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Back-to-school season propels parents and students to find money to pay for books, school supplies, uniforms, and more. Some tap into savings, use credit cards, or take out personal loans to pay for the upcoming school year. Others apply for scholarships.

That is easily accessible money.

However, the back-to-school season also sparks significant movement in the investment landscape, especially for Registered Education Savings Plans (RESPs).

For example, investors funding an RESP can consider capitalizing on this annual trend by selecting stocks they predict will benefit from back-to-school spending. 

This strategy can earn high returns only if their predictions are correct. It’s important to recognize that this approach has significant risks. 

This article suggests safer and more effective approaches to investing for your child’s RESP than relying on single stock predictions. We’ll also leave you with some ideas for how to save and invest for more short-term back-to-school expenses. 

Why Investing in Individual Stocks Is Not The Best Idea For An RESP

The appeal of investing in single stocks during the back-to-school season is undeniable. Investors and financial commentators watch daily market returns. Many investors think they can time the market. 

They try to leverage in the short-term the predictable surge in demand for school supplies, clothing, and technology by investing in companies that cater to these needs.

However, it’s important to remember that an annual trend is already priced into the stock.

Do Not Expect A Big Stock Price Spike In Back-To-School Season 

What this means is that the market prices you see and hear about typically reflect all available information, including the anticipated back-to-school sales spike. 

Therefore, investors who are banking on this trend to boost the prices of their stocks may find that the prices don’t shift as drastically as expected. 

Simply put, the rest of the market anticipated the trend and already adjusted their trading behaviour accordingly. Therefore, unless a company exceeds these expectations, the anticipated growth may already be accounted for in the current stock price.

Risky Business For Your Child’s RESP

The risk associated with single stock picks is never limited to one company. A major concern lies in company and sector-specific risks. 

Investing heavily in a single company or sector makes your investment vulnerable to negative events that may impact that specific company or industry.

Consider the retail sector. Despite the predictability of the back-to-school season, retailers are often at the mercy of many factors like changing consumer tastes, economic downturns, and increased competition. 

When Safe Bets Went Bust

Remember, even household names like Toys “R” Us can look like a safe bet. Yet, online e-commerce giants, like Amazon, started competing for the same customer dollars. Debt led to the downfall of Toys “R” Us, leaving investors with significant losses.

Moreover, the retail sector is known for its cyclicality. Every year, retailers experience peaks during certain seasons, like  holidays or back-to-school period. Then they hit a trough during off-seasons. 

The troughs can be harsh and impact the year-round performance of companies in the sector. Factor in an unforeseen event like COVID-19 with your stock picks getting hit with more volatility. 

RESP: Back-To-School Costs Happen Every Year, Whether Your Stock Does Well Or Not

All of these factors demonstrate the considerable risk that comes with putting all your faith—and financial resources—into single stock or sector picks. There are simply too many variables at play, which can make it a volatile and uncertain strategy for your child’s RESP.

Asset Allocation

Given the inherent risks and uncertainty associated with single stock investing, focusing on asset allocation can provide a safer and more stable approach to funding your RESP.

Asset allocation means diversifying investments across various types of assets,such as stocks, bonds, and cash equivalents. It balances risk and reward. 

Diversification As A Safety Net

Diversification is the key benefit of asset allocation. This means spreading investments across different types of assets, sectors, and even geographical regions. 

You  can protect your RESP portfolio against volatility and minimize the risk of substantial losses. When one investment performs poorly, it’s balanced by others that perform well, providing a safety net.

Each type of asset has a different level of risk and potential return, meaning each will behave differently over time. The right mix for you will depend on a variety of factors.

This strategy tailors your investment mix to your RESP’s specific financial objectives, time horizon, and risk tolerance, enabling a more strategic approach to meet your child’s future education expenses.

Time And Your Child’s RESP

The financial objective of your RESP, for example, must influence the proportion of different assets in your portfolio.

Your investment time horizon is a crucial factor. If your child is still young and university years are far off, you might take on more risk for higher potential returns. 

As your child’s post-secondary entry gets closer, you would typically shift to safer investments, such as bonds or guaranteed investment certificates (GICs) to preserve the capital. 

Lastly, your risk tolerance—how much volatility and unrealized losses you can financially and mentally handle—plays a role in determining your asset mix. 

If estimated back-to-school tuition fees are high, and you start investing early, you can choose a more aggressive RESP allocation. This leans more towards stocks for their higher potential returns.

You can have your individual or sector stocks. Just with less risk to your entire RESP portfolio.

If you are risk-averse, you may prefer a portfolio that focuses more on bonds and less on stocks, despite the lower potential return.

A well-diversified portfolio tailored to your financial goals, time horizon, and risk tolerance not only mitigates risk but also increases the probability of achieving your RESP’s objectives on time. It’s a careful balancing act that can yield steadier, more reliable returns, making it a preferred choice over the potential rollercoaster ride of single stock picks or sector bets. 

Asset Allocation ETFs for RESP Investors

ETFs serve as an excellent vehicle for executing an asset allocation strategy, particularly for RESP investments. 

Let’s highlight a few reasons why asset allocation ETFs could be a reliable investment strategy for your RESP.

  • Maximum Diversification: These ETFs provide global exposure, diversifying across various asset classes, equity styles, sizes, sectors, and geographical regions. This minimizes different risks, and your investment doesn’t hinge on the success of a single factor. 
  • Professional Management and Rebalancing: Asset allocation ETFs are managed by professional fund managers. They adjust the fund’s portfolio to ensure it stays aligned with its target asset mix. This active rebalancing maintains the desired level of risk and return. It adapts to market movements so you don’t have to.
  • Low Management Fees: Compared to other managed investment products like mutual funds, asset allocation ETFs generally have lower management fees. Lower costs mean you keep more of your investment returns, which can significantly contribute to your RESP’s growth over time.
  • Reasonable Share Prices: ETFs trade on exchanges at market prices. Their share prices are typically low and reasonable, making them accessible to investors with varying amounts to invest. 

By integrating asset allocation ETFs into your investment strategy, you can make the most of the back-to-school season without falling prey to the pitfalls of single stock investing. 

High Interest Savings Accounts

Not everyone puts their child’s RESP in the stock market. Some people put the money in a high-interest savings account (HISA). A HISA is less volatile, since you get paid a consistent interest rate. The money is accessible and safe when back-to-school rolls around.

Interest rates change and they might not outperform market-based investments. Neither may outperform inflation

However, if you’re risk averse or you need the money RESP money soon, HISAs are virtually risk-free. The money is available immediately for back-to-school or any point.

The Most Important Thing To Keep In Mind At Back-To-School Time: RESP Is For Post-Secondary Expenses

Last but not least, keep in mind that these investment guidelines are long-term for something big, like university tuition. For immediate back-to-school expenses like supplies or clothes, an RESP would be inappropriate. 

Paying for current school expenses is not easy. If your child is not yet out of secondary school, try to keep your past RESP contributions off the table when it comes to paying for back to school expenses for anything that is not post-secondary school related. 

RESPs and Saving for Back to School

Are there scholarships for secondary school costs?
Yes, some high schools/secondary schools have tuition assistance and other scholarships and bursaries. Often it is private schools that offer assistance to its students.
Can you apply for a student loan if you have an RESP?
Yes! RESP money doesn’t affect someone’s ability to apply for a student loan.
Tony Dong, MSc, CETF avatar on Loans Canada
Tony Dong, MSc, CETF

Tony started investing in 2017. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. His investing qualifications include the Canadian Securities Institute's Canadian Securities and Equity Trading & Sales course(s), Franklin Templeton's Canadian ETF Proficiency course, Bloomberg Market Concepts, CFA Investment Foundations, and McGill University's Personal Finance Essentials. His work has also appeared in U.S. News & World Report, USA Today, NYSE ETF Central, NASDAQ Fundinsight, Cboe ETF Market, TheStreet, The Motley Fool, and Benzinga.

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