Tom Bradley (founder of Steadyhand Investments) in Globe and Mail’s “‘It will sell’: A tipoff for bad investment products” warns readers who may now be psychologically ripe for the trap of “guaranteed income” and “principal protected funds” to beware! “Such things as downside protection, tax deferral or arbitrage and convenience come with a price.” Included in his list of what’s wrong with these types of products are: lack of transparency, misalignment of objectives, over-diversification, complexity, cost, even advisers don’t understand them. (For example you can read about the wonderful sounding Guaranteed Minimum Withdrawal Benefit funds in my GMWB II- Guaranteed Minimum Withdrawal Benefit blog.)

Financial Post’s Jon Chevreau reports in “Two thirds fixed-income panacea for retirement security?” that Russell Canada is recommending 65% bond allocation around retirement +/-5 years to minimize sequence of returns risk. I tend to agree with Chevreau’s view that this is too radical shift from the 35%-50% bond allocation in a traditional balanced portfolio, especially after a 50-60% drop in the markets from last year’s peaks. (Although there is a recent article by Rob Arnott who questions the size of the equity risk premium commonly quoted at 4-5 %, shifting from a stock-heavy to a bond-heavy portfolio after the market dropped 50% seems a little like closing the barn-door after the horses departed.)

In Financial Times’ “We modernized ourselves into this ice age” Eric Dinallo compares current financial crisis, not to the 1929 depression, but the 1907 bank panic, and argues that we got here due to forgotten earlier lessons that “instability comes from unregulated markets and gambling on securities’ prices.” Credit default Swaps (CDSs) were the fuel because it was the “alchemy” of CDSs “that allowed guarantees supported by little or no capital.” This does not mean the end of financial innovation, it just must be backed by capital (i.e. more expensive, but guarantee may be real).

Jeff Opdyke in WSJ’s “With this debt, I thee wed” reports that “accumulation of debt can undermine your marriage and cause the type of discord that can dissolve a marriage.” He suggests that you and your partner need to work on some debt related questions like: philosophy (live below means, pay off credit cards monthly, saving untouchable except in emergency), purpose (pay off debt before saving) and good (mortgage/car for affordable purchase, student loan) vs. bad (that which only improves your life temporarily, e.g. auto lease on BMW).

WSJ’s Jason Zweig article reports on results of neuro-economic research in “This is your brain on investment advice” . The study concludes that when investors have to think for themselves without “expert” input they use valuation circuits of the brain which evaluate size and probability of payoff; when “expert” input is provided to assist with the decision making, these valuation circuits fade away. “The mere act of seeking an expert’s opinion may erase your own…You should beware of people offering advice not just because they might be wrong, but because that advice may inhibit your own ability to form judgements.” To counter this phenomenon it is suggested that you write down your own views of the appropriate investment strategy before you go to see your adviser, and review it and decide only after leaving adviser.

Deborah Brewster writes in Financial Times that “David Swensen: The campus endowment legend likes to keep it simple” . Swensen achieved 16.8% per year for Yale’s endowment fund over the 10 years to June 2008. He achieved this by investing most of the funds into “private equity, hedge funds, non-US stocks and real estate.” “Mr Swensen and his team outsource almost all the money, acting as “managers of managers”. He also observes that “asset allocation, rather than stock selection, has been shown to account for most of the funds’ outperformance.” He avoids fund of funds (because you must know where your money is going) and quantitative managers (because how can you invest if you don’t understand if/how the quantitative model works). “He is highly critical of the asset management industry, seeing it as more or less a giant scam for retail investors, who would be better off putting their money into index funds.” This is because of the fees associated with active management and the difficulty of retail investors to select the high performing funds. Yale’s fund lost last year 25% in four months.

CBC’s Neil MacDonald tabled the report last week “The giant Ponzi scheme that is Florida’ warns about Florida scams and broken dreams: cheap fish passed off as grouper, new never owner-occupied (empty or now rented) run-down neighbourhoods, foreclosures, people leaving the state to find employment elsewhere. He quotes SFU’s Gary Mormino that Florida is like a “Ponzi state”. Well worth reading for those with Florida interests, even though he didn’t even mention the discriminatory treatment of Canadian (and other out of state) property owners in Florida! (You can read my new related blog Florida: April 2009- Property values, property taxes, constitutional challenge, should I buy now?, “Ponzi state”? )

Brian Milner in his interview with Eric Sprott quotes him with “First, ‘fix the economy’” . Sprott argues that the monetary policy (hyper-inflating the money supply) of trying to pump up the financial markets in the hope that that will in turn improve the economy is the opposite of the correct approach. What government should be trying to do is fixing the economy first, the markets will follow. Based on this assessment, his investment approach is: gold and shorting (the third thing that worked recently is being in cash, but he is not sure that it is sustainable due to the quantitative easing.) John Silvia writes in the Financial Times about related concerns in “’Band-Aid’ policies not enough” . He feels that the following issues are not being adequately addressed: (1) can’t push the economic activity back to the previously unsustainable credit driven level, (2) drive to sustain institutions is not sufficient when there is inadequate transparency, and (3) lobby-driven policy decisions are inherently flawed.

In  the Financial Times’ “The red ink of a greyer future” Cook and Briscoe report the current concerns about the cost (in terms of government deficits) of the current economic crisis will be dwarfed in the next decades by the cost of dealing with the impact of demographics (boomer bulge and increasing longevity) at least the developed countries. “For societies, even if not always for individuals, it is possible to offset and mitigate many of the problems of ageing. Employment law is changing in order to keep people in work for longer.” The growing public debt will mean tough years ahead for taxpayers.

NYT’s Tara Siegel Bernard in “Planning a Retirement Without Dividends” writes that those in retirement can no longer count on what some considered as old reliable dividend paying stock based portfolios because of the risk dividend cuts, stock price drops and portfolios overly concentrated on the financial sector. She discusses some of the alternatives: (1) total return rather than dividend focus (dividend, interest and capital gains) from a diversified portfolio with an asset allocation corresponding to your risk tolerance, (2) five year plan, which includes cash-like allocation for first two years of expenses, short-term bonds for years 3-5, and balance in a diversified investment portfolio, (3) immediate annuities which promise a lifetime income stream with appropriate caveats (inflation, insurance company risk, etc) and (4) payout funds which offer a constant percentage payout (e.g. Vanguard’s 3, 5 or 7%) of available assets. (Those of you who have been reading my blogs for a while may recall reading about these options in the past e.g. Annuity I, Annuity II, Annuity III, Annuity IV, Withdrawal Strategies in Retirement, GMWB II- Guaranteed Minimum Withdrawal Benefit )

And finally, Ottawa Citizen’s Bert Hill looks at the human impact on real pensioners as a result of Nortel’s bankruptcy protection (and possible ultimate liquidation) in “Perfect storm” . The concerns are not just because of potentially 30-40% reduction in pensions, but the impact on wives who will get only 60% survivor benefit of any reduced pension. Hill reports average expected Nortel pensions of $23,000 before of any fallout of the bankruptcy protection. He also suggests that the best hope for Nortel’s pensioners is a market recovery (Not a likely prospect given my 40% estimate of shortfall. And don’t you believe that this is is primarily due to the recent market swoon; this is the result of years of underfunding, reckless disregard of contractual commitments and fiduciary responsibilities to pensioners). Pensioners are also concerned about loss of health and life insurance benefits.