Hot Off the Web– September 13, 2010
Personal Finance and Investments
In WSJ’s “How retirement planning short-changes women” Reshma Kapadia reports that since women’s retirement savings tend to be only about 2/3 the size of men’s yet they have longer lifespans, their retirement planning needs are different. She argues that women are underserved by advisors, 70-80% of which are males, by being stuffed male oriented financial plans. She argues that women should invest more aggressively in their younger years and more conservatively during retirement, and be offered more frequently annuities and LTC insurance.
Rob Carrick in Globe and Mail’s “The 11th annual online broker survey” summarizes the results of the latest survey of Online brokers. Qtrade, Credential and BMO Investorline are rated 1, 2 and 3, respectively.
Jonathan Chevreau writes in the Financial Post’s “A little web advice can be a dangerous thing” that people can be misdirected by online financial advice which often tends to focus on “idiotic recommendations” according to one critic, instead of on a foundation based on an Investment Policy Statement (discussed under the Asset Allocation tab at this website)
In WSJ’s “Inflation? Deflation? It’s all about ‘Meflation’” Jason Zweig writes that you should “stop trying to guess the answer to the highly uncertain question of whether we will be hit with inflation or deflation. Start thinking about the much more knowable issue of what I call “meflation”: the direct, personal impact of the changing cost of living on your investments, your budget and (for younger individuals) your labor income….if you are a retiree living on Social Security and pension income, the last thing you should worry about is deflation. Falling prices would be good for you. With each passing month of falling prices, your income would go further”. Zweig suggests that for retirees, whose greater threat is inflation, they should protect against this with TIPS, REITs but he is less enthusiastic about commodities. (You might also be interested in my recent blog on the same subject Deflation: Impact on retirees? Is it necessarily bad? In case you missed it.)
By the way, Rob Carrick in his September 9, 2010 Personal Finance Reader recommended my blog Deflation: Impact on retirees? Is it necessarily bad?indicating “you’re heard the talk about how it’s possible the economic will slow enough to bring on deflation, or falling prices. Now read what it could mean to seniors (quick preview: better deflation than inflation).” (If you missed it when it was posted about ten days ago, you may still find it interesting read today.)
In WSJ’s “Tax wars” Laura Saunders takes a comprehensive look at the challenges facing Americans with regards to the many tax related uncertainties in the coming months. Topics with uncertain outcomes that she discusses include: income tax rates, stealth income taxes, capital gains rates, dividend tax rates, alternative minimum tax, charitable donations, retirement funding, estate taxes and gift and generation-skipping taxes.
In the Globe and Mail’s “Don’t let schools teach your kids to gamble” Preet Banerjee condemns school boards which use stock picking contest as a means of teaching children about investing, exposing them to “gambling inducing behaviour. (I violently agree with him. Instead of stock picking contests, schools should have compulsory Personal Finance courses. These could teach about saving, low-cost investing, importance of asset allocation and the damage inflicted by inappropriate debt. These courses could also explain how gambling, as in racetrack and casino betting, actually works and how the house always takes its cut first; this readily leads to a discussion of the similarities and differences between investing and gambling.)
Tom Fennell in Yahoo Canada’s “What to do if economy falls back to recession?” says that it’s difficult to tell how bad deflation can get and gave reference points of 27% price drop during the Great Depression and Japan’s 2% drop per year for about 15 years. He then lists ways for Canadians to protect themselves: hoard cash, pay off your debts, buy stocks of healthcare and food companies, sell commodities, buy gold, invest in emerging markets and avoid real estate. (Thanks to VP for suggesting the article.)
Ian Salisbury writes in the WSJ that you should “Beware of professors bearing ETFs”. He runs through a number of ETFs: Shiller (housing up and down shares), Rouwenhorst (commodity futures trading strategies), Siegel (dividend fund and others)and Lo(130/30 long/short ETF) where academics have tried their hands at creating ETF products using theoretical work and/or active strategies with less than stellar success. “Prominent academics long have dabbled on Wall Street, scoring some big successes, such as mutual-fund firm Dimensional Fund Advisors—and spectacular failures like hedge fund Long-Term Capital Management, which imploded in 1998.” (By the way DFA funds, marketed through advisors only, have been a success perhaps because they are based on academic work suggesting a passive approach to investing.)
Tom Sullivan writes in Barron’s “Vanguard unveils a line of S&P-based ETFs” that Vanguard launched new S&P 500 ETF (VOO) with expense ratio of 0.06% as compared with iShares IVV and SPDR SPY at 0.09%. (Competition is good- too bad that we don’t have much of it in Canada’s financial industry- not just because of lower costs but it also allows you to implement with a diversity of vehicles which may address some of the concerns discussed in one of my earlier blogs ETF Concerns: There are risks, but thanks I’ll stay with ETFs for my money )
The Globe and Mail’s Steve Ladurantaye in “Online real estate sites compared” compares the online real estate data available in the American (Zillow.com, Redfin.com and Realtor.com)and Canadian (Zoocasa.com, Realtor.ca) markets. he finds Canadians’ options wanting.
In the Globe and Mail’s “Housing bubble or no bubble” Tavia Grant discusses the views suggesting that house price decline expectations in Canada are perhaps exaggerated. The Conference Board of Canada predicted no “free fall” in price “but rather a pause in what has been, in recent years, rapid price increases”. Similarly the director of the Centre for Municipal Studies also predicted that since the economy is sound, labour market has rebounded and interest rates are still low, “this market will slow, but it will not nosedive”.
The September 9, 2010 CARP Action Online newsletter has numerous pension related articles including letters from Canadian Finance Minister Flaherty and Ontario Finance Minister Duncan pertaining to recent pension reform pronouncements. This issue also includes short comments critiquing the recent Ontario and Federal/Provincial pension reform proposals by CLC, CAW, ex-CPP Chief Actuary Bernard Dussault (on tightening the criteria for taking contribution holidays) , Actuary Jim Murta (he notes essentially setting great regulations is not rocket science, which he illustrate with the regulatory requirement for insurance company reserves and the fact that insurance companies’ Assuris already provides more than twice the coverage that Ontario’s PBGF in case a sponsor goes bankrupt….(and most importantly he notes that) ”unlike the benefits for pension plan members, the benefits for insurance company policyholders take priority over the creditors and bond holders of the insurance company. The result – no insurance policyholder has lost money due to insolvency.”) This issue of CARP Action also includes my own critique and recommendations in “Ontario pension reform? What really needs to be done!” (Thanks to CARP and Susan Eng their VP of advocacy for taking such a leadership role in driving pension reform.)
Paul Davies in the Financial Times’ “PPF beefs up longevity data” discusses the concern of the UK pension guarantor (PPF) about accurately estimating longevity, because ‘underestimating the life expectancy of pensioners by just one year – a relatively small miscalculation – could increase liabilities by up to 5 per cent”. (As noted in my “Is your (defined benefit) company pension safe?” a 2007 FSCO (Ontario regulator) report indicated their “good news” that plans using 1994 mortality tables rather than 1983 ones have increased from 48% to 96%; but that still was 11 year old data and longevity has been increasing about 1 year every decade, so that the longevity estimate was likely still 1.3 years too low, which implies that liabilities were 6.5% higher or funded status 6.5% lower than advertised, due to this factor alone. It’s amazing how different are the approaches used in UK compared to Canada!)
Jonathan Chevreau reviews Milevsky and MacQueen’s new book “Pensionize your nest egg” in “A cure for pension envy”. Chevreau indicates that the authors recommend a three legged approach: CPP/OAS, stock and bond funds and guaranteed lifetime withdrawal benefit products which “provide guaranteed income as well as potential for capital appreciation through stock market growth. (This last category “product” is similar to GMWB-like product which I discussed in earlier blogs GMWB I , GMWB II where I explained why these are very expensive “products’ which offer very little chance for capital appreciation and they are triumph of hope over reality; even (expensive) annuities are better options than GMWBs.)
In the Globe and Mail’s “Pension conversion fallout lands in court” Jeff Gray reports about pensioners who in 1997 “were given a one-time offer: stay in their current pension plan, or switch to a new “defined-contribution” plan” and are now suing the company sponsoring the pension plan for ““negligent misrepresentation” for understating the worth of the old pension plan and overstating the benefits of the new one. The income projections were “way out of line with reality”. (Sounds like an interesting case; I suspect this approach was pretty much standard procedure for many companies which wanted to cap/reduce participation in their DB plan.)
Things to Ponder
The BBC’s “Cost of ageing population needs re-calculating” reports on a new US/Austrian study indicating that dependency ratio is not the appropriate measure to forecast the cost of ageing on health services; dependency ratio is defined as the number of people >65 to the working age population 18-65. “But this measure is now out of date, say the authors of the study, because people live longer and someone at age 65 is not an old person anymore.” The new measurement, called the adult disability dependency ratio (ADDR) is the ratio of those who need care to those who are capable of giving it. “Their study shows that when ageing is measured based on this ratio the speed of ageing is reduced by four-fifths compared to the conventional old-age dependency ratio.” (Thanks to BS for suggesting the article.)
In WSJ’s “Tough bank rules coming” reports that “For banks, the rules could require them to raise capital, shrink balance sheets and dump business lines deemed too risky. They’ll likely have to keep in reserve more earnings to protect against potential losses, which will leave them less money to pay investors and employees. For consumers, the rules could cut both ways—potentially driving up the rates they receive on deposits but also raising the cost of loans and crimping their availability.” “Under the new Basel rules, banks would be able to dip below the 7% threshold and into their buffer, but would likely face limits on dividends and executive compensation. If a bank’s common-equity ratio fell below 4.5%, they could face tight regulatory sanctions and potentially seizure by national regulators. In other words, banks would have to hold in reserve $7 in capital for every $100 in investments and loans. The riskier the loans and investments, the more capital would be required.”
David Allison in Investopedia’s “Do financial decisions get better with age?” reports on a recent study indicating that financial decision making capability of the average person peaks around age 53.The author of the study is quoted as saying that “Physical exercise, mental stimulation, diet, and social interaction can all help maintain your cognitive abilities,” says Dr. Toth, “and of these four, physical exercise, especially aerobic exercise, appears to be the most important, with mental stimulation a close second, especially if that stimulation is truly novel and challenging.” Allison suggests selecting a trusted financial advisor who will be around when you’ll need him/her (or has competent successor), have a proper and regularly updated estate plan and an executor, as well as organized documents that executor and family members can easily access. (Thanks to VP for suggesting article)
In the Financial Times’ “What can be done to slow high-frequency trading” Gillian Tett looks at “speed limits on high frequency trading” to avoid repetition of May 6th “flash crash”. She refers to a recent Bank of England paper which argues that this “flash crash” event was not an isolated one, “it epitomizes, in an extreme form, a bigger problem of speed in modern finance”. She argues that “equity churning has grown…average equity holding periods for US equity holdings was around seven years in 1970, it is now nearer to seven months”. This increased volatility five fold since the 60s. The paper argues that western society has assumed that “speed was tantamount to progress and efficiency”, when in fact it has “made the system less efficient and rational than before”. Currently proposed changes aimed at slowing down trading are: the “Tobin tax” to “curb frenetic churn”, more voting power for long-term investors, and minimum “time in force” for orders to prevent HFTs from “frenetically cancelling deals”.
Fortune’s Richard Martin suggests in “What peak oil? Why an oil glut is ahead” that price of oil is heading to $50 due to lowering demand and increasing supply from recent developments. Also, “the looming oil surplus calls into question the concept of peak oil, at least in the near future”. (Well, that certainly would be nice if that in fact will turn out to be the case.)
Jonathan Chevreau in the Financial Post’s “Super longevity- are baby boomers up for it?” reviews Lyndsay Green’s new book “You could live a long time: Are you ready?” where she discusses the non-financial aspects of retirement such as: where to downsize to (include consideration of hospitals and essential services), building one’s “emotional circle”, and “to retire successfully, forget about retirement…you need a work plan instead of a retirement plan”.
Paul Vieira reports in the Financial Post’s “Rising debts cancel low-rate savings” that new research shows that “any savings Canadians have realized through this period of near-zero interest rates have been all but wiped out by the large amount of debt households have taken on”.
Ouch! The Economist reports that Canada ranks #1 among countries in 2009 for highest number of days lost due to Labour disputes, in “Striking facts”(Nice to be able to strike while others would love to have a job. Pointed out in CFA Newsbriefs)
And finally, in “Average rich or median poor?” Thomas Stanley points out that that the while the average net worth of an American household is $435K, the median net worth is only $91K. Also, that the ratio of the average to median household net worth has increased from 3.1 in 2000 to 5 today! To make matters worse, if home equity is removed the median household net worth is reduced to $34K according to Stanley. (I haven’t seen figures this low quoted before, and can’t vouch for their accuracy. Thanks to VP for referring the article)