blog06may2007

Hot Off the Web
This week’s Hot Off the Web is a little longer than usual to make up for the missed blog last week, as I spent must of it at the 60th Annual CFA Conference in New York; more about what I learned there in future blogs.
It difficult to disagree with Rob Carrick’s assessment that the ETF business is (becoming) a circus in “ETFs for everyone-even dermatology investors”  It certainly strayed a long way from the original intent, as suppliers continue to slice and dice into narrower and narrower segments. (I have no doubt that the market will take care of this in time. In the meantime, buyers beware). To help investors separate the wheat from chafe, he provides three categories of ETFs: core (broad based indexes), discretionary (e.g. energy, gold, dividend, high yield) and other. For the “other” category he suggests Tyler Mordy’s screens for: lowest cost, adequate liquidity (can you sell at a fair price when you want to) and diversification (content not dominated by high concentration of a few stock). (I suspect he’d advise you to also apply these tests to the other categories).
Jonathan Chevreau covers a number of new Canadian principal protected financial products (e.g. variable annuities) in “Principal protection adds appeal to VAs” . The caveat in such products is that while they may reduce risk, they of course, also reduce the upside return (no free lunch), and to top it off, they usually come with (very) high fees! WSJ’s Terri Cullen also talks about principal protected products in the context of annuities in “Change annuities, or not” and in the process provides an annuities tutorial worth reading. Her conclusion is the same; watch out for fees!
While he admits that fundamental indexing may have some merit, WSJ’s Jonathan Clements in “Why aiming for average has its own genius” comes down squarely on the side of traditional market-cap based indexing. The potential merit may be that in a cap-weighted index you are overloading/under-loading in overpriced/under-priced stocks and that there may in fact be stock market noise (i.e. market may not be as efficient as it is often drummed up to be) to be taken advantage of. Nevertheless, the jury is still out, and he is perfectly happy to beat the average active investor by a margin guaranteed by the lower index fund costs.
James Altucher of the Financial Times says that investors are starting to ask questions in “A fund of funds gets found out” . The question asked is, given 5-6% returns obtainable on T-bills, is the extra 2-3% returns obtained recently, by hedge fund, fund of funds worth taking on the extra risk and the lock-up period? Many answer not.
Respected National Post columnist Diane Francis does a fabulous job covering the discriminatory and confiscatory property tax system in Florida (including quotes from your truly) in “Snowbirds getting angry, organized- Two-tier property tax regime causing chill in Florida” She even raises the question of legality of the discriminatory taxes under NAFTA. If you are, or thinking of becoming, a non-resident Florida property owner, you must read this article. (You may also want to read more on the subject under the Advocacy and Taxation tabs at this website. The WSJ covers the same story in “Homeowners wage a tax rebellion”
Regulatory changes in the US in response of low savings rates toward retirement are making “Employers grab reins of workers’ 401(k)s” . Some of the features of the new approach include: default enrollment, default investment, default contribution levels; thus forcing employees to consciously opt out. This is an idea whose time has come and is overdue for Canadian RRSPs and Defined Contribution plans!
In “New rules alter financial-planning rules for consumers” Chuck Jaffe reports on suit won by FPA (Financial Planning Association) against the SEC, trying to (finally) force to adopt fiduciary responsibility standards. While the FPA won, it only accomplished that “brokers can give financial advice only is they are not paid for it”; somewhat of a hollow victory.
And finally from a non-financial perspective, there are many right answers to what retirement is or should be in “Making retirement fit your personality”  Tom Lauricella warns about drastic changes, emotional up and downs during the transition, the crisis resulting from one’s identity having been wrapped up in their lifelong job, need to learn to relax and enjoy the freedom that retirement offers; not just the freedom to do nothing, but also to do what ‘you’ want to do, when you want to do it! And, when one is asked “what you do?”, “he shouldn’t say he’s retired and taking painting classes; he should just say he’s an artist”.
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