INCREASE YOUR CHILD'S RESP EARNINGS BY 1.3%

I just increased my RESP returns by 1.3%.

When I initiated my son's RESP, I decided to set up a monthly contribution which went to a special RESP mutual fund. This fund, the RBC Target 2020 Education Fund, is designed to gradually shift from a heavy (high-growth) equity exposure to a more conservative asset allocation as a child nears his graduation date. It carries an MER of 2.08%.

This week I changed my monthly contribution to four separate RBC Index funds which should replicate the Target Education Fund's performance - at a much lower cost. The RESP's MER is now 0.74%. Consequently, our returns should now be 1.34% higher. Not bad, eh?

DO CENTRAL BANKS LOWER RATES IN RESPONSE TO FALLING MARKETS?

The Bank of Canada cut its overnight rate by 25 bps (0.25%) on Monday to 4.00%. According to The Bank, the main reasons for this decrease were lower than expected inflation figures for the fourth quarter and increased risk to Canadian exports from a more pronounced housing slump in the US.

The US Federal reserve also announced a surprise, more aggressive, 75 bps cut to their Federal funds rate on Monday. With markets taking a beating (year to date the TSX is down 6.7% and the S&P 8.1%) several blogs have questioned the wisdom of lowering interest rates in response to falling markets.

Given these interest rate cuts, are central banks bailing out investors? Although lower rates will surely help stock markets, the main impetus for providing monetary stimulus is the risk that falling asset prices pose to consumption - as asset prices fall, individuals will feel less well off, reduce consumption to increase savings, lowering aggregate demand and leading to a possible recession.

In short, the Bank of Canada and The Federal Reserve react to falling asset prices (both housing and the stock market in the US case) in order to manage the broader economy.

CANADIAN REITs AT A DISCOUNT

I'll start this post with the disclaimer that I am far from an expert on REITs. I know little on these entities, but I am becoming more and more intrigued by the idea of adding dividend income to my portfolio. However, given Canada's gravity defying real estate market, I have thus far shied away from investing in REITs out of fear of a real estate correction.

Now I've come across a research piece from CIBC that states that Canadian REITs may be oversold. Here are some excerpts:

• Since mid-2007, Canadian REIT prices fell by almost 25%

• That is 10%-points more than the drop in the financial index and three times the drop n the TSX as a whole (Chart 1).

• When evaluated in relation to the net value of their assets, Canadian REITs are now trading at an unprecedented discount of almost 20%. That is three points deeper than the discount observed during the near-recessionary conditions of 2001 (Chart 2).

• REITs are extremely sensitive to swings in interest rates. Interest rates will continue to fall in the coming months due to central bank action.

• It would take a full-blown recession in Canada to justify current REIT valuations. Under any other scenario, REITs appear to be oversold.

R WORD INDEX ON THE RISE

The Economist's R-word index, which tracks the number of stories in the Washington Post and New York Times that use the word "recession", is on the rise. Although simplistic, their index pinpointed the beginning of the 1981, 1990 and 2001 US recessions.

SIMPLE STUPID RRSP - Update

It has been a devastating start to 2008 for the Simple Stupid RRSP. It's currently down 8.4% since its inception in August 2007. XSB (Canadian short bond index fund) is my only investment not in the red.

Surprisingly, I don't feel very stressed and feel this is just part of the volatility that any equity investor should come to expect. In fact, given the current risk for a US recession, the market could easily drop further from where we are now. Graph 2 below displays the year-over-year change for the S&P and TSX during the 1990 US recession. As the figure displays, the TSX fell by 20% from October 1989 to October 1990. The S&P fell by approximately 10% over the same time period.

So what are my plans for the Simple Stupid RRSP? Stick to the plan. I'll be making a contribution over the next month and will make another in the summer. These contributions will be spread equally over the four ETFs I currently hold. Pretty boring, eh?