Archive for April, 2008

Still Sour on Group RESPs

April 30, 2008


The more I learn about group RESPs, the less I like them. In the comments thread on an earlier post on Group RESP plans, a reader referred to the prospectus for the years 2000 to 2007 filed by the Canadian Scholarship Trust filed with SEDAR. I was initially excited to lay my hands on so much information – at last, I could compare past results of Group RESP with a self-directed RESP that holds fixed-income securities and make an apples-to-apples comparison between the two for a number of time periods in the past. The results would be interesting and hopefully conclusive.

Alas, it was not to be. While it’s possible to find out contribution information or EAP (education assistance payments that is made over four years to eligible students) information, it is hard to obtain both for the same plan. For instance, consider the 2007 prospectus. The Group RESP plan marketed by Canadian Scholarship Trust is called “Group Savings Plan 2001”. The contribution schedule is available in the prospectus and tells us that buying one unit for a newborn would cost $105 per year, for a 1-year old $115 per year etc. The oldest child that can be enrolled in the plan would be 12-years old for a contribution of $1,100 per year. While, the prospectus mentions that EAP of $600 was made for the 2006 year, the “Group Savings Plan 2001” was offered only in 2006 and 2007, which means the oldest child enrolled in the plan in 2006 will be eligible for EAP in 2012. The Group plans offered in years 2000 to 2002 was called the “Optional Plan”, in years 2003 to 2005 was called the “Group Savings Plan”. So, it’s nearly impossible to tell how the plans have performed over the years.

The defendants of Group RESPs point out that the portfolio is invested in an “ultra-safe” manner. But, guess what? According to the prospectus for the “Group Savings Plan 2001”, about one-quarter (24.8%) of the assets is invested in index-linked notes. A fair comparison of group plans with self-directed RESPs, going forward, would be a 75% bond and 25% equity mix. I’m convinced more than ever that a self-directed RESP invested in a diversified portfolio in a low-cost manner is more flexible and almost certain to outperform any pooled RESP plan available today.

Global Housing Bust

April 30, 2008


The news on the housing front out of the U.S. continues to be bleak – prices were down 12.7% on average in 20 markets in February 2008 compared to the same time last year, with prices dropping 20% or more in Las Vegas, Miami and Phoenix. In Canada, at least one analyst boldly declared the housing boom “officially over”, not to mention an entire grim book on the subject but the IMF thinks that Canada is in a much better position compared to other major economies. Here’s the housing bust is playing out around the world:

Australia: Home prices have started to fall in many Australian cities (Melbourne and Sydney) and some estimates suggest property prices could fall as much as 25%. With interest rates at 7.25%, many reports indicate that overleveraged homeowners are struggling to pay the mortgage.

Ireland: The Independent newspaper colourfully labelled 2007 as “the year the roof began to fall in” and another later report notes that Irish home prices fell by an average of 7.3% in 2007.

United Kingdom: Reports indicate that the housing bubble has already started to deflate in the U.K. The Times featured anecdotal reports of falling home prices, while The Economist magazine calls for a “hard landing”.

Spain: Property sales are down, prices are moderating and home buyers are treated like movie stars.

India: After prices tripled over four years, reports indicate that housing prices have fallen as much as 20 to 30 percent.

Why Stock Market Predictions are Useless

April 28, 2008


Responding to a question from a group of business students on what investors should do, Warren Buffett replied:

The answer is you don’t want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that […] if you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market.

A recent article in The New York Times provides a fine illustration of the pitfalls that Mr. Buffett is warning about – you may be totally right about the economy but utterly wrong about how stock markets will react. The article notes that entering 2008, investors were confident that the US economy was bound for a recession and bet that growth will outperform value, large caps will outperform value and bought into “defensive sectors” like healthcare. Investors do seem to have got the first part right as mounting evidence points to an U.S. economy in deep trouble.

But, what happened to the stock markets? Since the beginning of this year, there is little to choose between growth and value among the S&P components. The iShares 600 Small Cap Index (IJR) has outperformed the iShares S&P 500 Index (IVV) by almost 2%. And healthcare is the second worst-performing sector with returns poorer than the much maligned financial sector.

The article concludes that this is one more reason to “ignore market chatter and simply stick with a diversified investing plan that calls for investing some money in large-cap stocks and small-cap shares, in growth and value, and in every sector of the market”.