blog16jul2007

Hot Off the Web
Grant Surridge reports in the Financial Post’s “Funding levels out of crisis”  that there is good news for many Canadian pension funds. This is the result of healthy stock market returns (on the asset side) and rising interest rates (on the liability side). The typical pension fund (whatever typical means, as each individual cares primarily about how her pension fund is doing and she is unlikely to find that out due to the loose reporting requirements in Canada). The same surveys also found, not ssurprisingly, that 2/3 of responsible executives still believe that we have a pension crisis in Canada! (And, again that’s because little has been done to tighten regulations in Canada to insure that corporation live up in a timely manner to their pension plan commitments, and that shortfalls are even disclosed in a timely manner)

Arne Alsin of the Financial Times suggests using some filters to identify financial advice from the media that you can safely ignore, in “Beware the financial adviser” Feel free to ignore “experts” who: (1) predict level of market index, (2) those using technical analysis, (3) experts who can’t distinguish price from value (good business vs. low priced stock).

In a similar vein, Jonathan Clements in WSJ’s “When the ‘self’ in self-interest isn’t you”  points out that self interest may be in play when advisors suggest that: (1) Life-cycle funds are a lousy investment, (2) You should not fund your 401(k), and (3) Your mortgage is too small
WSJ reports in “Do-it-yourself pensions”  that some 401(k) plans are starting to offer an annuity option. Many planners suggest an up to 25% allocation to annuities, to cover the basic living costs. One way of implementing this would be to replace some of the bond allocation with an annuity allocation. But watch out for costs, and you’ll have to make a choice between fixed and variable annuities (that a topic for another time). There is some disagreement as to whether you should get an annuity immediately after you retire or perhaps wait until you are over 75 years old; those arguing for early annuitization worry about the continuously increasing longevity, while those suggesting wait and see attitude worry about annuitizing and then dying early resulting in a significantly reduced estate.

U.S. Congress passed laws in 2006 shielding companies from potential legal action by employees if they are automatically enrolled in pension plans. Pension plan defaults are being set up in a way that individuals are automatically enrolled and once enrolled plan contributions increase automatically as well. In “’Auto-enroll’ retirement plans take off”  WSJ’s Jillian Mincer reports 95% increase in auto enrollment and a 26% increase in number of plans that automatically increase employee contributions. (Canada is falling even further behind the U.S.’s more progressive approach)
In “Get ready to structure your portfolio”  Barron’s talks about structured products being the fastest growing investment class in the U.S. Structured products, popular for many years in Europe, are bonds or notes with fixed income-like payouts, often principal (mostly) protected, tied to performance of equities or commodities or currencies. One of the problems with these products is that their pricing is not very transparent. A couple of suggested websites where you can get more background on structured products are www.structuredproducts.org   and their pricing www.numerix.com .

In WSJ’s “Alternative answers”  Gregory Zuckerman discusses the hot 130/30 funds which for each $100 of the investors’ money the manager invests $130 of his favorite stock and sells short $30 worth of his least favorite stocks. But watch out for fees and, in case the manager is wrong, the bet can go against him (you). Zuckerman also discusses the difficulty of assessing how Target Date Funds are performing; you really have to check what the composition of the Fund is and then compare the weighted performance against the Fund’s performance. The other option is to compare performance to other Target Date funds of same maturity.
“A little help please”  in the WSJ discusses a mechanism of co-ownership when first time homebuyers have difficulty with getting their down payment to the stage where they can get onto the home ownership train. A couple of options suggested using parents to co-own the property (without being residents) and when property is sold, then sharing the appreciation. A second option is becoming co-occupiers with unrelated persons. There are caveats to look out for, but if that’s the only way to get into home-ownership, then it’s worth exploring.

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