Hot Off the Web (May 4, 2008)
Globe and Mail’s Rob Carrick tackled the rising tide of inflation in two articles this past week. First in “Inflation is rising so pay down debt now” he warns that rising inflation will lead to rising interest rates in the coming years and he suggests that now it’s time to reduce debt, starting with credit cards and credit lines, rather than focusing on mortgage payments. In the second article on inflation this week “Inflation first aid: Gold, oil and real estate” Rob has specific recommendation on how to “inflation-proof” your portfolio. While commodities and gold are often thought of as the place to gravitate to when inflation is heading up, he correctly warns that not only are they already richly priced but Canadians also have adequate exposure given that about half of the S & P/TSX composite is commodity and gold related. He suggests: (1) Canadian REITs as a place to look for an “inflation-resistant sector”, (2) shift into short-term bonds (the long-maturities’ prices will be hit if interest rates rise significantly), and (3) avoid real-return bonds which are over-priced at this time.
Another interesting article on inflation, even if you are repeatedly told that “core” inflation (i.e. excluding that fastest rising portion of consumer expenditures, food and energy) is under control, is John Plender’s Financial Times article “The emerging markets will export inflation across the globe”. He argues that we can look forward to inflation feeding through from emerging economies because: (1) rising food/energy prices will drive workers to demand higher wages, especially as the emerging economies are increasingly operating with less excess capacity, (2) rising commodity demand and corresponding dollar prices, especially if their currencies further strengthen against the dollar (and thus partly contains their sensitivity to the price rise).
Arnie Alsin of the Financial Times explains (again) “Why stock market players make a hash of it” . It’s been shown repeatedly that investors garner just a small fraction (25-50%) of the available returns from the market. So when taxes and inflation are factored “the average investor barely generates a positive return”. His recommendation is: (1) buy and hold, (2) use index funds, and (3) “automatically adding to equity holdings when indexes are down by 10% or more, and automatically reducing exposure when equity index are up 20% or more”.
Alina Tugend discusses how critical is the selection of a financial advisor. In the NYT article “Pick a planner who can spell ‘Fiduciary’”  she specifically focuses on the importance of selecting somebody who has fiduciary duty, i.e. is legally obligated to “work in the best interests of their client”. The other consideration she mentions is how your advisor is compensated, with fee-only as the preferred model.
Jon Chevreau also drives home the advantages of the fee-only model, specifically fee-only compensation paid exclusively on an hourly basis, rather than fee-only based on the size of the assets under management, in the Financial Post’s “Fee only must mean just that” . The debate centers around not just whether advisor gets paid exclusively by the client, but whether the compensation model (e.g. based on asset size) creates potential conflict for the advisor to drive up the size of assets under management (e.g. take more risk than client should or not recommend products which reduce assets under management like annuities, etc). An example given is Life Planning Partners which is compensated by annual retainers chosen from a menu of four service packages.
In Financial Times’ “When it’s time to ask for whom the bell tolls” John Authers warns the reader that while Monte Carlo techniques based on the bell curve (Gaussian distribution) assumption in financial analysis brought a new measure of insight in the expected range of outcomes, they still leave us exposed to: (1) Black Swans (extreme, unpredicted events), (2) if everyone moves to the same place on the bell curve, that will change the bell curve. He also discusses weaknesses in the Value-at-Risk approach.
And finally, in the NYT’s “Whatever you do, call it work”  William Hamilton says that “RETIREMENT used to be the pot of gold at the end of the rainbow, life’s reward, time as enviable as wealth. But in an age-defying, competitive culture, it has become something of a dirty word.” To many in America culturally “It is better now in retirement to be a consultant, an independent contractor, an owner of a business, a dedicated volunteer, a portfolio manager, a pro bono worker or any variety of self-employment, as long as it is perceived as work.” But some warn that this trend may make people who are otherwise happy “having a good time and doing their own thing”, feel somewhat inadequate, for no reason. Hamilton closes off with the cultural difference with India where “in Hindu society, he said, the occupation of your final stage of life was to renounce everything and set out as a spiritual wanderer on an unknown path — a trip with a positive goal that sounds like the negative description of retirement as losing your way.”

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