Saturday, September 20, 2008

Q&A

Great questions of late:

Question 1:

Would you recommend getting out of money market funds regarding what has happened with these funds in the US? I'm feeling it might be best to move MM funds into short-term treasuries or bonds, but I'm not sure what to do. I can see the quality of ABCP in MM funds getting ever lower and riskier, but I'm not sure how this will affect Canadian banks.

Any advice would be highly appreciated.

I don't think it is wise for me to answer specific questions as this could get me into trouble as I am not a registered financial planner, but I will tell you what I am doing and you can draw your own conclusions. Also, please remember that this is a blog where I am spouting my opinion. All investment decisions depend on your timeframe, risk aversion and whether you can sleep at night. My views could change tomorrow and it is always dangerous to blindly follow what analysts or experts are doing. What I try to do is use my own analysis/opinion and then seek out the analysis and opinions of others (both similar and dissimilar to my own) and decide a course of action. I am honored that anyone would even ask or listen to my views.Here is what I am doing:

I am leery of most money market funds as they often chase returns by adding risk. For a money market fund, you want to have as little risk as possible. I am in the Altamira Cashperformer since it is CDIC insured (up to 100K) and in the Franklin Templeton T-Bill. I am thinking about transferring out of the Templeton T-Bill as there are some things in there that are not pure T-Bills. There are not too many choices in "safe" money market funds in Canada as most of the low MER and plain vanilla T-Bill ones are for high minimum investments (such as $250K). I am staying away from anything but T-Bills in the current environment and I think that ABCP and commercial paper is not worth the risk (just look at Lehman)

Question 2:
I have $50K in a BMO monthly income fund, which is basically ~55% bonds and the rest in Canadian Equities, with 5 of the top 10 holdings in Canadian Financials (mentioning that part makes me wince.) The money is dedicated to a downpayment on my first property, something I have been staying FAR away from since I started looking in 2006 - at least I feel I made one wise decision. Fortunately I'm not being pummeled like some of the other funds - today dropped ~1.3%. I'm not expecting to purchase property for at least one year, and most likely two. Regardless, my current instincts are telling me to stick it out and NOT PANIC. But logic is telling me to swing by the bank with a large sack.

I'm not a savvy investor by any means, but I am getting into it now and learning the ropes. But right now I'm hoping to make a wise decision before I get knocked out.
Once again, here is what I am doing: I have a lot of cash, some shorts (which went up like a rocket early in the week and tanked late in the week- not sure what I am going to do), a little gold. I still believe that we are in a bear market unless otherwise proven wrong, and so I think capital preservation is key here. A monthly income fund is probably not that bad in this environment (not sure about the particular one mentioned above since I did not do the research) but at least it seems to be holding up relatively well. Even a monthly income fund has some risks though as bonds and equities can go down together (although they seem to be in an inverse relationship at present). The key is to judge your time horizon and whether you can sleep at night. In a bear market, I believe that capital preservation is key (live to play another day). To catch the absolute bottom of a bear market is hard, but I believe that even if you miss the first 5 or 10% of the new bull and miss the 30% or so on the downside, you are way ahead.

I plan to update this blog when a new bull market has begun. I don't think that Thursday's bailout bottom was THE bottom but I will let the market decide and I will watch carefully. The best thing though is waiting to buy property as that bear market has just begun.

2 comments:

matt said...

Thanks Adil, your response is much appreciated. Considering the events of the last couple of days, I am happy that I didn't bail on the investments since the rebound was significant. That said, I still intend on getting out - it's just a matter of deciding when. IF this ends up being an up week, it might just be this Friday.

Aside from that, today I went to a few open houses in the Vancouver suburbs that I looked at 1-3 months ago. Several have been reduced by >10% ($419 -> $369), ($369 -> $329), ($419 -> $345). These are all still well overpriced, the rent on any of these ranges between $1300-$1600. Once they get closer to ~$270K I will seriously consider buying. It's nice to see my $50K growing in value in that sense, the fluctuations in the Stock Market are miniscule in comparison - my downpayment would've been wiped out had I bought any of these just a few months ago. SCARY.

jen said...

Adil,

Thank you so much for taking the time to respond to my question so carefully! Your input is very appreciated. I have much to think about, as places to park my cash that I always imagined were "safe" suddenly seem much less so. It's a new financial world out there, for sure.

In terms of housing, I certainly can't see how any sort of meaningful recovery could be due in the US anytime soon. As far as prices have deflated in the US (and just beginning to in Canada), the average house still has a long way to go before it's affordable to the average person. I'd wager that the fact that credit markets are seizing up due to a heightened sense of financial risk will drive prices lower, at least in the near term.

Thanks again for all your hard work, and I certainly look forward to your posts in the future.

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