Hot Off the Web- April 4, 2010

Personal Finance and Investments

Tom Bradley, in the Globe and Mail’s “It’s not a question of whether to invest- but how”, writes that the most important piece of the investment puzzle is “a long-term strategic asset mix” which “takes into account their objectives, time horizon and tolerance for short-term volatility.” The simplest approach is to “set the portfolio mix and keep it there, by rebalancing periodically.” This insures that you are always diversified and you won’t be chasing the hot product of the month. (You have heard it here before, e.g. Asset Allocation, but it is worth re-telling.)

In the NYT’s “How to choose a financial planner”, Conrad de Aenlle looks at “whether to hire a financial planner and, if the answer is yes, how to go about it”. It is not just about competence in managing one’s money, it is also about confidence, motivation, and there is the risk of overconfidence especially when one doesn’t know that one doesn’t know. It is not an all or nothing decision; a good financial planner can provide a “cohesive strategy” which includes “risk management and management of the money you have and provide a road map of where you are today and where you want to go”, and then you might do the execution yourself. On finding a planner, start with references from friends and associates with similar circumstances to yours and then: look for credentials, insist on independent custodian, and choose a planner who is explicitly compensated for advice rather than by selling you products. “The most important thing is to find someone who’s like you in terms of values and tolerance for risk…if you ever feel uncomfortable, don’t deal with that person.”

In the Globe and Mail’s “Tougher rules sought for financial advisers” Janet McFarland discusses legislative changes needed “to strengthen investors’ legal rights and raise the professional bar for investment advisers.” “In countries where fiduciary standard rules have been adopted, regulators were responding to concerns about sales of complex, high-fee products to ordinary investors. Advisers were accused of ignoring more suitable alternatives for regular investors because they would have paid lower fees to the advisers. While Canada has not joined the global reform movement, it is clear that concerns about poor advice are growing.“ “Waitzer, director of the Hennick Centre, said a new fiduciary standard in Canada would especially benefit investors before cases ever hit the legal system….new fiduciary requirement would also have the benefit of giving investors more time to launch legal action against financial advisers”. On the same subject in the Globe and Mail’s “Let’s get the ethics clear here” Rob Carrick writes that “with advice comes responsibility. Either the investment industry accepts it and adopts the fiduciary-like standards that define a serious profession, or it keeps a status quo where selling is the main objective.”

Other related changes worth emulating from other countries are discussed by Barry Critchley in the Financial Post’s “Advice worth following” and Shirley Won in the Globe and Mail’s “Canada unlikely to see a ban on fund commissions”. The U.K.’s Financial Services Authority has introduced changes, to be implemented in 2012, whereby “financial advisors will be banned from receiving commissions on products they sell to retail customers. Rather, they will be paid separately for advice.” “The new rules have been designed because of concerns that “commission bias, actual or perceived, affects the advice and ultimately the products that clients receive. This trend leads, in our view, to a misalignment of interests,” she said, noting the plan is to create an environment “where the amount of money that an advisor receives is not influenced by the product provider but is agreed between the advisor and his or her client.” The hope is that advisors will be “firm and product neutral,” so that they receive “the right product for their circumstances, irrespective of provider or legal structure.” (Clearly this is another sensible change required in Canada, but so far there has been little indication that this was a priority for the federal/provincial governments of this country.)

In the Globe and Mail’s “The lowdown on insurance salesmen and warranty peddlers” Moshe Milevsky writes that you should “Insure only events that have a potentially disruptive impact on your lifestyle and only if they have a relatively low probability of occurring”. He very sensibly argues that “insurance is a smoothing mechanism” to deal with very low probability catastrophic events. So life insurance is something you should buy to protect your ‘human capital’ (remaining earning power until retirement), whereas extended warranty on your $110 phone is a waste of money. “When you are retired, for example, it is hard to justify the payment of large insurance premiums to protect human capital that has a low value. “ He also discusses ‘self-insurance’, or how to deposit the premiums that one would have paid to insurance companies into “risk-free investments only and no dipping into the cookie jar (except to cover a loss)”. He also reminds his readers that with insurance “you can’t make money “on average,” and the insurance company make money “on average” at the same time.” You must decide for yourself what risks you’ll self-insure and what risks you’ll pay an insurance company to cover. (You might be interested in a similar discussion on the self-insurance option for Canadians’ health insurance in my blog Individual health insurance in Canada )

In the Financial Post’s “Inertia helped pension plan members during the crash, Vanguard says”Jonathan Chevreau discusses a Vanguard study which showed that “401(k) pension plans from September 2007 to December 2009 found most did well by adopting a “stay the course” or “path of least resistance” approach throughout the economic downturn…(plan members) mitigated damage to their retirement savings by reacting only marginally in terms of trading, contribution and distribution behaviour.” The portfolio gains were due to market gains, dollar cost averaging “throughout the downturn”.

Pensions

In the sad category, judge Morawetz running the Nortel CCAA proceedings has essentially arm-twisted pensioners (and long-term disability recipients) to forgo the right to sue those responsible for mismanagement of the pension plan and to forgo the benefits of potential changes in the Bankruptcy and Insolvency Act (potentially worth a billion or more dollars) in exchange of continuation of benefits to yearend 2010 (a few tens of millions of dollars). the story (without my previous editorial comment) was reported by the Ottawa Citizen’s Bert Hill in “Nortel, pensioners reach deal on benefit package”. (I hope that at least the long-term disability recipients appeal the decision. Of course it would be nice if the Federal government would change the BIA quickly and retroactively, to overturn this obvious injustice, but I am not holding my breath.)

Real Estate

The January 2010 six city Teranet National Bank House Price Index is out, and it is up 7.5% from January 2009. Month on month only Calgary was down (-0.5%), the other five cities all registered under 1% increases. “Prices are now down 9.7% from the previous peak in Calgary and 0.2% in Vancouver. The other four markets passed their pre-recession peaks between May and October last year.” (The Canadian real estate market continues to fire on all cylinders, though not sure for how long.)

Tim Shufelt in the Financial Post’s “Mortgage rates’ dream ride ‘almost over’”reports that “Rates are officially on the upswing, an indication that the country’s housing market is finally poised to cool off and the beginning of the end to historically low rates….Royal Bank of Canada and Toronto-Dominion Bank, as well as Laurentian Bank, announced Monday they are raising the rates they charge on certain fixed-rate mortgages, including the benchmark five-year mortgage, which jumped 60 basis points to 5.85%(?)”. Three and four year rates also increased about 20 and 40 basis points respectively. ” In addition, in mid-April new rules come into effect that tighten lending requirements, making first-time buyers meet an income test that says they can make payments based on the five-year fixed rate. The two effects combined are certain to price some prospective buyers out of the market “at the margin.”There is a risk if the market does not cool down, we could see a correction down the road.”

The January 10 and 20 city S&P Case Shiller Home Price Index-es are down -0.2% and -0.4% from December 2009, but are essentially flat since January 2009. Only Los Angeles and San Diego showed an increase over the previous month. “Charlotte, Las Vegas, Seattle and Tampa – posted new index lows as measured by the current housing cycle where, depending on the market, we saw peaks in 2006 and 2007. The peak-to-current declines for these MSAs are -13.8%, -55.8%, -24.6% and -42.0%, respectively. On a relative basis, Washington DC, Los Angeles and New York have held up the most, with each of those markets still 70% above their January 2000 levels. Las Vegas”.

Sushil Cheema in WSJ’s “10 summer home mistakes” lists mistakes that people make in the decision process of buying a second (summer/winter or weekend getaway) home. The list includes: impulse buying, forgetting maintenance costs (and insurance costs and property taxes, especially in Florida),  commute time for the weekend or  getting to the destination in general, not factoring in the impact of grandchildren (big enough to accommodate them), factoring in rental rates, and what you really want out of the second home.

Things to Ponder

In the Financial Times’ “Lessons to learn from Sweden”Ruth Sullivan argues for improvements in corporate governance by “getting the composition of a company board right”. A U.K. think tank report is “calling for UK-listed companies to invite big shareholders to join their board nomination committees. The study draws from Sweden’s shareholder-led nomination committee model of ensuring good board selection that has woken up investors to responsible stewardship. One of the key intentions of the report is to stimulate a real and substantive way to deal with ownerless companies.” Institutional investors have failed to be “actively involved in the selection of the boards of companies in which they invest…In Sweden, shareholders play a direct role in selecting and sometimes removing board members. Swedish board nomination committees typically comprise four or five of a company’s biggest investors, company representatives and board chairman, reporting their findings to the annual general meeting.”

Jeff Rubin in the Globe and Mail’s “Expect a new peak for oil next year”  predicts a major jump in oil prices next year. “Whether we are talking about supply or demand, there is nothing on the horizon to prevent the imminent return of the very same oil prices that put us into the deepest postwar recession yet in the first place…We’re barely out of the recession, and already we face prices that, just a few years ago, our government, our oil industry and our economists told us we would never see. Where do you think oil prices will be trading in the future? In a somewhat related story “U.S. finalizes car-mileage rules”with a target to increase new car mileage from the current 26.4 miles per (U.S.) gallon to 35.5. (Not clear to what extent this will help offset the rapidly growing oil consumption in the developing world.)

And finally, in the non-financial category and ‘only time will tell’, Amy Dockser Marcus in WSJ’s “How to outsmart Alzheimer’s” reports that “A recent study done by researchers at Columbia University Medical Center involved 1,880 elderly residents living in a neighborhood in New York City who didn’t have dementia at the start of the study, which ran between 1992 and 2006. The participants were evaluated on their level of adherence to a Mediterranean diet—high in olive oil, fish and legumes and low in dairy and meat products—and their level of physical activity. Their cognition was re-evaluated every 18 months. The study, published in JAMA in August, determined that higher levels of physical activity and good diet independently lowered people’s risk of Alzheimer’s disease compared with people who did neither. But when the researchers looked at the two strategies together, the benefit was even greater. People who exercised more and followed the Mediterranean diet more closely had a 35% to 44% lower risk compared with those who didn’t follow these regimens. The researchers cautioned, however, that the theories need to be studied further, and among other groups of people.”