Hot Off the WebFebruary 15, 2009

WSJ’s Kevin Helliker reports that “You might as well face it: You are addicted to success” It’s bad enough that with the growing number of job losses people lose their livelihoods, but the problem is aggravated with the “unmitigated identification of self with occupation, accomplishment and professional status” Concerns about losing one’s job or house coupled with “over-identification with work” leads to a growing “epidemic of recession-related anxiety and depression.” However, “identity dilemma is within the individual’s power to address.” Exercises suggested include: imagine earlier times without things seemingly essential today, broadening one’s circle of friends to include not just those who are dependent on new highs from new achievements/rewards, and “to disassociate identity from professional status, take pride in characteristics that can’t be stripped away- virtue, integrity, honesty, generosity.”

A Q&A with Nouriel Roubini in the Financial Times’ “Nouriel Roubini on prospects for 2009” is worth reading, not just because he was one of the first to warn about the coming of the current economic crisis, but because he was one of the very few who got the scale of the crisis right. The answers address what’s wrong, what should be done and what might happen next.

Whitney Tilson in the Financial Times’ “Lessons to be learned from losses” discusses how ‘cognitive dissonance’ drives our need to justify our wrong decisions. “After all, what’s more mentally uncomfortable than holding the belief that “I know what I’m doing as an investor”, while being pummelled with evidence to the contrary.” Tilson say that the unproductive response is to rationalize it away (extraordinary circumstances), the more productive approach is to learn some lessons. One of Tilson’s lessons is that no (few) companies are immune to a terrible economy, so macro factors must be considered with fundamental/micro elements. Certainties are gone.

Al Rosen reports in the Globe and Mail that “Economy will expose accounting schemes”, and the pent up need to come clean on ‘goodwill’ valuation will be exposed by the deteriorating economy. In the past six years, instead of the earlier requirement to write down ‘goodwill’ over a specified number of years, companies were permitted to ‘test it for impairment’; not surprisingly little impairments were found by many. Rosen predicts that earning will be hit not only by the ‘goodwill’ flushing through, but also by “financial reporting chicanery that becomes more difficult to hide in bad times.

BusinessWeek’s Amy Feldman discusses a new breed of retirement plans in “Can hybrid 401(k) save retirement?” and in “What you need to know about hybrid 401(k) plans”. These plans are called hybrid as they are a combination of investment vehicle and an annuity, and may mitigate the risk of retirement portfolio being decimated by a market fall. The annuity component provides a minimum retirement income, a longevity hedge and ideally, a built in inflation adjustment. As an employee ages, an increasing proportion of the employer/employee contributions go into the annuity (previously the bond component of the portfolio). Barclays, jointly with MetLife, for example have a SponsorMatch product which combines a target-date fund with an annuity. These products, because of their ultimate scale, may yield an extra 2% return compared to traditional 401(k)s due to lower costs and professional management. These hybrid plans, some think, may also replace disappearing DB plans, flawed DC plans and add to the safety net provided by Social Security. In the companion article, Ms. Feldman explains the six criteria which, if fulfilled, could make such plans attractive: (1) simplicity (hands-off investing) and flexibility (to take out funds without steep penalties), (2) portability (people change jobs), (3) lifetime income, (4) inflation protection, (5) safety (i.e. your annuity shouldn’t disappear with disappearance of the insurance company which provides- a feature that would be appreciated by retirees whose lifetime employer recently went bust with an underfunded pension plan) , and (6) cost (i.e. a fairly priced annuity). (It all sounds good, though I would personally prefer instead of an annuity, a pure longevity insurance product such as a delayed payout annuity, as discussed elsewhere at this website.)

Jonathan Chevreau clarifies the difference between fee-only (charge hourly and/or by the task) and fee-based (a percentage of the assets under management) financial planners in the Financial Post’s “Where to find a true fee-only planner”.

And finally, Kelly Greene in WSJ’s “There goes retirement”looks at the difficulty retirees, who now need to get some extra income, have to find work that helps pay the bills. She reports that “retirement savings in shambles and the economy in turmoil, job searches have taken on a new sense of urgency — and, in some cases, desperation”. She also provides a half-dozen or so specific examples of individuals who overcame the hurdles.


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