by the time secondary school graduation nears. In these final years, equities are reduced, sometimes to zero. Fixed-income investments increase and cash equivalents are introduced. For many subscribers, the entire plan may be invested in cash and low-risk investments before it’s time to withdraw funds for tuition and expenses.