Hot Off the Web- November 17, 2009

Personal Finance and Investments

A great article by Robert Arnott in the Financial Times’ “A steady hand at the tiller wins out” where he reminds readers that “like the best sailors, have a steady hand at the tiller, maintaining course through the storms…never lose sight of their course or their end goals.” (Of course you must have a clearly articulated goal in the first place, or as the saying goes that if you don’t know where you are going then any path will do.) The real measure of wealth is the purchasing power of our portfolio (also see the “Annuities I: What is wealth”blog), keeping in mind that octogenarian spending power from $1m is greater than that of a 30(-60) year old. Arnott looks at various interesting scenarios: (1) $1M in stock in October 2007 produced $1,800 in dividends, whereas 16 months later while portfolio size with reinvested income was reduced to $490K it still produced $1,900 dividends; (2) a monthly rebalanced 60/40 portfolio with reinvested income produced 5% growth in sustainable spending or can spend the “real yield” of the portfolio (about 3%); (3) can spend 2-3% of the portfolio inflation indexed for ever; or (4) if at any age your life expectancy is n-years then you could spend that year 1/n of your portfolio. “If we embrace a long-term “sustainable spending” mindset, where does this leave us? It encourages us to spend at a sustainable pace, rather than lulling us into overspending. If we spend sensibly, we can remain blissfully unruffled by the drama of bull and bear markets. “

Jason Zweig in WSJ’s “How to ignore the yes-man in your head” argues that we are victims of what is called “confirmation bias”, “your own mind acts like a compulsive yes-man who echoes whatever you want to believe.” Because “”We’re all mentally lazy,” says psychologist Scott Lilienfeld of Emory University in Atlanta.”It’s simply easier to focus our attention on data that supports our hypothesis, rather than to seek out evidence that might disprove it.”” “It also is easier for people to rationalize than to be rational.”We’re very good at cooking up post-hoc explanations of why our predictions didn’t work”. Methods to overcome confirmation bias are: (1) before you invest, imagine you investment went bad, and come up with potential explanations as to why, (2) ask somebody’s opinion about your investment, if they didn’t own it would they buy it? (3) write down circumstances that would make you sell an investment, before buying it; if they occur then seriously consider selling.

In Globe and Mail’s “Insurance: We avoid it, hate paying for it, but need it” Paul Brent discusses the importance of insurance, and making sure that you are not underinsured especially when it comes to the life (and disability) of bread-winner(s). Term life is generally the cheapest way to go (make sure it’s convertible to whole life). Some other  opportunities mentioned for saving money on insurance are by raising insurance deductibles on house, cars, etc. (You might be interested in reading my How much Life Insurance Do You Need? blog at this website.)

Gail Bebee in the Globe and Mails “An annuity is an option for any retiree” suggests that instead just taking the path of least resistance and converting your RRSP at 71 to a RRIF, you should investigate an annuity. The advantages mentioned for an annuity are that you won’t run out of money, you don’t have to worry about becoming incapacitated mentally and be unable to manage your money, if you buy an inflation indexed annuity then payments will increase with inflation, and if you buy a joint annuity also covering your spouse/partner then payments will continue so long as either one of you is alive. Annuities may be the right answer for some, but they come with high costs. (You can read more about annuities at this website at  Annuity I, Annuity II, Annuity III, Annuity IV)

Dimitra Defotis in WSJ’s “Look North for promising bank investments”suggests that Canadian banks are great investments because: Canadian banking system is rated as the soundest in the world, have relatively low P/E ratios and you get rewarded with high dividends. )If you are already heavily exposed to the Canadian market (e.g. via and ETF like XIU, make sure that you factor in that it already has 32% financials content.)

Tom Herman has a timely reminder in to “Tax ‘harvest’ your stock losers”. He cautions readers that “you shouldn’t ever make any investment move solely because of tax considerations. But if you were thinking of selling some investment losers anyway, why not do so now and give yourself a tax break? One caveat: Watch out for the (30 day) “wash-sale” rule.” (This applies to both Canadians and Americans, but of course Americans also get to deduct $3,000 losses against ordinary income”.

In the ‘but where are the customers’ yachts?’ category, new “products” were reported on by the Globe and Mail’s Shirley Won in “Invesco Trimark launches mutual funds investing in ETFs”. I understand that these “products” are of value to those who “manufacture” and sell them but the gullibility of those who buy them is truly amazing. The product manufacturer explains that: “With this innovative new investment solution, financial advisers – particularly those without direct access to the ETF market (i.e. mutual fund salesmen who are not brokers)- can help (?) their clients build stronger, more effectively diversified portfolios that are tax-and-cost efficient”. A 1.73-2.01% MER on top of about 0.75% MER associated the underlying ETF, brings you in the 2.5-2.75% annual cost range compared to annual expense ratio of 0.4-0.55% (e.g. compare Invesco PowerShares Gold to Barclays Canada’s XGD (0.55%) or State Street’s GLD (0.4%) covering similar asset space. Adding 2% annual fee to create a mutual fund wrapper on top of an already expensive ETF, just to allow mutual fund salespersons to sell these ETFs, is tough to justify; I would be inclined to just erase the distinction between brokers and mutual fund salespersons, since they are really in the same business. Whether it is currency hedged or tax class fund, this type of cost structure should require considerable sales job to convince an informed buyer; but then I’ve been surprised before.)

Real Estate

In Financial Post’s “Rapid rebound fuels fears of housing bubble”, Garry Marr reports that according to the Canadian Real Estate Association, volume is up 41% over October 2008 (that is not a surprise when you consider the sentiment one year ago), but prices are also up 20.7% and supply is down (new listings were 16% down). The article quotes assorted experts arguing whether we are already in a bubble or just heading to one; some even question the validity of the numbers. With mortgage rates in the 4% range, “tight supply, a favourable lending environment and government stimulus program have all helped stir the housing pot.” But is this sustainable given that “The latest GDP numbers show the economy actually contracted”? And, “consumers buying today are ready for interest rates that could be three to four percentage points higher by 2011”


Derek Sankey in the Financial Post’s “More employers re-think retirement plans”reports that 59% of Canadian employers are rethinking their retirement/pension offers by the end of this year in areas of: pensions (DB to DC or no pension), post-retirement healthcare (reductions in benefit and more cost-sharing by employees). (I assume that this is 59% of that one-third of employers that still offer pensions of some sort.)

Sophia Grene in the Financial Times’ “Phil de Cristo: Helping to find de-risking solutions”reports that Mercer (UK) is considering changing tack in the advice that they’ll be giving plan sponsors: active to passive, liability driven investing, mix of asset allocator and “fiduciary management” approach, sustainable investments (climate change focus). (The best way to describe this is too little too late, and there was no mention of starting to use conservative actuarial practices; if introduced this could be a major advance. Mercer is the Nortel pension plan actuary and they missed many opportunities to raise the flag of caution on that plan.)

In the bizarre story of the week, we find a lawyer representing the Financial Services Commission of Ontario in front of an Ontario Superior Court Judge trying to prevent some of the $1.13B proceeds from sale of Nortel’s wireless unit to leave Canada as reported by Bloomberg’s Joe Schneider in “Nortel wins court approval to have JPMorgan hold sale proceeds”. The Ontario Judge didn’t agree; he thought it’s OK to ship all the funds south of the border. (Not clear why Nortel would care which jurisdiction holds the escrow, though it may be due to lowest cost negotiated with JPM. But surely, given the difficulty of covering the costs of running the remaining Nortel operations in Canada because of the difficulty of getting the U.S. subsidiary to willingly pay its fair share of costs, it is strange why for a likely few measly basis points would one jeopardize access to substantial funds in case of cross-border jurisdictional dispute over the residual assets. This reminds me of a great movie just out entitled Law Abiding Citizen (2009), that you might consider seeing.)

Things to Ponder

In WSJ’s “’Greatest Trade’: How you can make $20Billion”Gregory Zuckerman list lessons that we can learn from Paulson who made himself and his investors $20B. Among the lessons are: have exit strategies (from bubbles), debt markets are the canary in the mine, and safety nets (e.g. puts) have value (of course they are not free)

And finally, in the Financial Times column the Emerging economies falter in graft survey” Michael Peel reports on the level of corruption in public life as reported by Transparency International. Brazil, China, India and Russia ranked 75th, 79th, 84th and 146th respectively. The Group of Seven western countries, except for Italy (63rd), were in the top 25. This is not very encouraging for those with growing levels of investment in these emerging markets. But then we may take some comfort (?) from the following closing comments: “The index is widely seen as a useful yardstick on corruption, although its basis on surveys of business perception rather than more objective measures means year-on-year movements of countries can be sharp and at times misleading. Critics say the TI work inevitably draws heavily on western sources and has to some extent become self-fulfilling, with people forming impressions of corruption partly through reference to the index itself.” New Zealand, Denmark and Singapore are 1, 2 and 3, while Canada and the U.S. are 8 and 19.


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