Hot Off the Web- October 16, 2009

Personal Finance and Investments

In the WSJ’s “Don’t let the market crash hit you at the finish line” Jason Zweig writes that “In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If “risk” is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods. But the risk of investing in stocks isn’t the chance that your rate of return might vary from an average; it is the possibility that stocks might wipe you out. That risk never goes away, no matter how long you hang on. The belief that extending your holding period can eliminate the risk of stocks is simply bogus. Time might be your ally. But it also might turn out to be your enemy. While a longer horizon gives you more opportunities to recover from crashes, it also gives you more opportunities to experience them.” (Another way of thinking of this is that any funds that you can expect to need in the next 7-10 years should not be in risky assets.)

In Globe and Mail’s “A tale of two hedges: Playing safe and playing for profit”Avner Mandelman discusses the two opposite uses of hedging. ‘it can be done for two main reasons: First, to eliminate risks you don’t have a handle on, so you can focus on the ones you do understand (because you have researched them); and second, to actively create a profit opportunity.”

There are also a couple of articles that you might want to read if you are interested in bond investing. The first is Gail Bebee in the Globe and Mail entitled  “Building a solid base with fixed income” and the other is in the WSJ written by  Barry Light “Taking cover: Where to hide if bonds fall”, in the Canadian and US contexts, respectively.

Jonathan Chevreau reports in the Financial Post on “Rethinking risk: Invesco Trimark urges advisors to embrace alternative assets classes” . “In it he refers to potential advantages based on 10 year period ending in July31 2009. A pure all-stocks portfolio lost a cumulative 27.9% over that time, or an annualized return of minus 3.2%, with standard deviation of 13.4%. A traditional “balanced” portfolio of stocks and bonds did better, with a cumulative return of 11.2% and a positive annualized return of 1.1%, with less risk: standard deviation of 8.2%.But the portfolio with alternative investments did best of all. With stocks, bonds and alternatives, the cumulative return over the ten years was positive 27.6%, the annualized return plus 2.5%, and the risk was lowest of all three portfolios, with a standard deviation of just 6.5%. (Why not September 30th? The conclusions are highly dependent on the start an end date and as the saying goes, past performance is not an indication of future one.) There is also the related article mentioned in passing “The case against commodities” where the other little detail is discussed pertaining to crowded strategies (especially in case of commodities where the vehicles are predominantly futures based.) “All of these new buyers overwhelmed the normal dynamics of commodities markets…It was a classic case of too many people chasing the same good idea. Many investors put 5% to 10% of their assets into commodities to cushion their portfolios when stocks tumbled. But the weight of investor dollars eclipsed market fundamentals. And the patterns of most investors’ behavior in buying and selling commodities — as opposed to those who use the markets to hedge — followed the same rhythms they did in buying and selling stocks.”

Real estate

It is absolutely amazing that the US/Canada border seems to separate two radically different worlds.

In Canada, the Globe and Mail reports that “Fewer listings boost home prices” . According to the CREA the third quarter saw an 18% increase in number of homes sold, an 11% in prices relative to last year, likely due to continued strong demand and a 17% drop in new listings. Factors further driving increased prices and volume are “sustained increase in sales activity, including a sharp rebound in activity at the higher end of the price spectrum” and “extremely low mortgage rates”. This puts Bank of Canada governor Carney between a rock and a hard place on interest rates, having to choose between the housing bubble and the Canadian dollar’s rapid ascent. You can read Paul Vieira’s Financial Post article on “BoC chief in quandary over interest rates”.

As to the US, Les Christie writes in CNNMoney that for “Foreclosures: ‘Worst three months in all time”  “During that time, 937,840 homes received a foreclosure letter — whether a default notice, auction notice or bank repossession — according to RealtyTrac, the online marketer of foreclosed homes. That means one in every 136 U.S. homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008. “”It’s hard to envision [the banks] putting millions on properties up for sale and cratering prices,” he said.”Recovery will be slow and gradual. I don’t see home prices getting much better until 2013.”


The Financial Times’ Ruth Sullivan in “Time to rise to the pension challenge” reports on state of pensions in UK. The “toxic combination of the closure of private sector final salary schemes, falling house prices, poor investment returns for savers and high management costs means that poverty in old age is a looming prospect for millions outside the public sector”. (You’ll note that there is no mention of losing your already earned DB plan benefits in the UK (or US), as in Canada where there is no pension guarantee fund…otherwise all the problems mentioned apply to US and Canada as well.) “However, the report is optimistic it is possible to bring out a decent, low cost pension scheme if government measures are taken and lessons are learned from countries where successful schemes are operating” “In one way or other governments have to make saving for retirement mandatory”. Reference is made to approaches used or planned in Australia, India, UK, Holland, Denmark and US which range from mandatory to auto-enrollment to voluntary, with or without (inflation adjusted) annuitization to deal with inflation and longevity risk. “The move from DB to DC shifts the risk responsibility from the scheme to individuals…(and) is constructed to benefit its suppliers rather than its beneficiaries” and needs restructuring.” There is a growing consensus that, with the demise of private sector DB pension plans, governments must take a central role in defining and operationalizing the next generation pension system; if governments won’t urgently enable the necessary structured asset accumulation/decumulation, they will end up with declining economies and significant proportion of the population with radically reduced standard of living and dependent on government assistance. (Canada is one of the least pension ready developed countries of the world, and there little or no action in progress visible here.)

Very similar message in the US context is delivered in’s article “Why It’s Time To Retire the 401(k)” “The idea that we could ever save enough to pay for 30 years of leisure is a relatively recent invention. An entire profession, financial planning, is dedicated to telling people they can, and must, pay for their own retirement. A 401(k) is usually a central part of those plans.” However Boston College’s Munnell says that “The average 55-to-64-year-old should have a 401(k) balance of $320,000. In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown…Some people don’t contribute as much as they should — essentially ignoring free money from company matches and tax relief. And, as the original engineers of the 401(k) suspected, the less you earn, the less you are likely or able to contribute….Additionally, to get the hypothetical higher returns over time and avoid investing disasters, you have to hold a diversified portfolio of stocks and bonds. Many of us don’t.” “Most of the proposed fixes to our retirement plans have to do with getting people to save more or invest better”…but “the biggest factor in whether the 401(k) works as designed has to do with whenyou retire….The market fell in four of the nine years since the beginning of the decade. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market. In fact, your chances of retiring into a down market are even greater than that: forced retirements spike in recessions just as the stock market is tanking.” A proposed solution “best way to guarantee a replacement for people’s wages in retirement is by pooling risk, and the way to do that is through insurance. “ Numbers mentioned are in the range of 5-6% of annual salary over 30 years to generate about 25% of final salary per year for life; the implementation may be done by government or insurance companies.  (Whatever approach is chosen, the wave of boomer retirement has started and none of them have 30 years left to participate; urgent solutions that work for all age groups must be crafted before the situation become irrecoverable.)

The Globe and Mail reports that according to a just released Mercer study Canada’s “Pension system gets solid ranking”.  “The study by pension consulting firm Mercer concluded the Netherlands, Australia and Sweden had the world’s best pension systems, while Canada ranked a close fourth, followed by Britain and the United States. Germany, China and Japan were at the bottom of the list. “The review looked at 40 factors relating to the countries’ pension systems, including the adequacy of private and public pension payments for retirees, and the level of pension incomes compared to preretirement incomes. It also looked at the rate of participation in private sector pension plans, the level of pension assets in plans, and factors affecting the “integrity” of private sector pension plans, such as regulation and risk-protection.” (I can’t wait to read it. Certainly this is contrary to my personal experience and if true, it doesn’t bode well for retirees in the world. This type of study will encourage Canada’s governments to pat themselves on the shoulder and continue doing absolutely nothing on pensions. I’ll reserve my praise for Canada’s pension system or condemnation of this study until after reading it.)

Norma Cohen reports in the Financial Times that “Staff pension issues fuel concern”“98 per cent of employers believe they should have a role in providing advice and guidance on pensions, more than two-thirds want a legal indemnity against the possibility that the advice will later turn out to be unwise.” And not surprisingly “employers overwhelmingly believe that workers want financial advice that is appropriate for their own circumstances rather than generic guidance”. (Investor education is the key. A system must be found which will provide unbiased advice so people can choose what is right for them individually.)

Things to Ponder

Russell Napier writes in the Financial Times that “Crisis leads to conflict” between governments and capital. “The need to bail out the banking system accelerated the public debt crisis that was coming anyway, due to the baby-boomers’ failure to save for their retirement. Once known as the ‘Grateful Dead’ generation, their demand for pensions and healthcare will mean they will increasingly be seen as the ungrateful undead. The political necessity of supporting their claims will drive government further into the capital allocation business. “

In the Financial Times’ “The rumours of the dollar’s death are much exaggerated”Martin Wolf writes “Higher prices of gold reflect fear, not fact. This fear is not widely shared. The US government can borrow at 4.2 per cent over 30 years and 3.4 per cent over 10 years. During the crisis, the inflation expectations implied by the gap in yields between conventional and inflation-protected securities collapsed….The dollar’s correction is not just natural; it is helpful. It will lower the risk of deflation in the US and facilitate the correction of the global “imbalances” that helped cause the crisis” But only the Euro may be a credible alternative/complementary reserve currency and…”The eurozone also has high fiscal deficits and debts. The dollar will exist 30 years from now; the euro’s fate is less certain.” “The two key preconditions for long-run stability, then, are a credibly independent central bank and federal solvency, both of which seem to be within US control.”

“Hedge funds misrepresent facts” “One in five hedge fund managers misrepresents their fund or its performance to investors during formal due diligence investigations.” The lack of transparency, in the name of protecting proprietary strategies, leads to managers who “misrepresented the amount of money they had entrusted to their funds, their performance and their regulatory and legal histories, according to the research.” (It sounds like some have misrepresented just about everything.)

Steve Johnson discusses  “Jeff Staley: Asset chief with alternative tastes and contrary views”dissenting view against two concepts wish represent the current “fund management zeitgeist”;  “low-cost passive investment and open architecture” are not what Staley, head of JPMorgan’s investment bank, believes in. “If you believe in open architecture you will eventually get out of the asset management business… An open architecture ‘best of breed’ program is inevitably looking backwards. If all you are doing is selecting investment managers based on trailing one, three and five-year numbers you are inevitably going to underperform. “The one place we have opted not to go is the passive space,” says Mr Staley….Managing money is extremely difficult so it has to be a religion, not just a passing belief. To do something that’s difficult really well, there has to be a dedication to it.” “Under his leadership, JPMorgan has increasingly embraced alternative assets such as private equity, real estate, and hedge funds” (This position to take for somebody like JPMorgan, makes sense, but of course their challenge is to demonstrate that they can deliver on their promise in a sustainable way; i.e. deliver superior risk adjusted returns to their customers after fees!)

And finally, read William Hanley’s piece in the Financial Post entitled “The meaning of having it all” where he discusses the meaning of luxury (“something desirable for comfort or enjoyment, but not indispensable”) and that “that luxury is in the eye and wallet of the beholder. “


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