How can I save for my child’s education with a recession coming?
It’s common knowledge that if you start saving early (like, one hour after you buy your child’s first diaper) you will be well on your way to hitting your RESP goals. But media headlines are constantly reporting bad economic news.
Over 80% of Canadians are worried about a coming recession in 2023.1 81% of Canadian parents plan to fund the majority of their children’s post-secondary education. However, 62% of parents are overwhelmed by this task.2
How bad is a Recession – and are we in one?
Despite all the hyperbole, recessions are a normal part of the economic business cycle. Imagine an elastic band. In prosperous economic times, the band is stretched. As any unsuspecting, university- bound four year old will tell you – eventually it will snap back (ouch!) to normal as economies contract.
Stock market recoveries occur after every recession. Since the 1970s, there has been five recessions in Canada. One year after the 2009 bear market recession, the TSX jumped 32%.
So when will the recession come?
Not to sound glib, but the surprise answer from some experts would be – why bother asking the question? What they mean is that if your RESP investing strategy is based on a long-term horizon, you’re going to see quite a few recessions over that time.
In the US, for example, stock indexes (like the S&P 500) decline on average about 10% almost every two years. 3 Professional long-term investors always keep an eye out for changing economic conditions, but because their outlook is 2-5 years in the future, they tend not to lose sleep over recessions.
So what are we suggesting? Should one just laugh in the face of dooms-day sayers and enjoy a nice summer nap in the hammock? Well…ideally…yes (not the actual laughing part, but the hammock option). But no matter how hard one ignores news reports, let’s be honest: trying to save for your child’s future during uncertain times can cause stress. Heightened emotions are a critical risk to any RESP investment plan.
Emotions and Investing in RESPs
Recession warnings are all over the news. Who wouldn’t be stressed? Here are some tips for how you can mitigate anxiety and protect your investing capital.
Stop checking your stock balances.
- Simon Moore, (financialmarketinsight.com) notes “By looking at your portfolio, you will be tempted to trade on a whim. 4
- Common mistakes include selling assets too early (“What if the stock price falls more”) or buying too late (“I might miss the stock rally”). This behaviour is considered short-term trading which can result in capital losses.
Create and write down your investment plan
- Writing a strategy down in black and white motivates investors to commit to a long-term plan.
- A plan encourages investors to read (and re-read) their strategy during uncertain times that require investing vigilance and discipline.
- During market volatility, investors can remind themselves of their original investing idea back when times where good.
- Be nimble – plans can change as one’s life and investment needs evolve.
As with any investing strategy it is strongly recommended to work with a financial planner to create and revise your plan.
How do recessions affect investors
Valuations
As the economic elastic band contracts to normal, stock prices fall. In March, 2020 during the short recession, Apple’s price was only 19 times its earnings. Nine months later, after it’s price rose faster than its earnings did – investors had to pay over 35 times its earnings. Congratulations to the patient investors in March who picked up Apple shares at a 46% discount.
Volatility
Since the first whisper of the R word, stock prices have moved in extreme daily patterns. These price gyrations feed investor anxiety – ( see note above about enjoying the hammock. )
Confusing news
Economic news can be contradictory during a recession. Good news – such as low unemployment – becomes bad news because strong employment = rising inflation = higher interest rates.
Rising interest rates
- Inflation is a major problem for Canadians and The Bank of Canada needs to fight it. The government’s main tool is to raise interest rates. High rates can pose challenges for Canadians who are renegotiating their mortgage or carrying lines of credit.
- But rising interest rates can also present investment opportunities like higher rates of return for your government protected fixed income (GICs, money market funds, government bonds). Over the last 12 months, the Bank of Canada’s 10 year bond yields have risen from 3.1% to 4.6%. 5
How should one invest in RESPs during uncertain times?
Planning, Planning, Planning, Discipline, Discipline, Discipline
In 1985, Warren Buffet said “The first rule of an investment is don’t lose money.” Regardless of recessions, risk management is paramount anytime to conserve capital. Be realistic with your RESP goals and revisit your investment plan
Consider following:
- Timeline (when would post-secondary school start)
- How much capital do you need (university vs college vs international fees)
- What is a realistic growth rate for your investments
- How do you invest – dollar cost averaging? Set it and forget it?
- How strong is your discipline (emotionally) should the market crash 20%
- How diversified are you? High risk / low risk equities?
- Safer fixed income vs risk-on stocks
- Asset allocation: Index funds vs sector funds (tech, energy, staples)
- Different geographical allocations (emerging markets ex-North America)
Investing opportunities
- Not only do stocks prices rise after a recession, but during the first year after prices fall, stocks typically deliver high returns. 6
- Growth is usually high in the first year of a stock market recovery because many investors have not invested their cash during the market turmoil and subsequently are eager to pile in their investment when the market is poised for a recovery.
- You’ll guarantee yourself a restful sleep knowing you bought Apple shares at a 45% discount when prices were low.
Ask an expert
Most Canadians with RESPs aren’t full time portfolio managers. We’re busy. We have full time jobs, family commitments and diapers to buy. It is strongly recommended to seek out a financial advisor who can guide you towards your financial goals according to your comfort level.
Jason Wodlinger has been investing for over 20 years and loves to write about money matters, financial goals and investing strategies. Jason is a Mortgage Agent and has a Masters of Business Administration, majoring in Portfolio Investing, Financial Management from Rotman.
jason@wodlinger.com / 416.899.2750
1 Léger, BNN, Rates.ca, December 2022 https://rates.ca/resources/canadians-worried-recession
Léger / Embark, May, 2023, via CTV News
3 https://www.fool.com/investing/2022/04/15/5-genius-bear-market-investing-strategies/ Sean William, April, 2022
6 Marlena Lee, the global head of investment solutions at Dimensional Fund Advisors, o/b/o New York Times, April, 28, 2023 NYTimes
