Hot Off the Web– May 2, 2011

Personal Finance and Investments

Brett Arends writes in the WSJ’s “Retirement income? Annuities come up short” that more than likely annuities are not the answer for most retirees in today’s environment despite the  fact that they will prevent you (at least nominally) from running out of money in retirement. Some of the reasons are: (1) very low payout compared to anytime in the past 30 years, due to ultra low Fed manufactured current interest rate environment, (2) the corrosive effect of inflation over a long retirement, (3) the higher than usual risk of not just current level, but also rising inflation, unlike the opposite effect over the last 30 years, (4) high sales and administrative costs, (5) “loss of control of your principal”, and (6) “you’re dependent on the financial strength of an insurance company”. If you must buy an annuity, he suggests “staggering multiple buys over several years in case rates rise”. Of course if you believe that interest rates will continue to fall in a generation-long deflationary period, locking in the current interest rates would look better. (I’d be very cautious about annuities today. If you’re interested in reading more about annuities look at my earlier Annuity I, Annuity II, Annuity III and Annuity IVblogs on the subject.)

In the Financial Post’s “What’s in it or the heirs?”Jonathan Chevreau’s interesting article explores how parents’ view of their children’s inheritance might affect their approach to financial planning. He looks at the approach of the full range of perspectives from those planning to “die broke” to “never eating into capital” and those in-between the two extremes. (The reality is a ‘generous’ (or conservative) approach is typically the only credible one; even looking at it from a perspective that an estate is a secondary objective (a want rather than a must in the planning exercise) at one extreme you don’t know when you’ll be dying so you better plan for a significant estate especially if you are using life expectancy as a guide for calculating required assets for retirement, at the other extreme spending only (real or nominal?) income can still be devastating when you consider the corrosive effects of  inflation and taxes on a fixed income portfolio. Given all the uncertainties of life, unless you have an indexed (public sector-like) pension you better plan to leave an inheritance…just in case you may have to live on it.)

In WSJ’s “How to find unclaimed property” Veronica Dagher discusses ‘tracers’ and websites that Americans can use to track down unclaimed property that they might belong to them. From unclaimed life insurance to “a refund check from a utility company, stock dividend checks that have been going to a stale address or proceeds from the estate of a relative who died without a will and whose estate took several years to be settled in court.” A suggested place to start the search mentioned is ACS Unclaimed Property Clearinghouse which even includes data from some of the provinces. (The Bank of Canada also has a Canada-wide database at Unclaimed Balances covering federally regulated banks and trust companies. In the case of Canadian Life Insurance policies, the search is a little like pulling teeth as described in “Finding lost life insurance policies”. If nothing else, at least consider this a reminder to look every few years in case something was misplaced/forgotten.)

In WSJ’s “How to profit from the shrinking dollar” Levinsohn and Silver-Greenberg suggests that American investors can get protection against the shrinking U.S. dollar in: large cap stocks (more competitive in exports, plus a kicker when repatriating foreign profits), avoiding U.S. dollar bonds, buying commodities (they rise as dollar weakens) and some currencies (China’s yuan in particular). In a related article, the Globe and Mail’s David Patterson looks at “Who wins and who loses from the falling greenback”from a Canadian investor perspective. He writes that “the Canadian dollar hasn’t risen against its other major trade-weighted currencies this year – only against the U.S. dollar. So, it makes more sense to consider the sectors’ exposure specifically to U.S. revenues. In this case, technology and materials look much less at risk to a currency hit than their overall export exposure suggested.”

In the Globe and Mail’s “The hidden pitfalls of real Return Bonds”John Heinzl cautions those contemplating inflation protection from RBBs that they need to watch: tax issues (use registered account), risk of capital loss if not held to maturity, and the risk since yields are at historic lows. A ten year bond ladder alternative is suggested in the article. If hyperinflation is your concern then there might be a case for RBBs but resources and resource stocks might even be better.

Jason Zweig in the WSJ’s “How inflation-protected funds get to inflate their yields” warns potential buyers of such funds that SEC-yields (which include only dividends and income) can mislead investors because many funds use the opportunity to include the inflation adjustment of the principal in the reported number. “The bottom line: While the SEC yield is a decent guide in other bond funds, it can steer you wrong in an inflation-protected bond fund. Before buying a TIPS fund, ask instead what its real yield is.”

In the Globe and Mail’s “Bulls, bears and baseball: tax strategies for investors”, an excerpt from his book, Tim Cestnick discusses the impact of taxes on a non-registered portfolio and writes that “There are two things in particular that will determine how much tax you pay annually on your non-registered investments: portfolio make-up (interest on fixed income/cash instruments and dividends and capital gains on equities) and portfolio turnover (“each sale is a taxable event”).” He also discusses the treatment of capital gains/losses as gains/income, capital gains reserves when not all proceeds of sale have been collected, TFSA vs. RRSPs, equity monetization to reduce a concentrated portfolio by locking in current price without triggering immediate tax, and other potential insurance based tax saving ideas (but as the saying goes, with most of the insurance based ideas you just end up paying insurance company fees instead of taxes; not a very socially constructive outcome.)

Shelley White in the Globe and Mail’s “Do you need rental car insurance?” warns readers about some potential holes associated with insurance for rental cars, and the advisability in to investigate exiting coverage with own auto policy (if you own a car- ask your insurer), credit card coverage (“gold” member only), what and how much is coverage (liability, comprehensive/collision), and geographic coverage (US, Canada overseas). “All in all, it’s worth a call to your car insurance or credit card company before you say no to insurance at the rental counter. No one wants to pay for something they don’t need. But no one wants to be left on the hook for thousands of dollars either.”

Karen Bond asks an interesting question in the Financial Times’ “Safety starts with knowing where assets are held”, do you know where your investments are held when you deal with an advisor? Her (UK) example suggests that even her advisor doesn’t know. “There’s a long and growing chain of participants in the administration, custody and settlement process these days. The investor’s entitlement to assets may be recorded on a platform, held in a pooled nominee by a platform-appointed custodian, or with a broker or transfer agent to settle a transaction… the devil is in the detail. It is understanding this chain which enables the reconciliation and rapid location of assets. Diligent firms will always know what these positions are.”

Real Estate

The data continues to indicate deterioration in U.S. home prices (though you must always keep in mind that data is lagging not just because it is two months old but also because it is a three month rolling average). S&P Case Shiller Home Price Index indicates that “prices for the 10- and 20-city composites are lower than a year ago but still slightly above their April 2009 bottom. The 10-City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels…There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing…Ten of the 11 MSAs that recorded index lows in January fell further in February. The one exception, Detroit, is 30% below its 2000 price level…Atlanta, Cleveland and Las Vegas join Detroit as cities with home prices below their 2000 levels; and Phoenix is barely above its January 2000 level after a new index low. The one positive is Washington D.C. with a positive annual growth rate, +2.7%, and home prices more than 80% over its January 2000 level. Other cities holding on to large gains from 11 years ago include Los Angeles (68.25%), New York (65.19%) and San Diego (55.05%).”

On the Canadian front the just released Teranet- National Bank House Price Index for February shows that “home prices in February edged up 0.1% from the previous month…It was the third consecutive monthly rise, following on three consecutive monthly declines. The slightness of the increase can be laid to declines in three of the six metropolitan markets surveyed. Prices were up 0.3% from the month before in Vancouver and 0.5% in Montreal and Ottawa. The Ottawa rise broke a run of five straight monthly declines. On the downside, prices fell 0.1% in Toronto, 0.4% in Halifax and 0.5% in Calgary.” The YoY gain was 3.8%. (Time will tell if this indicates a the start of a stall or it is just the February doldrums, and things will pick up again once March and April numbers become available)

Rob Carrick writes in the Globe and Mail’s “Safe as houses? That loud knocking is falling prices” and warns that the rate of increase in Canadian home prices (4.9% since 1988 and 8.3% past 10 years) is unsustainable not just because of affordability measures, low income growth and expected interest rate increases but also Canadian demographics. But then in the Globe and Mail’s “Foreign buyers buoy Vancouver housing”David Ebner suggests that external factors like the impact of foreign investors and wealthy immigrants must be factored in at least in the Vancouver (and Toronto) markets.

In the Financial Post’s “Rent vs. buy debate makes comeback”, with the apparently flattening (if not falling) Canadian real estate prices, William Hanley tackles the old rent vs. buy/own question from economic and cultural/emotional  perspective. While he makes no recommendations for what’s appropriate for somebody else, he does suggest that at least you do the math (Hanley refers to this calculator) and then “throw the math out the window and succumb to the emotional tug of home and hearth”. (If you’d pay cash for your (new downsized or retirement) home and you play with the calculator, you might conclude that, financially at least, the really big factors in the rent vs. buy decision are your expectations of the level of home price increases/decreases and your portfolio returns (asset allocation and market returns) over your horizon for any given level of lifestyle chosen.)

In the Palm Beach Post’s “Board has right to make hurricane windows the rule” Gary Polikoff writes that given Florida’s exposure to hurricanes “it was determined that impact glass and hurricane shutters improve the safety of unit owners and minimize the damage to the condominium itself. As a result, the legislature amended the Condominium Act to provide that the board, with the prior approval of majority of the unit owners, can make the installation of hurricane shutters or hurricane protection that complies with or exceeds the applicable building code, or both, mandatory.” He also discusses the desirability of making such a project a condo association rather than an individual condo owner project (not what is actually happens in many instances.)


Janet McFarland reports in the Globe and Mail’s “Middle-class retirement outlook takes hit” the results of a new IRPP study which concludes that: (1) “about half of middle-income  ($35-80K) Canadians born between 1945 and 1970 are likely to face at least a 25-per-cent drop in their disposable incomes when they retire”, (2) it significantly disagrees with Jack Mintz’s 2009 report which indicated that “Canada’s pension system is “performing well” and said 80 per cent of households are saving enough to replace 90 per cent of their working income in retirement”, (3) it “found that several bold reform proposals that have been floated – including doubling the Canada Pension Plan and improving the Old Age Security system – would not significantly improve retirement incomes for baby boomers” (essentially because , whatever limited merit the current proposals have, they cannot significantly impact boomers who started turning 65 this year). (Can’t imagine any of this could be a surprise to readers of this blog…Canada’s pension system is in systemic failure and our politicians continue to fiddle.)

Things to Ponder

In the Financial Times’ “Guarding against tails of the unexpected”, tail risk (e.g. Japan earthquake, Arab popular revolts) is defined as a “form of portfolio risk arising from statistically significant moves by an investment away from its mean. While such extreme events causing massive market dislocation are relatively rare, their historical occurrence is much more frequent than many investors might realise. History shows that those who have paid attention only to statistically tangible factors, such as historic correlations and returns, and who have ignored less predictable factors have suffered as a result”. Traditionally, diversification among asset classes and specifically trying to use uncorrelated assets are the ways to reduce portfolio risk in “normal” markets. However in crises (“non-normal” behavior occurs and) “everything” can become correlated (downward) and other approaches are used like: macro hedges like interest rate swaps, currency options, equity market futures, commodity indexes and momentum strategies (e.g. volatility that rises in value when market falls).  Of course such hedging strategies come at a cost, which must be factored into the hedging decision.

In the Globe and Mail’s “Spreading inflation speeds up debt repayment clock” “Jeremy Torobin reports that “Mr. Carney and other policy makers and economists warn that debt-saddled governments – much like households – can’t afford to wait before starting to pay the tab, because waiting will just make the task harder. Those annual budget shortfalls that seem manageable while borrowing costs are low pile up and, eventually, the interest costs on the accumulated debt can cripple a government’s ability to do much else…While low current interest rates create short-term fiscal flexibility, they expose budgets to any increase in policy rates and abrupt changes in private market sentiment. Countries would be wise to heed the lessons learned by Canada in the 1990s: The bond market is there until it is not.’’

In the Globe and Mail’s “For a happier retirement, think like a woman” Dianne Nice writes that despite women’s lower earnings and longer life (thus requiring more assets to meet same standard of living in retirement), they have happier retirements because of: stronger social networks and lower expectations. Men also tend to have their identities entangled with their careers, whereas “a lifetime of caregiving equips many women with a sense of purpose that will last into retirement”. (Makes sense- one’s perceived wealth is relative to expectations of lifestyle, and readiness for retirement is not just about financial readiness. There is no doubt that men have a great deal to learn from women in this domain.)

And finally, I couldn’t resist the Economist’s “Ayn Rand on tax day” in which you find the following comment on taxation, very timely at least for Canadians who coming Monday coincidentally have their annual ‘tax deadline’ aligned with federal elections: “Abraham Lincoln said so well, “The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves—in their separate, and individual capacities.” Citizens reasonably resent a government that milks them to feed programmes that fail Lincoln’s test. The inevitable problem in a democracy is that we disagree about which programmes those are.”


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