blog05oct2008

Hot Off the Web- October 5, 2008

WSJ’s Jason Zweig recommends that you hang on to your investments in “Depression of 2008? Don’t count of it” . He dispels concerns that: depression is coming (the Fed and the Treasury department have tools and are willing to use them) and that diversification is dead (normally different asset classes are not highly correlated, but during a market swoon correlations can increase dramatically- i.e. people are all trying to dump all assets at the same time; over the longer term diversification has worked and should continue to do so, except in circumstances of panic). If you are panicked, he suggests raising a little cash, say 1% at a time, and he reminds us “the only true certainty is surprise” (and it could be on the upside). A couple of days and several hundred additional point losses later, in “Summon your courage and buy stocks” he reminds readers that those who  had the courage to buy stocks during the depression did quite well, yet today “depression level stock phobia is making a comeback”. “Investors’ view of the decade to come is being shaped by the events of the last few days.” Fear has driven many people out of the market and perhaps it’s a good time to get back into it “because investments everywhere are priced as if the whole solar system were going out of business. U.S. stocks have lost 24% since Jan. 1; foreign stocks are off 32%; emerging markets, nearly 40%; junk bonds are down 13%; even municipal bonds have fallen almost 10%. Money is pouring into U.S. Treasury debt — so much so that stocks now offer more income than bonds do.”

In BusinessWeek’s “What’s in your portfolio?” there are a series of articles discussing safe investments, asset allocation, active vs. passive management and a particularly interesting one on “Retirement boot camp”  where people close to retirement are taken through a “rigorous financial indoctrination to test their financial pain limits. Their clients must compile a comprehensive net worth statement of assets and liabilities, tot up every single expense over the past year, sock away as much as 25% of their pretax income into a retirement account, and live on a tight budget.” Most participants put off retirement by at least a year. (Sounds like a painful but valuable exercise!)

Suzanne McGee in WSJ’s   “Lowering the bar” remind readers that perhaps the right investment strategy is to only take as much risk one needs to achieve one’s objectives or as she writes “need, not greed”. Instead of chasing performance, one advisor suggests aiming one’s risk level to inflation plus 3-4%, for a total of 6-8%. “That is what is achievable — and the point at which investors can sleep at night.”

On the subject of real estate, the recent news has not been great. The July S&P Case-Shiller Index shows that the most inflated markets of Miami, Phoenix and Las Vegas continue in free-fall of about 2% for the month and 20-30% down from previous July. In about 9 of the 20 cities covered by the index, prices appear to have flattened over the past 4 months, but most of these have dropped 5-15% over the past year (except for Denver, Charlotte and Dallas which dropped <5% in the past year). Few are ready to call it a bottom, except those who are in a real estate related business. Robert Shiller was also was reported to have opined last week that Canadian real estate may be in for a rough period especially in Vancouver, Calgary and to a lesser extent Toronto, in “Canada may face housing bust: Shiller”.

Also on real estate, WSJ’s June Fletcher asks it is “Is now a good time to buy a home?” . Her answer is a (very tentative) yes for those meeting a set of criteria like: access to credit, fat cash reserves, not overexposed to real estate, secure job and prepared to hold at least two years. Then she quotes a recent Credit Suisse report that “nationally, the ratio of median home prices to household incomes will return to their historical average of 2.86 in another 18 months.” The WSJ had more extensive and very interesting historical data of this ratio from the Credit Suisse report showing the current value of the ratio at 3.3 from which a further drop of 14% would be required to reach the historical 2.89 average value; and this is a national figure (real estate is very local) and this ratio was as low as 2.7 in 1991 (that’s a further 8% drop, and are we in better or worse economic situation that in 1991?).

Selling/buying real estate in auctions has increased dramatically in the past few years, but you usually had to be there in person to bid. Now, according to the LA Times you can do it on the web “A home page for bidding on foreclosures”Just because you can do something, it doesn’t mean that you should do it. You’ll be at a significant disadvantage relative to the seller and to other bidders who may know the area well, may have seen the condition of the property and may had a chance to fully investigate other loans on and liens against the property.

Jonathan Chevreau in Financial Post’s “Getting ready for unretirement”reports on a recent Sun Life study in which about half of the respondents indicated that they expect to be working at age 67. This appears to suggest intent to move away from actual early retirement trend in the past decade. He quotes Prof. Laurence Kotlikoff that “These plans to delay retirement reflect a desire to stay mentally engaged, but also real anxiety about financing retirement”.

And finally, Tim Cestnick in the Globe and Mail has suggestions on “How to save taxes and guarantee returns at the same time”. He suggests selling some losers and then using capital losses to save taxes on earlier/current (or even future) capital gains; and even better, you can use the cash to pay down debt. According to his example, if your borrowing cost is 7% (sounds like a mortgage rather than a credit card) and have a 35% marginal tax you’d earn 4.55% and 7% after tax respectively, depending on whether your interest cost is tax deductible (incurred for investment purposes) or not (typically mortgage and credit card debt). Sounds pretty good nowadays.

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