Hot Off the Web– September 17, 2009

Personal Finance and Investing

WSJ’s Jason Zweig writes that “Buy-and-hold is dead. Long live buy-and-hold.” “There is not much evidence that professional portfolio managers are any better at picking securities in bear markets than they are in bull markets, which is pretty faint praise.” “(Having grown up on a farm, I think money has a surprising similarity to cow manure: the more you move it around, the worse it smells.)” “Other than routine annual rebalancing and jettisoning company stock from my former employer, I haven’t sold anything in years. My portfolio today is virtually indistinguishable from what I put together around 1994, nor do I plan any significant changes for the foreseeable future.” (You’ll see that today’s blog is full of recommendations for rebalancing; well worth doing!)

Also Zweig in the WSJ asks “Should a shrinking (U.S.) dollar worry you?“ Depending on where and what you spend your money on, you may not be affected that much. Here are some approaches to consider. “Three cures are most commonly prescribed for investors worried about a weakening dollar: foreign currency, gold or a diversified basket of commodities…(but even better)…If the dollar keeps dropping, stocks and bonds priced in euros, yen, rubles or shekels will tend to become more valuable; anything denominated in foreign currency will then buy more dollars. That’s why, for U.S.-based investors, international stocks and bonds tend to outperform commodities when the buck falls. Global diversification thus provides an automatic buffer against a dollar drop, unless the fund managers have hedged the holdings back into U.S. currency.”  So does an un-hedged foreign bond fund/ETF (e.g. BWX) or domestic companies which make a significant proportion of their revenues in foreign countries.

Ken Kivenko of writes about the growing interest in do-it-yourself investing in “Control your own destiny- or someone else will”. “Whether its investment dealer shenanigans, greedy commission- driven advisers, high mutual fund fees, the non-bank ABCP meltdown, the Earl Jones fiasco , poor fund performance or advisor fraud, retail investors are looking at alternatives to the commission-driven advisor channel.” He recommends a number of websites and blogs that you might find interesting and good sources of information for DIY-ers; included in the lists is “a respected site for those interested in retirement issues”.

The Financial Post’s John Chevreau reminds readers about the “ruthless arithmetic” which states that “You need a 100% gain to erase a 50% loss”. No wonder people who had very high (close to 100%) stock allocations before the crash, still don’t feel that great after about a 50% upswing in the market since March; but at least feel a lot better than last March.

The Globe and Mail’s Rob Carrick in “A rebalancing act for wary investors” does an excellent job of reinforcing to readers the importance and power of rebalancing: a discipline which removes emotions from one’s urge to try to time the market. It helps you to buy low and sell high, while you maintain your target asset allocation (the one consistent with your risk tolerance).

Jonathan Chevreau in the Financial Post’s “We’re poorer but smarter after last year” writes about the Kiplinger’s list of lessons for investors. These include; know where your money is-literally, avoid investment “products”, higher volatility is the new normal, “cash is never trash”, and geographical diversification is not enough. “You also need other asset classes such as bonds, commodities, real estate, precious metals, inflation-linked bonds and others. Remember too that currency is an asset class.”

Rob Carrick in Globe and Mail’s “Low-fee Vanguard on deck for Canadian market?”discusses Vanguard’s upcoming October 8, 2009 Toronto conference where speakers will be covering “active-passive debate” and “effective risk management”. Considering that Vanguard, the king of low-cost primarily index-fund focused provider in the U.S., conducts no business I Canada, this conference could be to gauge Canadian interest and opportunity given the coming discontinuity finally triggered by Canada’s pension crisis. The Toronto conference, according to Carrick, is “aimed at pension funds managers and advisers”. Given the systemic failure of Canada’s pension system, Vanguard is probing Canadian opportunities at the right moment; many pension funds that are about to be wound up could benefit from Vanguard’s expertise and low-fee structure. It would be great news for Canadian investors if Vanguard dove into the Canadian pool.

The Financial Post’s Jonathan Chevreau writes in “When to sue your financial advisor” that Robert Goldinlists 156 grounds for suing your financial advisor. The list includes “lack of suitability”, failure to update KYI (know-you-client) form, failure to protect against losses and “failure to explain risks and dangers of investments recommended”.


The Ottawa Citizen’s Karen Mazurkewich reports in “CPP boss sets out the case for reform” comments by CPP boss Denison about the need to a new approach to retirement income, as the current DB/DC pension system including RRSPs are not working for Canadians. “…he made the case for an accessible set of regional or national defined contribution plans that would also help Canadians accumulate retirement savings.” Denison said: “We have estimated that private sector insurers in a voluntary annuity market would have to charge a contribution rate of at least 11 per cent to deliver income benefits comparable to those delivered by the CPP. This amounts to 1.1 percentage points more than the current contribution rate of 9.9 per cent for all benefits provided by the CPP — the cost advantage for a pure pension supplementary layer would be even greater.” (I suspect that’s being generous considering 2%+ annuity fees.) Also see the Globe’s “Denison touts CPP model as solution for pension crisis” . (The pressure is building, let’s hope that the governments which are supposed to govern in the and protect interest of its citizens will see the light, stop doing studies in the hope that the Canada’s pension system (that is in “systemic failure”) will somehow heal itself, and instead take decisive action which will enable people to access large-scale and low-cost asset pools in a systematic manner to allow and encourage Canadians (and Americans) to provide for their future.

Real Estate

Ron Lieber in NYT’s “Seven new rules for the first-time home buyer” writes that “it’s a good time to blow up a long-standing but under-examined maxim of real estate — that you should always stretch financially when buying your first home.” In this new real estate era, his advice includes: at least 20% down, fixed mortgage, understand your income and expenses and consider the possibility that you may have only one or no income for a while, “buy the best (or the cheapest) not something in the middle, and make sure that you can sleep with your decision.

Things to Ponder

Margaret Wente write in the Globe and Mail that “We still have the same disease” quoting Nassim Taleb (author of Black Swan) in an interview. Taleb argues that the financial crisis was predictable (not a Black Swan) due to a cancer. “The cancer was a huge build-up of risk-taking based on the lack of understanding of reality. The second problem is the hidden risk with new financial products. And the third is the interdependence among financial institutions….Today we still have the same amount of debt, but it belongs to governments. Normally debt would get destroyed and turn to air. Debt is a mistake between lender and borrower, and both should suffer. But the government is socializing all these losses by transforming them into liabilities for your children and grandchildren and great-grandchildren.” He says “My advice is that instead of investing in medium-risk securities, you should put most of your money in very low-risk securities, and a little bit in high-risk securities.”

John Dizard in the Financial Times’ “Is time being called on gold’s bull run”discusses the tug of war between gold bulls and bears. The bulls are emboldened by Barrick Gold’s unwinding their gold futures contracts while the bears who question the case for higher gold prices since the “dollar isn’t breaking down”. Bears also argue that if interest rates increase (speculative) gold demand will decrease, and don’t count on inflation until you see rising wages (not yet visible).

And finally, for a good chuckle (and a sad story), read the Globe and Mail’s “Ontario fires back at the mutual fund industry” where Karen Howlett reports on the spat between the Ontario government and the mutual fund industry. The Ontario government threatens to “release a document on the (here is the surprise) negative impact of management fees for investors if (mutual fund) executives continue to complain in public” about the proposed harmonized tax. (I have only two comments/questions: (1) if the Ontario government has such a report why doesn’t it release it and perhaps take some corrective action to fix the problem, and (2) why are people still buying mutual funds when ETFs with less than 1/10th of annual fees are available which accomplish the same investment objectives? (By the way the numerous proposals for a national or regional retirement savings vehicles that could be enabled by the Ontario and/or the federal government (by simply creating a deduction at source like CPP contributions) would also solve the problem with high mutual fund fees…but perhaps instead of action the governments will instead do a few more studies. The time for studies is over; it is now time for action.)


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