tag:blogger.com,1999:blog-46156812045674235612024-03-12T19:03:08.254-07:00Y HATFinance notes from an Ex-Ottawa-Montrealer, now living in Toronto.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.comBlogger40125tag:blogger.com,1999:blog-4615681204567423561.post-75047773971655511372008-03-24T18:12:00.000-07:002008-03-24T19:12:12.709-07:00RRSP UPDATE<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMHxJi3yvdbX4fDqgz8AbfIb7VJt29zqN5tM8h8Y_nmVBxCp6Tf5mijmNYUasmxN3-dOgkZkMb5k_65gnauAMvI1l5DLnBEHoBnjTNLL1-cgfrvLVgQy3Dc4yv3-N8XzqoQP4rL2i8rxA/s1600-h/y_hat_rrsp_returns+20080324.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMHxJi3yvdbX4fDqgz8AbfIb7VJt29zqN5tM8h8Y_nmVBxCp6Tf5mijmNYUasmxN3-dOgkZkMb5k_65gnauAMvI1l5DLnBEHoBnjTNLL1-cgfrvLVgQy3Dc4yv3-N8XzqoQP4rL2i8rxA/s400/y_hat_rrsp_returns+20080324.png" alt="" id="BLOGGER_PHOTO_ID_5181496217423444450" border="0" /></a><br />It's been a tough month for the Y HAT RRSP, which is down 8.14% since inception in August 2007. <a href="http://finance.google.ca/finance?q=TSE%3AXIN">XIN</a>, the portfolio's EAFE ETF, is down 19.1%; <a href="http://finance.google.ca/finance?q=xsp&hl=en">XSP</a>, its S&P 500 holding, is down 9.9%. The only holding not in the red is my short bond ETF, <a href="http://finance.google.ca/finance?q=xsb&hl=en&meta=hl%3Den">XSB</a>, which is up 1.72%.<br /><br />I'm not surprised with XIN's performance as I knew it was volatile from the get go: from 1969 to 2006, the standard deviation for EAFE's annual returns has been 21.4%. Despite my awareness of this volatility, however, it still hurts to see my investment drop by 20%.<br /><br />So what have I done to the Y HAT RRSP given all this market turmoil? My original investment plan was to move funds into the portfolio during this first quarter and I have begun doing so by purchasing more XIN (at $23.50). My next purchase will be more XSB, given that the Bank of Canada will probably be lowering interest rates over the year.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-27683057609834705742008-03-03T18:57:00.000-08:002008-03-03T19:03:35.828-08:00WHAT'S UP WITH MY LAYOUT?The font on the blog seems weird. The paragraph spacing is off too. What's up with that? This is a sample post. Just trying to add a paragraph to test. I added a link to a Google spreadsheet that tracks performance for the Y HAT RRSP. There's a twenty minute delay on the data, but I don't mind.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-9130188815096859652008-03-01T11:57:00.000-08:002008-03-01T12:47:46.452-08:00CREDIT CRUNCHES AND REAL ESTATE BUSTS<blockquote>The inevitable collapse of the real estate boom really shook the banks. Uncertainty about the value of the real estate collateral securing their loans made bankers unsure of how much capital they actually had - leaving many of them paralized, frightened, and reluctant to lend further...<br /><br />Nothing we did at the Fed seemed to Work. We'd begun easing interest rates well before the recession hit, but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than twenty-three times in the three year period between July 1989 and July 1992, the recovery was one of the most sluggish on record. (Alan Greenspan, <span style="font-style: italic;">The Age of Turbulence</span>).<br /></blockquote>The above is an interesting paragraph from Alan Greenspan's memoir with many parallels to today's economic environment: a real estate bust, a financial credit crunch, and the efforts of a central bank intent on warding off economic Armageddon.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-86519014594953604442008-02-09T15:25:00.000-08:002008-02-09T15:33:53.376-08:00THE CANADIAN DOLLAR IS OVERVALUED<div><div><div><div>The TD Economics department put out an interesting research piece on the <a href="http://www.td.com/economics/special/mm0108_candol.pdf">value of the Canadian dollar</a> arguing that the loonie is slightly overvalued. </div><br /><div>The research piece argues that, although there are strong macroeconomic reasons for the rise in the Canadian dollar, three forecasting models tested argue that the level hit by the loonie in the fourth quarter of 07 – when it reached $1.10 to the US dollar – is not sustainable. Their three models give the loonie a value of $0.93 - $0.95 US.</div><br /><div>Below are graphs displaying the actual value of the loonie and the value implied by their three models (a Purchasing Power Parity approach, a Behavioural Equilibrum Exchange Rate model, and the Bank of Canada model). Note that all these models show the dollar to be above the forecasted (i.e. explainable) level. They also have a great graph showing the correlation between commodity prices and the Canadian dollar.</div><br /><div></div><img id="BLOGGER_PHOTO_ID_5165127034655007090" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOrblRUAE2XhSQOdbF4ECt_BI9lasmJu2EHcJEqK5rj9yU2eLarHwGuue1hmUHFZfrBCb8GBmKPemJtFdDojO23eddQrf4a6HCGfPGqImdN_Oi8MvOexETmyRwp6avLty3rmEbxCuSqMQ/s400/USD+CAD+Exchange+Rate+BoC.jpg" border="0" /><br /><img id="BLOGGER_PHOTO_ID_5165126845676446050" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwQ1WYniKm1Xfrye7tya9dfUw5fQ0KYMLXkTjfqHw6faIDmFMO2NglutygBn3ZOpoGVeikZd7yGwG8g5AtXBBiXTsQ8uCTpRRZ3QMEBXU43oUECDyRJH-H2UTvrhGIMc4VCzBVTsPclIU/s400/USD+CAD+Exchange+Rate+BEER.jpg" border="0" /><br /><div></div><img id="BLOGGER_PHOTO_ID_5165126686762656082" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjubP5ta-_DPLa3Wt2bQhc5TqIGjG3hyLJIxRgCQreEHalZ3s5xkRKufWbyoIEMTFnD0iqYqsnlE-vHTvjAbxrYbq6gpypjmv2dpUxPTSPl9RA9yKUPLoPbzNZ3P-kRx6lmTTLekuHDdFY/s400/USD+CAD+Exchange+Rate+PPP.jpg" border="0" /><br /><div></div><img id="BLOGGER_PHOTO_ID_5165127270878208386" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEht5Z45uIqvlj7C1V6XNE7t4GQV_Qo4Vd0Q0akdRJSET3nJawOHYE00qNFV_SPPnMpMqA-N7NurK68ISveLQosXAx5Ifoh69yg1cbVr0c_x6ySMYZDveUv1yOrRfKmNP61UjXqv4PmPVjI/s400/Canadian+dollar+Commodity+Currency.jpg" border="0" /> <div> </div></div></div></div>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-60409448512427151592008-02-02T19:54:00.000-08:002008-02-02T20:04:34.137-08:00GREENSPAN ON INFLATIONI'm currently reading Alan Greespan's memoir, <span style="font-style: italic;">The Age of Turbulence</span>. Here is a quote on the effects of inflation:<br /><br /><blockquote>"[I]nflation had everybody spooked. People cut back on spending because they worried about making ends meet. In businesses, inflation creates uncertainty and risk, which makes planning more difficult and discourages managers from hiring, or building factories, or indeed doing any kind of investing for growth. That's what happened in 1974 -- capital spending essentially froze, making the recession far more severe."<br /></blockquote>I'm posting this excerpt because I always felt economics textbooks did a crappy job of explaining why inflation is so detrimental. I found this to be a rather clear explanation.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-28521486026314627512008-02-02T06:46:00.000-08:002008-02-02T07:22:38.375-08:00FALLING INTEREST RATES AND THE STOCK MARKETThe Federal Reserve cut its funds rate by 50 basis points (bps) this week, on top of last week's unannounced 75 bps reduction. A good article on <a href="http://www.economist.com/finance/displaystory.cfm?story_id=10567544">The Economist</a> last week pointed out that on the 15 occasions since 1970 when the US Federal Reserve has cut interest rates by 75 bps or more, European stock markets have risen by an average of 10.3% over the next 6 months.<br /><br />The same article has a great graph displaying the performance of some major world indices since January of 2007 (see below). Note that Japan's main index, the Nikkei 225 average, is down about 25%. This explains why my EAFE fund is down a devastating 15% at the moment (about 1/4 of EAFE is allocated to Japanese stocks).<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyKzfpgrKcmlEGf_-EcesPRX5qqWo7CVzw1URI73msuGp8UsxSS57qzTTVcoLJxKhaEFTJ_IoOxFnlyLFDYH6okUWWFg5yQdHivoFspTrZPSZS5XGj1Hz5mA4aLysHBGuyJKu-G-WNljw/s1600-h/MSCI+WORLD+PERFORMANCE+200801.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyKzfpgrKcmlEGf_-EcesPRX5qqWo7CVzw1URI73msuGp8UsxSS57qzTTVcoLJxKhaEFTJ_IoOxFnlyLFDYH6okUWWFg5yQdHivoFspTrZPSZS5XGj1Hz5mA4aLysHBGuyJKu-G-WNljw/s400/MSCI+WORLD+PERFORMANCE+200801.jpg" alt="" id="BLOGGER_PHOTO_ID_5162403254419477298" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-8213002727541566332008-01-29T18:07:00.000-08:002008-01-29T18:43:18.932-08:00INCREASE YOUR CHILD'S RESP EARNINGS BY 1.3%I just increased my <a href="http://www.hrsdc.gc.ca/en/hip/lld/cesg/publicsection/CESP/RESPs_General.shtml">RESP</a> returns by 1.3%.<br /><br />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 <a href="http://en.wikipedia.org/wiki/Expense_Ratio">MER</a> of 2.08%.<br /><br />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?<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJxKYCg7YOFMsUTjKYzL6uLjTTEdWLRkrKhth-DZ6_3tW6R0MDP8mG6SaF1h9a9UKMzB-fj03pdwFZa-2F8yHGsvXLtlNdaUSVNsma9aK18ATXPXf8zrpqzAvI-inUL3IHiTwv_ZbgRYA/s1600-h/RESP+MER.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJxKYCg7YOFMsUTjKYzL6uLjTTEdWLRkrKhth-DZ6_3tW6R0MDP8mG6SaF1h9a9UKMzB-fj03pdwFZa-2F8yHGsvXLtlNdaUSVNsma9aK18ATXPXf8zrpqzAvI-inUL3IHiTwv_ZbgRYA/s400/RESP+MER.jpg" alt="" id="BLOGGER_PHOTO_ID_5161094229992035106" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-52804669558779604642008-01-23T19:55:00.000-08:002008-01-24T20:05:30.067-08:00DO CENTRAL BANKS LOWER RATES IN RESPONSE TO FALLING MARKETS?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfZbnJ07uosO86XRfQXGzAjuYknpF3EZNNGS41sHye6INkhipR6Ja0TcXr2-jCLUOv3JPqsjrCPS95lw8ZOxXJBEKQbqytGzaKiW_vAzMF73Z41RVF3irM_8HHrTyYTkco5bvmUX9Skic/s1600-h/MONEY+PICTURE.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfZbnJ07uosO86XRfQXGzAjuYknpF3EZNNGS41sHye6INkhipR6Ja0TcXr2-jCLUOv3JPqsjrCPS95lw8ZOxXJBEKQbqytGzaKiW_vAzMF73Z41RVF3irM_8HHrTyYTkco5bvmUX9Skic/s400/MONEY+PICTURE.jpg" alt="" id="BLOGGER_PHOTO_ID_5159260313316381458" border="0" /></a><br />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.<br /><br />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.<br /><br />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.<br /><br />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.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-11820195378368202142008-01-21T12:40:00.000-08:002008-01-21T09:40:56.504-08:00CANADIAN REITs AT A DISCOUNTI'll start this post with the disclaimer that I am far from an expert on <a href="http://en.wikipedia.org/wiki/Reit#Canadian_REITs">REIT</a>s. 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.<br /><br />Now I've come across a <a href="http://research.cibcwm.com/economic_public/download/feature2.pdf">research piece from CIBC</a> that states that Canadian REITs may be oversold. Here are some excerpts:<br /><ul><li>Since mid-2007, Canadian REIT prices fell by almost 25%</li></ul><ul><li>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).</li></ul><ul><li>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).</li></ul><ul><li>REITs are extremely sensitive to swings in interest rates. Interest rates will continue to fall in the coming months due to central bank action.</li></ul><ul><li>It would take a full-blown recession in Canada to justify current REIT valuations. Under any other scenario, REITs appear to be oversold.</li></ul><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Mf-s-7yjzOYZ4DbQ4JfLKGO9DtEx8SC15smiOyVjLosVklYXOJUB03LMOwQjktFOCjvIV-AzOjg_7on02i9KRlC0DvrUtpL7YAtlJAC9geFlKeoyfy4hXFJFpNboARya-aviBDgE9w4/s1600-h/REIT+CORRECTION.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Mf-s-7yjzOYZ4DbQ4JfLKGO9DtEx8SC15smiOyVjLosVklYXOJUB03LMOwQjktFOCjvIV-AzOjg_7on02i9KRlC0DvrUtpL7YAtlJAC9geFlKeoyfy4hXFJFpNboARya-aviBDgE9w4/s400/REIT+CORRECTION.jpg" alt="" id="BLOGGER_PHOTO_ID_5157375369786269714" border="0" /></a><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLl2G2GiF4OuHXrEIccI_AtHbIoEGys1Qnce5I539E7er4lQd9SDRjbtTKLOzpvzHpX8ZYxHJsBeVExrQmFAdvQpgCNLOE6hu3C_RJ1s07OyJNm8OwXpIrfEcUws63Oxy51xNe3DFyMwc/s1600-h/REIT+DISCOUNT+TO+ASSET+VALUE.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLl2G2GiF4OuHXrEIccI_AtHbIoEGys1Qnce5I539E7er4lQd9SDRjbtTKLOzpvzHpX8ZYxHJsBeVExrQmFAdvQpgCNLOE6hu3C_RJ1s07OyJNm8OwXpIrfEcUws63Oxy51xNe3DFyMwc/s400/REIT+DISCOUNT+TO+ASSET+VALUE.jpg" alt="" id="BLOGGER_PHOTO_ID_5157375532995026978" border="0" /></a><br /><br /><img src="file:///C:/DOCUME%7E1/RODRIGO/LOCALS%7E1/Temp/moz-screenshot.jpg" alt="" />Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com2tag:blogger.com,1999:blog-4615681204567423561.post-90242834983107358042008-01-21T09:45:00.000-08:002008-01-22T07:06:30.483-08:00R WORD INDEX ON THE RISEThe Economist's R-word index, which tracks the number of stories in the <span style="font-style: italic;">Washington Post</span> and <span style="font-style: italic;">New York Times</span> that use the word "recession", is on the rise. Although simplistic, their index pinpointed the beginning of the 1981, 1990 and 2001 US recessions.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5qGPql1tBNxOjaGKnkJqEWchyphenhyphenFmC8KJq4fWjRqd-NcDNpKjn8wzw5RbtZI9Obnu61Y0dHDlLgCEWQrsm57HyG73DcLlS7eCJg2IofY349vAa5MoJuX96UhRfCyestkqa464My7pztpjE/s1600-h/R+WORD+INDEX.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg5qGPql1tBNxOjaGKnkJqEWchyphenhyphenFmC8KJq4fWjRqd-NcDNpKjn8wzw5RbtZI9Obnu61Y0dHDlLgCEWQrsm57HyG73DcLlS7eCJg2IofY349vAa5MoJuX96UhRfCyestkqa464My7pztpjE/s400/R+WORD+INDEX.jpg" alt="" id="BLOGGER_PHOTO_ID_5157989142087704642" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-25723691932832294422008-01-19T06:23:00.000-08:002008-01-19T09:08:55.971-08:00SIMPLE STUPID RRSP - Update<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS4nRMNMJEDqzu0IAJcVPa1SBy9VrHhSyH2xZjLupR5mwjf6MTaTl7xKS707yZwu_30XB4X8lvznXsH3P4mbNiMDCr4CqnR0O6IX8PomepvVHl-78IY4wqB8WFEbqFPex4K0wDOPqJQ7o/s1600-h/RRSP+RETURNS+2008-01-18.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS4nRMNMJEDqzu0IAJcVPa1SBy9VrHhSyH2xZjLupR5mwjf6MTaTl7xKS707yZwu_30XB4X8lvznXsH3P4mbNiMDCr4CqnR0O6IX8PomepvVHl-78IY4wqB8WFEbqFPex4K0wDOPqJQ7o/s400/RRSP+RETURNS+2008-01-18.jpg" alt="" id="BLOGGER_PHOTO_ID_5157234963010396146" border="0" /></a><br />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.<br /><br />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.<br /><br />So what are my plans for the Simple Stupid RRSP? Stick to <a href="http://yhat.blogspot.com/2007/10/introducing-simple-stupid-rrsp.html">the plan</a>. 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?<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhW5hr7LBtIABMp3Ep-gBO72gv-x4Zasr9XwvLZRalfc6MGdOtb9rJa-RzSkWJco1-fRQ7104qlfl9zwi6WuVqi_QOgYP6e7H5_MWF3aR5HaDbiPfjTYuAbh1V2PwARn4ZFVZ-uT2ZXdS8/s1600-h/S&P+TSX+RETURNS+1990+RECESSION.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhW5hr7LBtIABMp3Ep-gBO72gv-x4Zasr9XwvLZRalfc6MGdOtb9rJa-RzSkWJco1-fRQ7104qlfl9zwi6WuVqi_QOgYP6e7H5_MWF3aR5HaDbiPfjTYuAbh1V2PwARn4ZFVZ-uT2ZXdS8/s400/S&P+TSX+RETURNS+1990+RECESSION.jpg" alt="" id="BLOGGER_PHOTO_ID_5157235199233597442" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-77851545901601076382007-12-16T17:49:00.000-08:002007-12-16T18:14:41.733-08:00SIMPLE STUPID RRSP UPDATE & WHAT TO EXPECT IN A DOWN MARKETThe Simple Stupid RRSP ended November down about 1% (since it's inception in August). It was actually down about 5% at one point in mid-November before "recovering" somewhat.<br /><br />I crunched some numbers for the TSX to put this performance in perspective and found the following. From 1982 to 2006, the TSX has ended the year down seven times during this 25 year period. The average loss for these periods was 8.9%. The largest loss was in 1990, when the TSX dropped 18%. I find these numbers interesting as they give some indication of what to expect in a down market.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ9AeYhIq_ac_Ux9e2k8UKeF7KvjoeE3JW_REeaGEyXzYGW8yIpDNZF0GnOCA99VJW5GWqoaofNCgOA0amhvL-wIR0UYI8NuU-qKtotGvlN1lQc8QWmGmNJoA71jT386tINgzxEpR_ugE/s1600-h/RRSP+RETURNS+2007-12-14.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ9AeYhIq_ac_Ux9e2k8UKeF7KvjoeE3JW_REeaGEyXzYGW8yIpDNZF0GnOCA99VJW5GWqoaofNCgOA0amhvL-wIR0UYI8NuU-qKtotGvlN1lQc8QWmGmNJoA71jT386tINgzxEpR_ugE/s400/RRSP+RETURNS+2007-12-14.jpg" alt="" id="BLOGGER_PHOTO_ID_5144759178232172818" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-8196272973202159182007-11-25T16:22:00.000-08:002007-11-25T18:25:23.345-08:00MEASURING RISKACME's International Market Fund, touts a recent ad, has had average annual returns of 31.52%, 25.59%, and 11.78% over the past one, five, and ten year periods. While knowing past returns is great, what investors' should really be provided with is a proper measure of risk: what is the likelihood, say, of experiencing negative returns?<br /><br />Enter the <span style="font-style: italic;">standard deviation</span>, a statistical measure that helps quantify how much we can expect an investment to vary around it's mean. For example, take an asset that has an average annual return of 11% (such as the EAFE index from my <a href="http://yhat.blogspot.com/2007/11/bankgrounder-eafe-index.html">previous post</a>). Knowing that this asset has a standard deviation of about 20% helps us deduce that 68% of the time it's return will take on a value of 11% plus/minus 20% (assuming this asset follows a <a href="http://en.wikipedia.org/wiki/Normal_distribution">normal distribution</a>) . In other words, there is a sixty-eight percent chance that it's returns will be between -9% and 31%. We can also infer that 95% of the time, returns will be the average plus/minus two standard deviations (or between -29% and 51%).<br /><br />So how risky is investing in the TSX? Looking at the 1982 to 2006 period, the average annual return was 9.9% and it's standard deviation 17.9% (see table below). Consequently, 95% of the time we can expect returns to be between-25.8% and 45.6%. Risky enough for you?<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYNqopdDbKg65i_EbRd8fhv_Ai-D_tZReXD9ZmFzh9FDh2YelvUzHETOhX-TQyQfQcKHvXA_cl43BECPdT2CljqXLvJi5UAFJoyQEzPR0VOPSNjNABaZ6a33R6dOk45KWdMA1qdvKqyVo/s1600-h/S&P+AVERAGE+RETURNS+AND+VARIANCE.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYNqopdDbKg65i_EbRd8fhv_Ai-D_tZReXD9ZmFzh9FDh2YelvUzHETOhX-TQyQfQcKHvXA_cl43BECPdT2CljqXLvJi5UAFJoyQEzPR0VOPSNjNABaZ6a33R6dOk45KWdMA1qdvKqyVo/s400/S&P+AVERAGE+RETURNS+AND+VARIANCE.jpg" alt="" id="BLOGGER_PHOTO_ID_5136965270664794914" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-2463025898942149612007-11-18T15:07:00.000-08:002007-11-25T17:03:31.635-08:00BACKGROUNDER: EAFE INDEXThe MSCI EAFE index is an international equity index which represents 21 countries in developed markets outside North America (EAFA stands for Europe, Australasia and the Far East). Japan and the UK comprise nearly 50% of the index (see table of country weights below). EAFE has been around since 1969, has an average yearly return of 10.97%, and has a standard deviation of 21.40% - making it quite volatile.<br /><br />Canadian investors can hold EAFE in their portfolios through funds such as <a href="http://finance.google.com/finance?q=TSE:XIN">XIN</a> or <a href="http://www.tdcanadatrust.com/mutualfunds/perforFrame.jsp">TD's International Index</a>.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG6T0eOKKhi8xNx7b6pBXAzLxQiGeayL102Y4rxcCaS9uPuipLkgi-DlSfmDKkAvxae6gELdVfluYt8kE9WZPGXA2RI7-N5PTqorkUWZj7b1QhB7S-TiKw0rF37a9q673kqMmCqom4JKE/s1600-h/EAFE+RETURNS+II.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG6T0eOKKhi8xNx7b6pBXAzLxQiGeayL102Y4rxcCaS9uPuipLkgi-DlSfmDKkAvxae6gELdVfluYt8kE9WZPGXA2RI7-N5PTqorkUWZj7b1QhB7S-TiKw0rF37a9q673kqMmCqom4JKE/s400/EAFE+RETURNS+II.jpg" alt="" id="BLOGGER_PHOTO_ID_5134337613968067090" border="0" /></a><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjh1htpIcKnaBFFdg2a4jVsGq-gKX3ZPAXq6LgRuN8CypzS7dBekF1kfzIgPVXCABmoSWIySSVTg8xTgBuW5bbjWD3FBMGgpgo1PAu1_SA3ENm_2FCYjUudtASFX8cHZxQ6Fxm_pjYaSDA/s1600-h/EAFE+COUNTRY+WEIGHTS.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjh1htpIcKnaBFFdg2a4jVsGq-gKX3ZPAXq6LgRuN8CypzS7dBekF1kfzIgPVXCABmoSWIySSVTg8xTgBuW5bbjWD3FBMGgpgo1PAu1_SA3ENm_2FCYjUudtASFX8cHZxQ6Fxm_pjYaSDA/s400/EAFE+COUNTRY+WEIGHTS.png" alt="" id="BLOGGER_PHOTO_ID_5134334727750044146" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-22542904350779520882007-11-12T20:11:00.000-08:002007-11-13T17:31:28.442-08:00ROB CARRICK ON CURRENCY HEDGINGRob Carrick from the Globe and Mail wrote <a href="http://www.theglobeandmail.com/servlet/story/LAC.20071110.STMAIN10/TPStory/TPBusiness/?query=">a column this weekend</a> outlining 3 scenarios for the Canadian dollar. More interestingly, he constructed four sample portfolios to deal with these scenarios:<br /><ol><li>Canadian dollar will appreciate: use (currency) hedged funds to protect against a higher loonie.</li><li>Canadian dollar will depreciate: use non-hedged global equity funds. Carrick still recommends that 20% of this portfolio be allocated to hedged funds.</li><li>Canadian dollar will stabilize at current levels: use hedged and non-hedged funds.</li><li>Keep it Simple: use a 50/50 approach between hedged/non-hedged funds and ETFs.</li></ol>Note from below that his appreciation example still allocates 10% to a non-hedged fund. I point this out because the foreign portion of my RRSP portfolio is fully hedged to currency movements. I should probably revisit this.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiv2OhQriAKNXMFLHUYPze0E5fEn443mQl2FCmYx5nPDOpKL6t7iUGbdb01zl2rc_Njl0EtTwEjyhSKNYEwnGHWK454EfQsHnLJWC_MN6wpwLSp8MYEI8BJL-cjy61xYhzTzNfbhPHmzz0/s1600-h/CURRENCY+HEDGE+PORTFOLIOS.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiv2OhQriAKNXMFLHUYPze0E5fEn443mQl2FCmYx5nPDOpKL6t7iUGbdb01zl2rc_Njl0EtTwEjyhSKNYEwnGHWK454EfQsHnLJWC_MN6wpwLSp8MYEI8BJL-cjy61xYhzTzNfbhPHmzz0/s400/CURRENCY+HEDGE+PORTFOLIOS.jpg" alt="" id="BLOGGER_PHOTO_ID_5132502354711960242" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-57667341379782842412007-11-10T20:13:00.000-08:002007-11-10T21:16:36.008-08:00SIMPLE STUPID RRSP - UpdateOne of my plans for this blog is to keep notes on my investment experiences; to keep an investment diary, if you will. I'm particularly interested in how much volatility I will be able to tolerate and how I will feel when my investments are down.<br /><br />So I just checked the performance of the <a href="http://yhat.blogspot.com/2007/10/introducing-simple-stupid-rrsp.html">Keep It Simple Stupid RRSP</a> and found that it is down about 1% since inception (August 07). How do I feel about this? Not much, I'm glad to say. Thus far it feels like a little volatility. Let's see if I feel the same way one month from now.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiepcRY3yaAqvEjkuT98PvZ29Bwq94OCm86xwTHcOMewfiyIhZWZt-l-X8Y5UWvpTNoxY2GzD0wt6ukzFPeXJRzUeTxUeV5vUNSzoVeEB_qhc38vutiKlmuVNshCghUo9vZaFf_qWeQsK0/s1600-h/RRSP+RETURNS+2007-11-10.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiepcRY3yaAqvEjkuT98PvZ29Bwq94OCm86xwTHcOMewfiyIhZWZt-l-X8Y5UWvpTNoxY2GzD0wt6ukzFPeXJRzUeTxUeV5vUNSzoVeEB_qhc38vutiKlmuVNshCghUo9vZaFf_qWeQsK0/s400/RRSP+RETURNS+2007-11-10.jpg" alt="" id="BLOGGER_PHOTO_ID_5131446952398314146" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-28255524381912056192007-11-04T10:25:00.000-08:002007-11-07T19:46:49.879-08:00GO CANADIAN DOLLAR - Think twice before buying US equities.<div>As I write this the Canadian dollar is trading at $1.07 to the US greenback and most Canadian finance articles I'm reading are suggesting you should jump into US equities - these are cheap by historical standards and the Canadian dollar is bound to retreat. This blog's opinion is that no one knows were the loonie is headed next. Consequently, you should save yourself a lot of stress by insuring your portfolio against currency movements.<br /></div><div> </div><br /><div>First, let's discuss some factors contributing to the loonie's strength and the dollar's weakness.<br /></div><ul><li>The US has a current account deficit of roughly $760 Billion (USD) (or -5.6% of GDP) and a budget deficit of approximately $200 Billion (or -1.5% of GPD). The current account deficit points to weakness in the greenback as it reflects that Americans are buying more than they are selling to the rest of the world. As they must sell dollars to pay for these imports, this deficit should put downward pressure on the US dollar.<br /></li><br /><li>In contrast, Canada is the only G7 country with a twin surplus: our current account surplus sits at $22 Billion (USD) ( or 1.8% of GDP) and our budget surplus is at $12 Billion (or 0.6% of GDP).</li><br /><li>Furthermore, commodities comprise 35% of Canada's exports and our proven oil reserves stand second only to Saudi Arabia's. As long as China and India continue to grow and demandthe type of goods we export, the underlying strength in the loonie is bound to continue.</li></ul><div> </div>In short, as long as the US continues to spend more than it earns and China/India's growth continues to put upward pressure on commodities, the underlying strength of the loonie should persist.<br /><br /><div> </div>Now let's discuss how you can protect your portfolio against further currency movements: buy funds tracking foreign indices that are hedged to Canadian dollars. Every bank has one, I believe. RBC has this <a href="http://www.rbcam.com/pdf/information/commentary/Qrmfusr.pdf">one</a>, for example, that tracks the S&P 500. I use <a href="http://finance.google.com/finance?q=TSE:XSP">XSP</a> in my portfolio.<br /><div> </div><br />I'll finish this post with the main reason why you should use foreign funds that are hedged to Canadian dollars: sleep. These funds save you a lot of worry with regards to currency movements. If you expect to retire in Canada, why add currency risk to your portfolio?<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbYdy5KoRuuB7AxsUGAyiwIp5CM6qWOqdqunFfbK9dtyS96IWEtb2kjtNAmxVeqSUXSltYKXLd0ULsAoVG3S01a-RbqCeI17vukeWH6tiSJuAhb-cg5p1uIOeofBTsSmIz6ahauXJ_kPc/s1600-h/CANADIAN+DOLLAR+AGAINST+US+DOLLAR.gif"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbYdy5KoRuuB7AxsUGAyiwIp5CM6qWOqdqunFfbK9dtyS96IWEtb2kjtNAmxVeqSUXSltYKXLd0ULsAoVG3S01a-RbqCeI17vukeWH6tiSJuAhb-cg5p1uIOeofBTsSmIz6ahauXJ_kPc/s320/CANADIAN+DOLLAR+AGAINST+US+DOLLAR.gif" alt="" id="BLOGGER_PHOTO_ID_5130310787519633730" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-357813406900142892007-11-03T10:01:00.000-07:002007-11-03T07:04:10.263-07:00MYOPIC LOSS AVERSIONLast week I wrote on why we should <a href="http://yhat.blogspot.com/2007/10/stop-checking-market.html">stop checking the market</a> on a frequent basis: as you narrow the time scale at which you view an asset's returns, the probability of viewing a positive return decreases. This post will expand a little on this topic by introducing the concept of (myopic) loss aversion.<br /><br />Loss aversion is a concept introduced by two behavioural economists, Amos <span class="blsp-spelling-error" id="SPELLING_ERROR_0">Tversky</span> and Daniel <span class="blsp-spelling-error" id="SPELLING_ERROR_1">Kahneman</span>, which states that people have a stronger sensitivity to losses than to gains. Researchers have measured this sensitivity and found that we regret loses 2.5 times more than similar sized gains. In other words, the psychological impact (pain) I feel from losing $100 is two and a half times the impact (pleasure) derived from winning $100.<br /><br />Myopic Loss Aversion, introduced by S. <span class="blsp-spelling-error" id="SPELLING_ERROR_2">Bernatzi</span> and R. <span class="blsp-spelling-error" id="SPELLING_ERROR_3">Thaler</span> to explain why equities offer such a higher premium over bonds, expands on loss aversion by discussing how long term decisions are evaluated by their short term results. Under myopic loss aversion, investors are too anxious and evaluate the performance of long term investment decisions by focusing on short term results.<br /><br />The lessons we should take from myopic loss aversion are as follows:<br /><ol><li>By checking the state of my portfolio on a frequent basis, I expose myself more to short term volatility than to long term results. As I increase this frequency, the probability of viewing negative returns increases (see <a href="http://yhat.blogspot.com/2007/10/stop-checking-market.html">this</a> previous post).</li><li>Given that the pain of a x% loss is 2.5 greater than the joy of the same x% gain, the costs of monitoring my portfolio on a daily basis will probably exceed any positive return I might view.</li><li>The pain experienced by focusing on short term results might push me to change investment strategy. Given that I invest with a long investment horizon in mind (i.e. four decades from now when I retire) I will be basing any changes on (meaningless) <span class="blsp-spelling-corrected" id="SPELLING_ERROR_4">volatility</span>.</li></ol>Given this knowledge, can someone please tell me why I continue to check the status of the Simple Stupid <span class="blsp-spelling-error" id="SPELLING_ERROR_5">RRSP</span> on a daily basis?Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-56638216072733809462007-10-27T18:49:00.000-07:002007-10-28T15:19:28.603-07:00BLACK MONDAY, BLACK SWANS AND TURKEYSOctober 19th was the 20th anniversary of Black Monday, the moniker given to October 19th, 1987, a day when the Dow Jones Industrial Average fell by 22.6% in a single day. They say history doesn't repeat itself; it rhymes. So on this anniversary, let us remember a very important investment lesson: beware of the Black Swan.<br /><br />A Black Swan is a term, recently made famous by <a href="http://en.wikipedia.org/wiki/Nassim_Taleb">Nassim N. Taleb</a>, to describe an unforeseen event of extreme severity that, due to human nature, we regard as extremely improbable - i.e. when pigs manage to fly the stock market will experience a fall of 22.% in a single day.<br /><br />The Black Swan is Taleb's parable for the problem of induction:<br /><blockquote>"No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion".</blockquote> <br />Black Monday should remind us to not be complacent about risk. I have decided to put 70% of my savings into stocks in order to chase high returns. And everything seems fine as I have never lived through a drastic market correction. However, just because I have never <span style="font-style: italic;">seen </span>stocks fall by 20% or more, this does not mean I should rule out this scenario. Chances are, there's probably a 20% drop out there with my name on it. <br /><br />Taleb also uses the story of a turkey just before Thanksgiving to illustrate the Black Swan. Throughout his whole life, the turkey has come to regard humans as wonderful benign creatures that show up several times a day to provide food. All his experience points him in this direction. That is until Thanksgiving, when something very unexpected will change the turkey’s mind.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgn9Ylrndpl0ys-BxariMPnDoczCiH6SKmcJrWnH6Jd8WMMqckOiOYLg8WkKHQSf63X6ES9NRs1xTRO59IdjU8-FgVmXIvBIa_tfnAhdQx1g5b5XZf7smavupT-pHolQ64FlYJ4pXNX9sY/s1600-h/S&P+500+on+BLACK+MONDAY.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgn9Ylrndpl0ys-BxariMPnDoczCiH6SKmcJrWnH6Jd8WMMqckOiOYLg8WkKHQSf63X6ES9NRs1xTRO59IdjU8-FgVmXIvBIa_tfnAhdQx1g5b5XZf7smavupT-pHolQ64FlYJ4pXNX9sY/s320/S&P+500+on+BLACK+MONDAY.jpg" alt="" id="BLOGGER_PHOTO_ID_5126514517826750994" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-82056139527461784492007-10-25T17:37:00.000-07:002007-10-25T18:55:24.795-07:00STOP CHECKING THE MARKETIt's time that you stop monitoring your portfolio's performance at the end of each day. And all those times you check what the market is doing throughout the day? You have to stop that too. Why? It turns out that the probability of making money decreases as you narrow the time scale at which you track an asset's return. All that portfolio monitoring is just stressing you out.<br /><br />The table below, taken from <a href="http://www.fooledbyrandomness.com/">Fooled by Randomness</a> by Nassim N. Taleb, displays the probability of making money from a portfolio with an annual average return of 10% and a standard deviation of 15%.( A standard deviation is a measure for the variability of returns. For example, the standard deviation for this hypothetical portfolio tells us that 68% of the time our portfolio will yield returns between -5% and 25%; 95% of the time returns should lie between -20% and 40%).<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIMF21PZzODJ7iGj2RYOz1A0mo3ZdYimqPqUYtQsC1YVrYZtYkBO0P4oet_QoZ0AFtsNvzxoTsV6zpoRZ5sWLUS1BaM0rMWig6CjVLGZH1Aj4JJBiaHvDvJFG4_4LUPwkpmhWaFgGD_mo/s1600-h/PROBABILITY+OF+MAKING+MONEY+AT+DIFFERENT+TIME+SCALES.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIMF21PZzODJ7iGj2RYOz1A0mo3ZdYimqPqUYtQsC1YVrYZtYkBO0P4oet_QoZ0AFtsNvzxoTsV6zpoRZ5sWLUS1BaM0rMWig6CjVLGZH1Aj4JJBiaHvDvJFG4_4LUPwkpmhWaFgGD_mo/s320/PROBABILITY+OF+MAKING+MONEY+AT+DIFFERENT+TIME+SCALES.jpg" alt="" id="BLOGGER_PHOTO_ID_5125449975822698978" border="0" /></a>Note from this table that as we decrease time scale at which we monitor returns, the probability of making money decreases. If we track this portfolio's performance over one hour, for example, the probability of experiencing positive returns is only 51.3%. As Taleb explains,<br /><span style="font-style: italic;"><blockquote>"Over a short time increment, one observes the variability of the portfolio, not the returns. In other words, one sees the variance, little else."</blockquote></span><br />In essence, by constantly monitoring your portfolio's performance you expose yourself mainly to its variance and the meaningless stress attached to this volatility: you're in the black one minute, only to find yourself back in the red in the next.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-70125122468624116552007-10-20T10:22:00.000-07:002007-10-20T12:22:04.364-07:00IS YOUR PORTFOLIO'S EXPECTED RATE OF RETURN TOO HIGH?How realistic is it to forecast that your investment portfolio will grow by 8% or more?<br /><br />To determine my monthly RESP contributions, I calculated that by saving $140 per month I should be able to cover a good portion of my son's future university costs. Assuming an annual rate of return of 7%, sixteen years from now this monthly payment should come to $63,000 (note that I'm including the CESG contribution in this calculation). However, am I being overly ambitious in expecting a rate of return of 7%, per year?<br /><br />The table below contains data on annual real equity returns over a 103 year period. Note that the real rate of return on Canadian equities has been 5.9%*. Assuming an annual inflation rate of 2.5%, this translates to a nominal rate of return of 8.4%. If 40% of my RESP contribution is going into a bond fund that returns 5.94%, I can safely expect my son's RESP portfolio to earn 7.4% per year.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg5kz8KhQa5lOJP2x12BaLUvmiE9Mu7zFeM9YP0GLcXTZzbKt5GdhFwAQ8riaVyu5Nh24Z7bvjj2DzthPhizVrTayu1cOYs-WwaFCIO4Sxqm7xRR5NMyXvJo40SOz1G9FMphbML1QOUhU/s1600-h/20+YEAR+REAL+RETURNS+BY+COUNTRY.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg5kz8KhQa5lOJP2x12BaLUvmiE9Mu7zFeM9YP0GLcXTZzbKt5GdhFwAQ8riaVyu5Nh24Z7bvjj2DzthPhizVrTayu1cOYs-WwaFCIO4Sxqm7xRR5NMyXvJo40SOz1G9FMphbML1QOUhU/s320/20+YEAR+REAL+RETURNS+BY+COUNTRY.jpg" alt="" id="BLOGGER_PHOTO_ID_5123496262035133026" border="0" /></a>In short, using the last 100 years as a guide, we have reasonable evidence to assume a rate of return of 8.4% for the <span style="font-style: italic;">equity </span>portion of our portfolio. However, if a significant portion of your portfolio is comprised of bonds, it may be time to revise your expectations.<br /><br />*You can refer to <a href="http://www.finance.paranoidbrain.com/blog/2006/02/10/geometric-versus-arithmetic-mean-which-is-better/">this post</a> for an explanation on the difference between the geometric vs. arithmetic mean.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-45354924007841592342007-10-14T18:13:00.000-07:002007-10-15T15:51:35.646-07:00INVESTMENT FEARS & LONG RUN EQUITY RETURNSOne of my deepest investment fears is saving diligently over the next 10 to XX years, placing a good portion of my savings into stocks, and have the market move absolutely nowhere over this time frame. I also worry about showing up on the scene five minutes before the end of the party, similar to someone investing in the Nikkei (Tokyo Stock Exchange) just before the end of 1989.<br /><br />In short, I am a worrywart that sometimes questions the popular belief that future long rung equity returns will outperform close to risk free investments, such as government bonds or sticking my money under the mattress.<br /><br />I recently read <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981#PaperDownload"><span style="font-style: italic;">Irrational Optimism</span></a>, a paper by three London Business schools professors that studied the performance of 16 country stock indexes over the lat 103 years in order to challenge the notion that, over an interval of 20 years, equities provide positive real returns (i.e. provide returns that will beat inflation). Their research found that, "aside from the U.S., only three other equity markets... have never experienced a short fall in real returns (before costs and fees) over 20 years". Can you guess what country I was very and extremely excited to find in the top three?<br /><br />That's right, Canadian equity stock markets have not had one 20 year period with negative real returns (see figure below).<br /><br />So as long as I'm investing in Canadian, Australian, Danish or American equities over a period of 20 years, I can be somewhat reassured that I should beat inflation over my investment horizon.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgykPRpd3b8NSxii-YlXVb40IQcEW8jKHpqQR8hi_dgHQJiICb0DFHJxuLdnVgz5m4xoNFsOaa9ThyphenhypheniKqXlA9BuHaGGLHooct_JUAixXYks_tyDcO8VgRrAGrE7N5IQPHDAIkY3DyiItQQ/s1600-h/DISTRIBUTION+OF+20+YEAR+RETURNS.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgykPRpd3b8NSxii-YlXVb40IQcEW8jKHpqQR8hi_dgHQJiICb0DFHJxuLdnVgz5m4xoNFsOaa9ThyphenhypheniKqXlA9BuHaGGLHooct_JUAixXYks_tyDcO8VgRrAGrE7N5IQPHDAIkY3DyiItQQ/s320/DISTRIBUTION+OF+20+YEAR+RETURNS.jpg" alt="" id="BLOGGER_PHOTO_ID_5121395808279024210" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-69717907349952833212007-10-12T17:50:00.000-07:002007-10-13T07:32:15.768-07:00INTRODUCING THE SIMPLE STUPID RRSPEarlier this year I decided to sell the various funds I held in my RRSP and build a simple ETF portfolio: the Keep-It-Simple-Stupid RRSP.<br /><br />The portfolio has what I consider an aggressive position in stocks: 75% is in equity index funds and the remaining 25% in a Canadian short bond fund. It's composed of four ETFs, each with a 25% weighting: <a href="http://finance.google.com/finance?q=TSE:XIC">XIC</a>, <a href="http://finance.google.com/finance?q=TSE:XSP">XSP</a>, <a href="http://finance.google.com/finance?q=TSE:XIC">XIN</a>, and <a href="http://finance.google.com/finance?q=TSE:XSB">XSB</a>. I bought these funds in August. Here is how the portfolio has fared since then.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuUq3VtVtTFOzyXcGz0uVcuPa_tr_PpLy8ltA97NAtbvBcADD5VPfyK8p91M-f8V3c9QKUHIW4DjwxQfAArglJl-OLwcbYtVZQG7RBPb1RvBQl_RmOs_TTnw8NYvV-BfCFLt-z3_RfcIY/s1600-h/RRSP+RETURNS+2007-10-10.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuUq3VtVtTFOzyXcGz0uVcuPa_tr_PpLy8ltA97NAtbvBcADD5VPfyK8p91M-f8V3c9QKUHIW4DjwxQfAArglJl-OLwcbYtVZQG7RBPb1RvBQl_RmOs_TTnw8NYvV-BfCFLt-z3_RfcIY/s320/RRSP+RETURNS+2007-10-10.jpg" alt="" id="BLOGGER_PHOTO_ID_5120826939860668994" border="0" /></a>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-59220599222357637462007-10-09T19:25:00.000-07:002007-10-09T19:59:32.554-07:00ONLINE SAVINGSWow. HSBC will be increasing the interest rate on their online savings account to 4.25%. Meanwhile RBC is offering 4.0% and ING 3.75%.<br /><br />What makes this interesting is that competition is beginning to drive these rates closer to the Bank of Canada's <a href="http://www.bank-banque-canada.ca/en/monetary/target.html">overnight rate</a>, which is currently at 4.5%. I have always been jealous that US banks offer online savings accounts with rates above the <a href="http://en.wikipedia.org/wiki/Federal_funds_rate">federal funds rate</a>. With some luck and a little more competition, maybe Canadian banks will get there.Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0tag:blogger.com,1999:blog-4615681204567423561.post-32863470003050429572007-10-07T11:59:00.000-07:002007-10-07T12:37:49.857-07:00HOW DIVERSIFIED ARE YOU?My <span class="blsp-spelling-error" id="SPELLING_ERROR_0">RRSP</span> portfolio is composed of <span class="blsp-spelling-corrected" id="SPELLING_ERROR_1">exchange</span> traded funds (<span class="blsp-spelling-error" id="SPELLING_ERROR_2">ETFs</span>) that <span class="blsp-spelling-corrected" id="SPELLING_ERROR_3">replicate</span> the returns of the <span class="blsp-spelling-error" id="SPELLING_ERROR_4">TSX</span> composite index, the S&P 500, Morgan Stanley's Europe, <span class="blsp-spelling-corrected" id="SPELLING_ERROR_5">Australasia</span> and Far East index (<span class="blsp-spelling-error" id="SPELLING_ERROR_6">EAFE</span>), and a short term bond index. I hold all these funds with the aim of building a global diversified portfolio. Unfortunately, it turns out these holding are not bringing the diversification I hoped for.<br /><br />An article in The Economist earlier this year highlighted that, over the past five years, international <span class="blsp-spelling-corrected" id="SPELLING_ERROR_7">stock markets</span> have shown a 95% correlation to the S&P 500. I just plotted the year-to-date performance of my <span class="blsp-spelling-error" id="SPELLING_ERROR_8">ETFs</span> and they all appear to be moving in tandem.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzga8CqqV_IFpAobxnhzG729cDBvIzccrdovrPvKJv9EUfHXBuASgbACvBKbo7NX2B3pQR5aGuaCBYhLGQVTiU3z-4HsvF96cStQ_s667DE2dSUmJ62I9VQ27EstGf1g3kRRx-05dYNaU/s1600-h/ETF+PORTFOLIO.png"><img id="BLOGGER_PHOTO_ID_5118680250781618738" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzga8CqqV_IFpAobxnhzG729cDBvIzccrdovrPvKJv9EUfHXBuASgbACvBKbo7NX2B3pQR5aGuaCBYhLGQVTiU3z-4HsvF96cStQ_s667DE2dSUmJ62I9VQ27EstGf1g3kRRx-05dYNaU/s320/ETF+PORTFOLIO.png" border="0" /></a><br /><div><div>In short, <span class="blsp-spelling-corrected" id="SPELLING_ERROR_9">although</span> I have manged to build a low-cost global portfolio, I have some work to do when it comes to diversification.</div></div>Y HAThttp://www.blogger.com/profile/01759754663042242852noreply@blogger.com0