blog09dec2007

Hot Off the Web
Rob Arnott in Financial Times’ ”Stellar earnings not a certainty” indicated that while many point to P/E ratios that have now fallen to more historically average levels from the obscene heights reached in 2000, but the earnings on which these P/Es are based are at historical highs. He also points to U.S. and developed market long-term earnings growth in excess of inflation of 1.5% and 1% respectively; this is well below current expectations built into the market. Furthermore given that both prices and earnings are now 60% above trend line, there may be disappointed investors in the near future. His conclusion is that we “should save more aggressively, to prepare a personal safety-net for ourselves. We should expect less from the stock market, which will not make up for anaemic savings with lofty returns. And we should look to diversify more broadly, outside of mainstream stocks and bonds, to mitigate out exposure to markets that may disappoint. “
In WSJ’s “How funds that pay out cash, can help you retire in comfort”  Jonathan Clements reviews mutual funds (availably to Americans only) that deliver regular income in retirement and promise to do it with less complexity, lower cost and without loss of control over assets than various annuity type products. He mentions: the recently rolled out Fidelity’s Income replacement funds (0.54-0.65% per year expenses; these basically can deliver an inflation adjusted monthly income, but one can outlive the selected maturity date and there are tax implications). Clements points to source of similar funds like John Hancock and Charles Schwab, but he specifically highlights upcoming offerings from Vanguard which will attempt to shoot for 3%, 5% and 7% annual payouts with both principal and income rising faster than inflation, both rising about the same as inflation and one with objective of preserving nominal value of initial investment, respectively. Asset allocation of the Vanguard funds will include, in addition to stocks and bonds, inflation indexed bonds commodities, REITs and market neutral funds; resulting income stream is expected to be fluctuating (hopefully mildly). These are not available to Canadians, as they are U.S. based mutual funds, but hopefully similar ETFs will become available, which could be accessed by Canadians. (These type of funds are would be an excellent choice for decummulating assets in retirement!)
William Hanley writes in Financial Post’s “Minding the gap: Health vs. wealth” that in a recent RBC survey 79% retirees indicated improved quality of life in retirement, which is 23% higher than the expectations of those approaching retirement. Also 90% in retirement are more focused on “wellness” as compared to only 59% in preretirement phase. “Retirees are using their present wealth to help them preserve or improve their health. Pre-retirees are using their present health — and relative youth and energy — to improve their wealth.”
Brian Milner in Globe and Mail’s “Investing smart is ‘no-brainer’ at least for this neurologist” discusses Dr. William Bernstein’s investment approach, best summarized as “do nothing and wait” (not very different than the approach advocated at this website.) He recommends a passive investment approach based on index funds to create his desired asset allocation, a “mix of equities, bonds, gold and international markets.” He by the way discourages investment in hedge funds, BRIC and even commodities.
And speaking of commodities, Globe and Mail’s Rob Carrick “How to ride the commodity express” shines the light on how to invest in commodities in “How to ride the commodity express” Commodities can be invested in by buying funds (mutual funds or ETFs or ETNs) that invest commodity producing companies or funds that invest in commodities directly or indirectly by the use of futures. Canadian and U.S. versions are available for all types, but he warns that Canadian dollar exchange rate will impact actual returns.
WSJ’s Tom Lauricella in “Credit crunch provides opening on muni bonds”  points out that this week average 30 year muni yields were about the same as the corresponding Treasury bonds. This is a very unusual state of affairs since munis usually yield less than Treasuries since they are not taxable at (U.S.) federal and often at the state or municipal level, thus having significantly higher effective yield. Some consider this a special opportunity to buy minis, while others suggest that you tread with caution since when yields are that high there may be a good reason (perhaps downgrade or credit risk) for it!
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