Hot Off the Web- December 1, 2009

Personal Finance and Investments

Globe and Mail’s John Heinzl tackles how much of your nest egg can you spend each year in retirement, in “How not to outlive your money”.  Options discussed include: (1) “the 4% rule” (spending 4% from a balanced portfolio the first year and then increasing dollar amount annually by inflation) where over a 30-40 year retirement there is a definite risk of exhausting assets, and (2) William Bernstein’s conclusion using similar annual inflation adjustment mechanism is that the approach is bulletproof at 2%, probably safe at 3%, but starting to be risky at 4% (20% exhaust probability at 4% and 30-50% at 5%). Other options mentioned are saving more, working longer or buying annuities. (Don’t forget the safer approach is drawing a fixed percent , up to 4-5%, of the available assets each  year (or for a smother ride, the average of assets the previous three years); this make your income/spending more volatile but you can’t run out of money. Also, it is a more realistic approach to how people actually behave in real life; in years that the portfolio (market) does better/worse than average, you take out more/less dollars. Of course, once you get to be over 85, you could increase your annual draw rate, since you have fewer spending years remaining.)

In WSJ’s “Saving is something you should do every day” Jason Zweig reminds readers with a few simple examples that saving is something that should be done daily (in the spirit of Benjamin Franklin’s  “A penny saved is a penny earned”): conserve energy (driving at 55 instead of 70 MPH saves $0.70/gal and lowering thermostat a few degrees during the day and a few more degrees at night), “walk or bike to work”, take your lunch to work, quit smoking and pay off credit cards fully each month. These add up to thousands of dollars saved each year.

In the Financial Times’ “Variety is best for passive approach” Sophia Grene reports that new research indicates that capitalization weighted indexes are not the only way to reduce risk of portfolios built on passive approaches; she quotes Rob Arnott’s work that using equal weighting,  fundamental index and/or minimum variance approach (lowest risk portfolio independent of returns), actually helps diversify their “beta risk”. (By the way, not everybody would agree to call these other suggested approached a form of ‘indexing’.)

You might find of some use a couple of year-end tax-related articles. The first is Gail Bebee’s “Boost your investment returns courtesy of the government” in the Globe and Mail. Her list includes: TFSAs (tax avoidance), RESPs (free money), and RRSPs (tax savings and deferrals). The other is Jonathan Chevreau’s “Golombek’s top ten year-end tax-planning tips”. Golombek’s list adds among others: tax-loss selling, taking advantage of the prescribed interest rate of 1% for investment income splitting, and paying investment expenses before year-end.

In WSJ’s “Are you too late for the junk-bond party?”Jason Zweig writes that beside the fact that the junk bond party is  over, some like William Reichenstein argue that “junk-bond returns are highly similar to what you would get if you put two-thirds of the money in investment-grade bonds and one-sixth each in large-company stocks and small-company stocks—all of which you probably own already. Who needs junk bonds to have a diversified portfolio?” asks Prof. Reichenstein. “I would say nobody. They’re a hybrid asset, neither fish nor fowl. They muddy your asset allocation without adding a lot of diversification.”  (I tend to agree.)

Real Estate

The September Teranet-National Bank House Price Indexissued this week, shows the fifth consecutive month-on-month increase in Canadian house prices with 1.3% increase in the six city aggregate over August. Vancouver and Toronto showed the highest September increases at 2.1% and 1.5% for the month, while Montreal was only city to show an in-month decline in prices of -0.2%.

William Hanley’s Financial Post article “Buyer beware on snowbird deals”is a reminder that when things look too good to be true, they may in fact be so. How about a nice Waikiki condo near the beach for $50,000? Well, it is actually leasehold with a lease approaching its end of term. Other pitfalls, despite appreciation of the loonie and 50% drop on some real estate prices, to buying U.S.  (investment or recreational) property mentioned are: continuing market uncertainty, renting may be a better deal for those not using the property  4-6 months a year (it may be a better deal even for them), uncontrollable annual expenses (maintenance fees, assessments, property taxes, etc).


The Star’s James Daw in “Bankers’ group wants to continue to protect you”, strikes out against bankers salvo to “protect” Canadians from big governments attempt to create large-scale pension plans which may “require” young Canadians to divert much needed income for other purposes. Daw exposes the bankers’ contribution for what it is (self-serving hogwash). The bankers forgot to mention “the drain on retirement income caused once banks and insurers receive our meagre savings. Canada has the highest investment fund fees in the world, enough on average to bleed 40 per cent of future retirement income from the most diligent savers. Most of these funds lag market and pension returns. There’s also the occasional bad advice and outright larceny by employees of banks and associated securities dealers. Yet the banks’ solution for stretching dollars in retirement is to keep more of our money. They ask to be able to sell life annuities from their branches.” (Enough said!)

On November 26th McGuinty Liberals dash(ed) hopes of Nortel Pensioners. The Ontario Liberal government defeated Bill 213 tabled by Opposition MPP Norm Sterling to modify the Pension Benefit Act and not to force pensioners into an annuity in case of pension wind-up; According to the government, the Bill was defeated because “it didn’t address all the problems facing Ontario’s current pension system.” (No doubt all pensioners are waiting eagerly to hear what the Ontario government will unveil (as promised) early in December the changes which will “address all the problems”.

In “Allan Gregg’s interview of Jacquie McNish on Canada’s pension crisis (on TVO)”a lot of the issues are covered quite thoroughly. Areas covered were: lack of any pension for 8M Canadians, the private sector pension participation rate dropped from 40% in the 70s to 15% today, underfunded DB plans and its impact when company goes into bankruptcy, the need to raise the priority of pension underfunding  in a bankruptcy situation, the 90s shift from investing  pension plan assets from bonds to stocks, lack of transparency, irreversible move away from DB plans, inadequate/lack of pension guarantees in Canada (as compared to U.S.), inadequate frequency of reporting and the Canadian jurisdictional cesspool associated with pensions . (Did somebody say that Canada’s pension system is not in ‘systemic failure’? Well worth 27 minutes if you are interested in the subject.)

Things to Ponder

Gregory Zuckerman writes in the WSJ that it is “Time to prepare for the next bubble” . He argues that gold won’t protect you when the next bubble bursts. “So what should investors do? Financial pros abhor buying insurance on their portfolios because the cost could allow a competitor to score better returns. But individuals needn’t worry about losing a few percentage points a year in returns if it means building a safety-net for a portfolio. Mr. Paulson purchased credit-defaults swaps which serve as insurance on debt rising in value when the debt falls (but that was more likely as a form of speculation than insurance for bonds already held). Most individuals aren’t allowed to buy this derivative investment. But out-of-the-money ‘put’ contracts, or options that pay off only if the market tumbles, often trade at inexpensive levels and are a boon in market tumbles. And a variety of exchange-traded funds have been introduced that rise when markets fall, making it easier for investors to buy some safety. Have an exit strategy ready, along with some extra cash to cushion any tumble.” (Not sure if this would be the best approach. Why not just sell some of what has run up in price and/or rebalance your portfolio to reduce its risk level.)

In WSJ’s  Brett Arends looks at expectations of future inflation (fear due to al the dollars being printed), looks at the  2.4% market perceived future inflation (as reflected in the difference between 20-year Treasuries and TIPS), the fear that the government published CPI does not reflect true price levels, and that long term Treasury rates don’t reflect fears of inflation. He argues that perhaps gold is the next mania but ““Will gold keep you safe?”betting on a bubble is a very different thing from relying on a “safe haven” from inflation.”

In WSJ’s “U.S., overseas stock correlations too strong to last”Palash Ghosh reports that recent strong (first downward and then upward) correlations between developed and emerging markets has made a mockery out of geographic diversification. However Harris’s Cox believes that this was a once in 50 year event, and given the “disparity in economic activity”, it won’t last; Asia will outperform U.S. and Europe. Correlations will reduce but the power of geographic diversification may not return to historical levels.

Spenser Jakab, in the Financial Times’ “Apocalypse how?”writes that confusion about the future reigns supreme in the financial markets.  “Record gold prices and negative US Treasury yields are strange bedfellows, indicating general uneasiness but also conflicting bets on inflation or deflation” He asks in fact if we are heading toward deflationary Japan or Zimbabwean hyperinflation. “. As the great economist Woody Allen once put it: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly.” As you can imagine, no definitive conclusion is reached, but it includes a long list of references that you could pursue, if you are so inclined.

And finally,  in  WSJ’s “An economist’s invisible hand”   John Cassidy discusses some of the ideas of an early 20th century economist, which are getting fresh attention: “Mr. Pigou believed capitalism works tolerably most of the time, he also demonstrated how, on occasion, it malfunctions. His key insight was that actions in one part of the economy can have unintended consequences in others.”


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