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moneysense.ca, 4/02/08
Sleepy Portfolio Rebalancing Spreadsheet
Our sons’ RESPs are very similar to the Sleepy Mini portfolio and I rebalance them every year when making a lump-sum contribution. In the past years, I used a desk calculator, pencil and paper to figure out how to divide the new contribution among the four TD e-Series index funds. This year, I finally got around to creating a simple spreadsheet to do the calculation for me and thought that you may find it useful as well.
The spreadsheet is fairly self-explanatory. First, save the spreadsheet in your local directory. Now edit grey cells (circled in red in the image below) to reflect your holdings and asset allocation targets.
![[Step 1 of Portfolio Rebalancing]](http://www.canadiancapitalist.com/wp-content/uploads/2008/02/portfolio_rebalancing_step_1.png "portfolio_rebalancing_step_1")
You also need to edit the yellow cells to show how much new money you are adding (circled in red in the image below) and the current value of each of your holdings (circled in blue in the image below).
![[Step 2 of Portfolio Rebalancing]](http://www.canadiancapitalist.com/wp-content/uploads/2008/02/portfolio_rebalancing_step_2.png "portfolio_rebalancing_step_2")
The green cells show how much of each holding you should buy (or sell) to bring your allocation back to target.
moneysense.ca, 4/02/08
Wouldn’t buying the same investments in your child’s name (you’ll just need to get an S.I.N number for this) outside of an RESP and then just selling them and buying again to trigger a tax-free capital gain (ie taking advantage of the personal tax exemption) each year or few years be a much better than buying an RESP? This will result in most of the gains being sheltered until the child needs to use the money.
I think CRA may wonder how a 4-year old has thousands of dollars to invest – and then the attribution rules kick in.
I’m not advocating Leon’s approach, but aren’t capital gains exempt from the attribution rules? I know interest and dividends would be attributed back to the parents, but I was sure that capital gains were treated differently…..
Leon – you are ignoring the 20% grant that is given in the RESP. Assuming the child goes to school this gives the RESP a huge advantage.
Mike
I’m participating in the RESP for two reasons – the 20% CESG grant and the tax deferral offered by a RESP. At this point, it is not a big concern because our kids are very young and most of the portfolio is in equities. But as they become older, more and more of their RESP will be in bonds/GICs and tax deferral will be very attractive.
Leon is right in that capital gains are taxed in the hands of the minor but dividends and income are attributed back to the parent who lent the money. Though I haven’t made a comparison, I suspect the RESP will come out ahead due to the grant and tax sheltering.
Thank you for sharing this rebalancing spreadsheet for TD eFunds! I too invest in eFunds and this will come in handy when I rebalance.
CC, how would you go about investing in the Sleepy portfolio if you wished to add every month rather then once a year? Is that too often to rebalance?
T: I would venture that it too frequent and too much of a hassle to rebalance that often. I would channel each contribution according to the target asset allocation and rebalance once every year.
I’ve opened up a self directed “Family RESP” with TD for my 2 children (a 1year old & 3 year old). Would you use the same sleepy formula of TD eFunds today if you had $10-15k to dump in there, or another type on investment like the ETFs?
Also it’s my understanding the contribution rules changed to allow making lump sum payments in 2007 so I should get the grant for a bit of missed time and also going forward, right?
Great spreadsheet. I’ll be using it for my portfolios.
The 20% grant by the government does not compensate for the fact that the portfolio is taxed as income when the student starts to draw upon it.
Actually that should be ‘may’ not compensate and certainly won’t if the child does not go on to post-secondary education and then the amount in excess of contribution and CESG (which must be returned) is fully taxed in the contributor’s hands.
If the child don’t go to school you have 2 options: to transfer the money to another child who does go to school or (if there is only 1 child) you can transfer the money to an RRSP and avoid taxes. In this case the CESG must not be returned.
The 20% grant by the government does not compensate for the fact that the portfolio is taxed as income when the student starts to draw upon it.
Leon – that’s not true. Unless the student gets an incredibly high paying summer job, their tax rate should be quite low (in most cases). Keep in mind that the contributions to the resp are withdrawn tax free.
As far as if the student doesn’t go to school, I did some extensive analysis on this topic and concluded that the penalties if the child doesn’t go to school are no where near as severe as I thought. If the parent is still working when the resp is collapsed then investing in a non-reg account is better but not by a huge margin. If the parent is retired when the resp is collapsed then it’s pretty much a wash between the resp or a non-reg account.
If the child does go to school then there is no comparison – the resp wins by a mile.
I agree with FourPillars. I’d also like to add in that if your kids know that they have an RESP available, and are planning for most of their lives that college/university is what they do after High School (or a couple years of working, then University) then their probably more likely to actually go to school.
I would like to see some stats on kids enrollment rates for kids with RESPs vs. kids with no RESPs and see if there is a difference.
Plus, remember that the child will get to deduct the cost of the schooling itself from their income making it more than likely that they will pay little to no tax at all. Say for instance you put $1000 a year in an RESP in a GIC earning 5%, that means you have put in $18000, got 3600 in CESG, and earned 13800 in interest. The only thing that will be taxed at withdrawal is the CESG and the Interest. They withdraw the whole thing in year 1 so their reported income is around 17400 from the RESP. They go to community college so their tuition will be around 4 grand, making their income 13400. They also get the credit for books and thing depending on the months enrolled. They could split the cost over two years by making two withdrawals, one half way through their school year, which would probably be in January of the following year since a school year runs from September to July usually.
For the vast majority of people the RESP is the perfect solution.
Is there any financial institution that offers an RESP saving account? Lately, I noticed that my RESP (mutual funds at TD) is giving almost the same growth (including the government grant) as my usual saving account with other banks.
My own contribution + 4% (interest I have from a saving account) is almost the same that I get from RESP. And all these as I have efunds meaning a smaller MER. Before I found out about efunds it was even worse. The bottom line is: the government grant is only helping me to get almost the same 4% growth, may be a bit more, without it I would loose money.
Hey Cookie,
North Shore Credit Union offers a savings account.
I believe Scotia Bank does a savings account.
Most banks will let you use GICs, Money Market Funds, and Bond Funds (or any mix of these).
You also have to keep in mind that if you have a long horizon (10 years plus) that the returns on your equity funds my bounce around a bit. Sometimes you’ll be in the negative at the start just because of the timing. Over the long run you should end up in a much better position.
If you need to use the funds in less than 5 years, I would recommend the sizable portion of your funds are in the bond e-fund, the regular money market, fixed income, or balanced funds. Remember if you’re doing multiple funds to look for overlap when your doing your allocation calculations.
Also, keep in mind, that if you have invested over the last little while, the stock markets around the world are basically falling apart. Selling assets now that are in these equities would lock in any losses you’ve incurred. If it were me (and i have a TD E-Fund portfolio) and I wanted to change my investment instructions, I would simply change future investments, ride out this market for a while. Once you get your returns back (say when the TSX is back to 14500 or so, and any of the others you are in gain some momentum too) then think about moving your funds again.
For now, just don’t look
cookie: I concur with Traciatim. Your allocation to equities should depend on your time horizon, your ability and willingness to take risk. Being in equities means enduring the volatility that comes with it. If the “sleep-at-night” factor is more important for you then building a ladder of GICs would be an option for you.
Cookie, you can transfer up to $50,000 from an RESP to an RRSP but the catch is you must have the RRSP contribution room available. Few people would have anywhere near that kind of contribution room available.
Thank you all for the answers! I appreciate all your ideas.
Traciatim, I have 1 kid only 4 years old, so for her I have an ‘aggressive’ portfolio’ which I will continue but my other kid is 15 years old so for him I am a little worried even if his portfolio is moderate. I was thinking that a ‘saving RESP’ is more secure nowadays.
so I am thinking about a change for future investments, which I am making once a year when I get my tax refunds… If the trend continues I could transfer the funds to my daughter to be used later when their value is back on track, right?
A couple of a month ago only the ‘Canadian equities’ was making some gains, all other 3 were losing… now even this one is losing
What do you exactly mean by: fixed income, or balanced funds?
CC, “sleep-at-night” factor is important for me as my resources are limited to a low-medium fix income… on the other hand I was investing more for my son than for my daughter.
Leon, although I have enough spare room (over 20k) I will not have in the near future 50k to transfer
This year is the third year I am using some RRSP deductions… so my room is growing every year…
I hope this question isn’t too off topic …
We only have 1 son (11 years old now). He is also the only grandchild in the family so he is spoiled. My parents have contributed money to some sort of RSP account. Their financial planner is telling them to tell US to get a SIN for our son now. My father-in-law also wants to contribute, as does his son to funds for our son’s education.
We are sort of stuck int he middle because we personally are not able to save and make any contribution.
What is the best way to handle contributions coming in from 3 different directions? There is only a $2000 limit to RESP contributions, right? What is the sum total of all 3 is over that amount?
Aldo: I am a bit confused about your question. If your son doesn’t yet have a SIN number, how did your parents set up a RESP (I hope that’s what you mean by RSP account) for him?
You may to check out the numerous RESP rules and links to other sites in the RESP category: Link
To answer your question though: there is no annual limit to contributions to a RESP but you get a matching grant for $2,500 per year (or $5,000 if you have unused grants from previous years). The lifetime maximum contributions to a RESP is $50,000 but the basic CESG grant is limited to $7,200. The annual and lifetime limits are per individual, not per account.
It is an RSP account of some sort (from their description “for his education”), so I’m guessing RESP. I don’t know either how it was set up without him having a SIN. Thanks for the link and info! I will check that out.
My opinion has changed. The best option for a child’s education funding requirements is an RESP as long as you are sure the child will go to school and you know the child won’t make oodles of money when he is working while going to school. If he doesn’t end up going to school, then it is debatable and highly dependent on the contributor’s personal circumstances.
However, buying equities in your child’s name from any excess money (my very young niece and nephew already each have $10,000 in equities) and buying and selling to lock in tax-free capital gains each year as they grow older is a great way for them to have a really nice nest egg when they are older (but it could also be a bad thing having so much money).
I should have added “nest egg which they can draw from almost entirely tax free”
Leon: I was going to mention that most people have tons of RRSP contribution room available. The newspaper today mentioned that in 2007, Canadians used up a mere 7% of their total contribution room.
[...] – Bonds 20%, Canadian Equities 20%, US Equities 30% and International Equities 30%. Using this simple rebalancing spreadsheet, we can easily figure out the transactions we need to [...]
Thanks for the spreadsheet, I put it on thru my googles docs.
Thanks for the spreadsheet!
Thanks for the spreadsheet. Sometimes it’s just the simple things in life that make things very useful. It will take me five minutes each pay day to plug in these numbers, click on the shares (just opened a Scotiabank iTrade account).
[...] This nifty spreadsheet simplifies the rebalancing process. [...]
[...] use the nifty rebalancing spreadsheet to figure out how much of each holding should be purchased to bring the portfolio to target. [...]
Hi,
I am starting out my investment in the td e-funds. I plan for this to currently account for all of my RRSP holdings. I am curious to know why other e-funds have not been chosen to make up part of the portfolio (outside of the same funds that are in USD or currency neurtal). For example no Euro, Japanese, dow jones or nasdaq index?
Insight would be great appreciated as I get going on and with this.
Thank you
[...] — 20% bonds, 20% Canadian stocks, 30% US stocks and 30% International stocks. I use this spreadsheet to divvy up the new money between the portfolio components. You might notice that International equities are currently slightly below plan, so that’s [...]
So I am ready to start these TD eseries funds, and will be using them for an RESP, I would like to do bi-weekly or monthly purchases, but then how do I rebalance every year? Do I just do the monthly purchases in the new rebalanced format or is it better to sell everything once a year then rebuy? Please explain the pros and cons of any way you suggest. Thanks
I have a question similar to Rob H’s.
Is it better to buy the same proportions (for example 20% bonds, 20% Canadian stocks, 30% US stocks and 30% International stocks everytime), then rebalance (sell/buy) once a year?
Or, make a special buy once a year, for only the funds that are running lower than the target? (no selling here, just buying)
Which approach would you expect to produce higher gains/growth? please explain.
Thanks