RRSP UPDATE

It's been a tough month for the Y HAT RRSP, which is down 8.14% since inception in August 2007. XIN, the portfolio's EAFE ETF, is down 19.1%; XSP, its S&P 500 holding, is down 9.9%. The only holding not in the red is my short bond ETF, XSB, which is up 1.72%.

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%.

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.

WHAT'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.

CREDIT CRUNCHES AND REAL ESTATE BUSTS

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...

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, The Age of Turbulence).

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.

THE CANADIAN DOLLAR IS OVERVALUED

The TD Economics department put out an interesting research piece on the value of the Canadian dollar arguing that the loonie is slightly overvalued.

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.

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.

GREENSPAN ON INFLATION

I'm currently reading Alan Greespan's memoir, The Age of Turbulence. Here is a quote on the effects of inflation:

"[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."

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.

FALLING INTEREST RATES AND THE STOCK MARKET

The 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 The Economist 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.

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).

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?