Hot Off the Web– July 10, 2009
Personal finance and advisers
Ron Lieber in his NYT article “A day to tackle the financial to-do list” refers to a “What to do if we’re dead”-list or more gently “Organizing your financial life. Critical information at your fingertips” list that you might want to look at and fill out. Lieber plans to send his list to some family members. (Hmmm, not a bad idea.)
In Globe and Mail’s “Bear market a chance to fix what ails advisory industry” Rob Carrick interviews Cary List, CEO of the standard setting organization for 17,500 CFPs in Canada. .Some of the issues identified were: the need for a shift from selling products (e.g. mutual funds) and investment advice toward “advice in form of financial planning”, investment advice is a very small part of answering the question ‘How can I do what I want in my life with the resources that I have and given the situation that I find myself in?’, how to deal with the rising level of complaints (anecdotally those who get planning advice are less panicked and less likely to complain.) Bottom line is that current crisis is an opportunity to re-vector the (CFP) adviser community from commission generating sales to financial planning advice. (No doubt this would be good for clients, though I don’t remember noticing a mention of a move to a fee-only compensation model!?! That may be even better for the customer.)
Financial Times’ Pauline Skypala suggests that “Talk of need to regain trust may be just talk” . Reporting on a fund management conference, there was lots of talk about: managing investors’ expectations, need for more stewardship and less salesmanship, that “You (adviser) shouldn’t be able to get very rich while the client gets poor.” (You recall the old “but where are the customers’ yachts?” story), need to move “from selling fashionable funds to majoring on strategic asset allocation”, and “build what is missing – long-term savings and decumulation products that are cost-efficient and offer a proper investment solution”. (That’s quite a good list. If industry operated that way there certainly would be not just more trust but better customer outcomes. To regain trust the focus should be on the long-term needs of the customers. Skypala figures that “Judging by previous experience, (the chances for more trust are) not great. We have been here before: there was much lamentation about loss of trust after the dotcom boom and bust, but complacency returned once normal service resumed in the markets.” A nameless asset manager said “I wouldn’t bet on the idea that clients will remain gullible and trust us again – some will, most won’t. If anything, when things get better, we expect many of them to cash out and never return.”
Brett Arends reports in WSJ’s “Baby boomers to kids: Kiss inheritance good-bye” with suddenly significantly smaller portfolios many boomers’ newly revised retirement plans leave nothing to kids. A combination of smaller portfolios, lower capital market expectations are making people re-think the relative importance of estates, their lifestyle costs, and their risk tolerance. Arends also mentions that changes in risk tolerance may drive some to immediate annuities as a means of protecting a lifetime income. (There is no doubt, that aside of some exceptional circumstances of family dependency, retirees’ first priority is to protect their requirements for their senior years; this in fact is an important service to their children as well. However, aiming to leave an estate is also a mechanism of self-insuring against longevity; i.e. if one dies earlier than burnt into the financial plan, then the estate remains intact, however if one dies much later then perhaps the estate is exhausted but income was available for the post-plan years. As to annuities, Americans now have access to longevity insurance which is a pure insurance product; i.e. it provide lifetime income, like annuities do, but the investment and insurance portions of annuity have been separated.)
Tom Lauricella in WSJ’s “Failure of a fail-safe strategy sends investors scrambling” discusses some of the re-thinking that people are doing about asset allocation as a means of risk control in one’s portfolio through diversification. Lots of people are bemoaning the fact that
diversification didn’t do its job in the recent market crash. The use of apparently historically uncorrelated (or not very correlated) asset classes was supposed to give protection by some assets appreciating while others lost value. Some like Pimco’s respected El-Arian “argue that asset-allocation strategies are fundamentally flawed. This wasn’t a one-off failure, they say, but one that’s been long in the making”. But not everyone agrees. (It is well known that correlation increases during crises, there are also differences between upward versus downward correlation. Cash and government bonds were only safe haven. We need to re-think/remember(?) what the purpose of cash/bond portion of portfolio is? Perhaps it is to protect the floor value of our portfolios and then perhaps we would allocate differently to “risk-free” asset class.)
In Barron’s “I know this much is true” Lawrence Strauss interviews Burton Malkiel, author of “A Random Walk Down Wall Street” , a 1973 book in which he argues that “stock prices are unpredictable, and that retail investors are much better off investing in index funds (at least in their core portfolios) rather than actively managed funds.” Well, he hasn’t changed his mind even after 36 more years of experience. As to the argument that indexes end up having too much of the overpriced stock (e.g. internet in 2000) he argues that active managers had even more! Other views: behavioural finance is won’t help you beat the market, “it is about how to avoid mistakes”, individual investors are wasting their time (and money with hedge funds since they won’t be let into the really good ones and “2 and 20” will kill them, and as to China he argues that just about everyone is underweight China which represents 5% of the world GDP at official exchange rates and 10% with a purchasing power adjustment.
James Stewart in WSJ’s “A (covered) call for caution on the market” discusses the covered call selling strategy that some use to enhance stock returns and he adds that “selling covered calls is a good lesson in curbing greed. If a stock on which I’ve sold calls continues to rise, I’ll still make money, even if it’s not quite as much as I would have by simply owning the shares. If I can’t tolerate earning a good profit just because I could have made even more, then something is wrong.“ (You do give up some of the potential upside, but then you do get some extra income in return. Not an approach that I have personally practiced, so far.)
In the WSJ’s “No quick recovery for hard-hit target funds” Andrea Coombs discusses the damage inflicted by some target-date funds on investors near retirement. There is great variability among target-date funds; Coombs says that stock allocations can range from 20% to 55% with correspondingly massive differences in impact as a result of the market drop. Many retirees will have to delay their retirement. There is disagreement in the industry whether there is a problem with target-date funds. (The least you should o if you own or planning to buy such a fund is to look at its asset allocation/mandate and you need to factor that into your total asset allocation, which then needs to be tested against your risk tolerance.) The Financial Times’ Mariana Lemann writes that “Funds resist regulation of target date pensions” . Given that these funds are often used in the U.S. as default funds in 401(k) accounts, some are pushing for regulating them. Arguments include that regulation would stifle innovation and mandated glide-paths (i.e. changes in stock allocation as a function of age) would eliminate the possibility of customization. There appears to be general agreement that target-date funds are “to” retirement rather than “through” retirement funds, though it is not unanimous. The “through” funds are expected to be more aggressive than the “to” funds, a “distinction is not filtering through to plan participants”.
Real estate and property taxes
In Herald tribune’s “Property values plummet” Doug Sword discusses the impact of plummeting real estate valuations on the finances of Florida’s cities and counties. (Florida certainly earned this crisis: city/county spending doubled between 2001-2006 on the backs of tripled property taxes on non-resident property owners and then topped it off last year with additional tax cuts to (resident) homesteaders when tax exemption was doubled from $25K to $50K and portability of Save-Our-(Homesteaders’)Homes benefits was introduced.) In the last two years, the collapse of real estate values lead to unexpected(?) small increases of homesteaders’ taxes and a more significant decrease of non-residents’ taxes. (If you are a non-resident this no doubt gives a little relief, but don’t be too happy you are still probably carrying 2-10 times the load compared to a homesteaded resident living in an identical home/condo. Out-of-staters who are thinking about buying in Florida should do this with open eyes and realize that you will be carrying a massively unfair tax load, more twice the tax on less than half the use! As for Floridians, they perhaps should “never let a crisis go to waste! As property values continue to plummet and the gap between taxes paid by residents and non-residents will narrow further, and it would be a relatively painless time to declare Florida’s readiness once again to welcome non-resident property buyers by declaring equal treatment of all property owners. What could be a better step toward stopping further property value declines?
If falling property values wasn’t enough, the NYT’s Jack Healy writes that “Tax bill appeals take rising toll on governments” , further driving down city/county tax revenues. “The call for counties to acknowledge the falling price of homes is loudest in states where taxes are highest, or the housing crisis has hit the hardest. “ (It might not be a bad thing if you checked your (shortly available) new property appraisals for tax purposes for opportunity to challenge it.)
Financial Post’s Garry Marr, based on real estate industry numbers, reports that year-on-year “Housing sales soar in Ontario’s biggest cities” with Toronto and Ottawa volumes up in June 27% and 12% respectively; prices also rose 2 and 3% respectively. Pent up demand accumulated as a result of very low volumes over this past winter, coupled with still very low mortgage rates may be the driver of last month’s pop in volume. (It will be interesting to see if buyers’ enthusiasm is maintained through the summer in light of still rising unemployment.)
Something to think about
In Globe and Mail’s “Why Eric Sprott isn’t right”Avner Mandleman takes issue with half of a recent Sprott argument to buy gold (yes) and short U.S. Treasuries (no) based on the fact that the U.S. government is broke and interest rates will have to rise dramatically for borrowers to step up to the plate. However Mandleman goes through the interesting argument that historically not all transactions are voluntary and superpowers (U.S. in this case) “will adhere to the old Wild West rule – when your opponent holds all the cards, overturn the table.”
Liam Denning in WSJ’s “Consumers face a long, hard workout”discusses the predicament of the average US household whose debt as a percentage of disposable household income peaked in 2007 at 133% compared to 60% in the mid-80s. Should the consumer want to reduce indebtedness, “the Federal Reserve Bank of San Francisco modeled a deleveraging of U.S. households, with the ratio falling back to 100% over a decade. The resulting drag was 0.75 percentage point off consumption growth every year.” (Not a great signal for a robust recovery.)
Philip Shishkin in WSJ’s “Crashes fuel debate on rules for older drivers” presents some interesting data on fatal crashes as a function of age. While the <24 age group has almost 54 fatal crashes per 100,000 licensed drivers, the >24 age group statistic drops to 21-26 range and keeps decreasing with age. However in the case of the fatal crashes per mile driven statistic, the 25-74 age group clocks in the 2-3 range, whereas the 16-24 and 75 and older groups clock in at over 7! This latter statistic is expected to result in calls for and debates about stricter rules in licensing the future increasing number of older drivers.
And finally, to give you an idea of how devastating the impact of the Nortel bankruptcy is, Karen Mazurkewich writes that “Nortel’s disabled benefits may go” . Just like the retirees’ health insurance, the disability insurance is not actually a policy with an insurance company; it is just a so called ASO (administrative services only) agreement with Sun Life, and Nortel self-insures against disability claims. This is not just typical Nortel corner cutting at the expense of employees but also another indication of the inadequate regulatory protection that Canadians receive. So you know what this means? It means that people on LTD have to join the ranks of pensioners and others in the unsecured creditors’ line, in hope to get perhaps 10-15% on the dollar of claims. Truly amazing in one of the supposedly most ‘developed’ countries in the world! We sure fall far short of our reputation. The simplest/best way to solve this problem is to immediately modify the BIA (Bankruptcy and Insolvency Act) to give priority to pension plan underfunding and long term liability claims. Last Wednesday night there was a Webinarin support of this immediate change to BIA, with all the necessary supporting economic, social and moral arguments. It also included a call to political action by all Canadians to make this change; this is not just about the tens of thousands of Nortel related individuals and their families, but it is something that could happen to millions of other private sector employed Canadians should their employer become bankrupt. And if you think it can’t happen to your employer, just ask yourself who would have predicted in 1999 that Nortel would end up here today?
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