Hot Off the Web- August 22, 2011

Personal Finance and Investments

In WSJ’s “Turning losses into gains”Laura Saunders suggests that investors consider sharing their pain with the taxman by doing some “tax-loss selling” in their taxable accounts. In the U.S. there are added complexities because of the distinction investments held less than one year vs. those held over one year (not in Canada). The other item to be handled with care is the “wash sale” rule which prevents you from using the loss if you acquire the same security within 30 days, though you could buy a ‘similar’ security. Saunders also reminds reader that repurchasing the securities later at a lower cost creates a lower “cost basis” for the future gains, and thus higher taxes to be paid later; also if investor dies with unused losses they are of no value to the estate as” no capital gains tax is due on assets in an estate” (unlike in Canada).

Rob Carrick in the Globe and Mail’s “Make sure you and your adviser are on the same page” explains the importance of an Investment Policy Statement. The IPS is intended to bring the investor and advisor to a common understanding about the objectives, needs/desires, risk tolerance, return goals/expectations, corresponding asset allocation and planned withdrawal strategy. The IPS, which is generally prepared not in the middle of market crisis, will act as a roadmap during times of turmoil to insure that investments are managed rationally rather than in panic mode.  If your advisor didn’t prepare one, you should consider asking for one. (If your advisor doesn’t know what an IPS is, get a new advisor. The IPS is not only valuable for the advisor insure that approaches to investments meet client’s needs and insure that client understands how the assets are managed, but if properly prepared, would allow another advisor to continue managing the client’s assets in the same manner.)

In the Toronto Star’s “An 89-year-old man’s travel insurance mistake” James Daw describes a situation where traveller was stuck with paying for the $65,000 medical expenses incurred in Florida because he “had failed to disclose his high blood pressure, and that he had seen a doctor about his heart before leaving for Florida. This was an indication the condition of his health was not stable, as required under the contract.” (Recommended by Carrick’s Reader)

Catey Hill in WSJ SmartMoney’s “How to tap your nest egg in a wild market” writes “Traditionally, advisers have said a well-diversified retirement portfolio could throw off 4% per year in income in perpetuity; more recently, some firms have created more flexible models that let retirees take 8% or more. Now that’s in jeopardy, with some advisers recommending retirees take no more than 2% to 3%, less if they can help it…(For a well diversified balanced portfolio) “”As a baseline guide for setting individuals’ spending expectations at retirement, it’s in the ballpark,” writes John Ameriks, the head of Investment Counseling and Research at Vanguard.” (I’d continue with the 4% recommendation at this time, except for individuals over 80 where a higher withdrawal rates may be considered.)

In the National Post’s “Free bond price quotes could disrupt market model Barbara Shecter writes that “The latest attempt at increasing transparency for investors that could disrupt the dealer business model comes from Omega ATS, an alternative trading venue that entered the bond business in December…“If bond market pricing became fully transparent, you could just add it to the list of margin pressures facing the investment dealer community.”…”bond quotes are also available at

In the WSJ’s “Which way to retirement?” Kelly Greene writes about the impact of the recent market volatility/drop: “The worst thing you can do now is panic. Hitting the “sell” button on your stock portfolio, after the Dow Jones Industrial Average has fallen 11.1% in three weeks’ time, could hurt you more than anything else. Not only would you be locking in losses prematurely to preserve capital you might not need for years, but you also would miss out on any future rally…Here’s what to do now.” The suggestions include: figure out what’s your current spending and don’t expect to spend less in retirement, securing “two years of grocery money provides a psychological benefit. You’re able to be more patient with your investment portfolio”, consider an annuity if your risk tolerance is very low but “Be warned: They are complicated, and can be costly” (immediate fixed and variable annuities are mentioned but handle with great care), or consider “structured notes with principal protection” (again very high cost products whose intended outcomes can be achieved much cheaper or more conveniently), buying put options (but insurance is very expensive when volatility is high), and (more sensibly) move out your retirement date. (Some of the suggestions in this article are very sensible; others show the risk of accepting recommendations in newspaper articles at face value.) In a related story Rachel Ensign writes in the WSJ that “For many seniors, there may be no retirement”. A confluence of events such as needing to pay a parent’s long-term care, low interest rates coupled with losses in the market rising prices and inability to execute on planed sale of house keeps many older people working past expected retirement age. “More than three in five U.S. workers in their 50s and 60s plan on working past 65 — and 47% of that group say they’ll do so because they’ll need the money or health benefits…But in this tight labor market, working into your golden years isn’t easy. And you’ll have to make your age and years on the job come across as assets”. Tough recommendation to follow include: stay on the job, start a new job/career, (if you got a job) keep saving, and delay tapping Social Security and any tax-deferred accounts.

In WSJ’s “Lessons in investing from America’s richest family” Karen Blumenthal lists some investing lessons from Sam Walton: have a plan and if necessary consider an advisor to set you on the right track, live below your means, value cash flow and make sure to have enough cash (equivalents) to be able to sleep well, “focus on risk, not return” and “hang-on” don’t sell in panic.

Jonathan Chevreau in the Financial Post’s “One advisor’s calming letter to clients” writes about an advisor’s letter to his clients in which he explains the threat of coming inflation. Chevreau writes that “Smith believes — and I concur — that indebted governments will inevitably take the least painful route out of their problems and continue to resort to the printing presses to repay their debts. So sooner or later, inflation will be a problem, at which point those parked in debt securities issued by those governments will experience a loss of purchasing power.” (Well worth reading.)

In the Bloomberg’s “Stock volatility to leave lasting scars on investors’ psyche” Laura Keeley writes that “Last week’s record volatility in U.S. stocks ended after four days. The anxiety it instilled among mutual-fund investors may linger for years….The (2000 and 2008) debacles, combined with falling home prices, unemployment above 9 percent and a lack of trust in government to bring down spending, may sour individual investors on domestic stock funds for an additional three to five years…“Investors are in cash for a reason and, regardless of time horizon, conventional investing wisdom no longer applies…The Great Recession of 2008 has had a profound and longer-lasting impact on investors’ confidence than expected.”…”

In the Globe Mail’s “An investor’s road map to safety” Simon Avery quotes a number of advisors’ search for places to hide: Treasuries, gold, currencies, cash, GICs. (…but the latter two might be the simplest way to deal with the uncertainty, if one believes it is short-term phenomenon only.)

In the Financial Post, Mark Miller explores various perspectives of “How much stock should older investors hold?” However, he suggests a very sensible ‘correct answer’ “as little as possible, while maintaining high confidence that you can meet your retirement goals. Start by crafting a serious retirement plan that includes a credible estimate of spending needs, balanced against income you can count on from Social Security, pensions and the like; then, back into a portfolio equity allocation that provides enough growth to fill in the gaps but exposes you to as little risk as possible.” “You need to balance two risks – short-term volatility against long-term risk that inflation will erode your assets.” (…in other words, take only as much risk as you need to in order to achieve your objectives…but never more than your risk tolerance permits you to take.)

Real Estate

Nick Timiraos in WSJ’s “Linkage in income, home prices shifts” looks at a “recent analysis, real-estate firm Zillow Inc. studied the correlation between home prices and annual incomes over the 15-year period that ended in 2000, before home prices began to surge. For decades, price-to-income levels have moved in tandem, with a specific housing market’s prices rising or falling in line with local residents’ incomes. Many economists say that makes the price-to-income ratio a good gauge for determining whether housing is undervalued or overvalued for a given market…For the U.S. as a whole, home prices were around 2.9 times incomes from 1985 to 2000. But during the housing boom, values increased at a much faster rate than incomes. The price-to-income ratio peaked at around 5.1 in 2005. Home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14% above the historical trend.” The article has some excellent graphics showing the most under- and over- valued cities in the U.S. by this (local) measure. Most overvalued leaders are: Virginia Beach, Honolulu, Charleston, Boulder, Richmond, Eugene (in the 49% to 40% range); while the most undervalued: Detroit, Las Vegas, Manchester, Merced, Stockton, Modesto, Reno (in the -35% to -17% range). The article even suggests that with the current low mortgage rates and growing demand for rentals it may be a buying opportunity for investors.

In the Financial Times’ “Investors Snap up real estate” Sara Silver reports that “Many institutional investors have been tactically shifting some of their fixed income allocations to real estate…Over the last year, [investors] have been looking for safety and yield and trophy assets were perceived as offering that, but yields have been so low that inflation leaves them on risky footing.” “If everyone piles in at the same time, this will lead to a speculative bubble. There isn’t enough of this stuff globally in countries with stable political systems, where you have the confidence that you can invest and then later get your money out.”Those investing in prime locations include the Canada Pension Plan Investment Board, which has increased its holdings of unlisted assets, such as real estate, from 8.8 per cent to 31.6 per cent of its portfolio in the past five years.” (Let’s hope that such an aggressive allocation won’t backfire.) Yet in the WSJ’s “Buyers wary of building bubble” Craig Karmin reports that “Some of the nation’s largest pension funds are starting to back away from trophy properties in the most expensive real-estate markets over concerns a new bubble is inflating…But strong demand for a limited number of buildings has boosted prices of big-city skyscrapers so high they are approaching record levels.”


Janet McFarland writes in the Globe and Mail’s “Pension plans are suffering after market turmoil” that “Canadian pension plans have taken a double hit from the recent market turmoil, losing money on their investments while simultaneously seeing their funding obligations grow thanks to falling bond yields…Aon Hewitt estimates the average funded position of corporate pension plans in Canada fell from 97 per cent on July 25 to 85 per cent by Aug. 8 after stock markets went into a tailspin…Mercer, estimates typical pension funds have seen their funded status slide by 10 percentage points since the beginning of the year on a solvency basis, which is the regulatory ratio used to determine whether companies are required to inject more cash into their pension plans”

Things to Ponder

In Reuter’s “Fitch affirms U.S. AAA rating, disagrees with S&P” Frierson and Brandimarte report that “Fitch Ratings on Tuesday confirmed the United States’ top-notch credit rating and, in blatant disagreement with rival Standard & Poor’s, gave a vote of confidence to Washington’s deficit-reduction efforts…Fitch also said the U.S. AAA rating is underpinned by key pillars: the country’s pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides the country’s revenue base. Monetary and exchange rate flexibility enhance the capacity of the economy to absorb and adjust to shocks, it noted.”

In the Financial Times’ “We cannot inflate our way out of debt” Ranghuram Rajan disagrees with “commentators (who) propose a sharp, contained bout of inflation as a way to reenergise growth in the US and the industrial world.” Rajan argues that this proposed ‘solution’ is wrong because: it failed in Japan since the early 90s, it’s of no real help to holders of floating rate and short-term maturity liabilities (US government average is 4 years), it won’t help with the US government’s promises which are indexed, “will clearly make debt holders worse off” (rich people, pensioners, pension plans and insurance companies).

In the Financial Times’ “Central banks polish gold’s image” Jack Farchy writes thatThe system of fiat money is 40 years old today. And quite frankly, it is looking its age. The Bretton Woods system under which fixed exchange rates were linked to the gold price gave way to the current monetary system, in which currencies are backed by fiat, or trust, four decades ago… But after a period in the wilderness, the yellow metal has come almost full circle… The most striking evidence of its return is the approach of central banks to the bullion market. After two decades in which central banks, mainly in Europe, were queuing up to dump their gold, central banks are now significant buyers. The most recent figures from the World Gold Council show that as a group, on a net basis, central banks bought about 208 tonnes of gold in the first half of this year… “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today” according to Robert Zoelick World Bank President who also see gold as part of a future multipolar currency system. But Debarati Roy writes in Bloomberg’s “Gold market is a ‘bubble poised to burst’, Wells Fargo says” that “Speculative demand from investors has pushed the gold market into a “bubble that is poised to burst” after prices surged to a record this year, Wells Fargo & Co. said…Gold futures have advanced 26 percent this year, following 10 straight annual gains. The price reached a record $1,817.60 an ounce on Aug. 11 on demand for an investment haven as European and U.S. sovereign-debt woes escalated.”

According to Avner Mandelman in the Globe and Mail’s “The world isn’t ending: Sell your bonds, buy stocks” “the time has come to sell your long bonds into the bond-buying hysteria and start buying stocks. Why? Because even as stock markets were plunging following Standard & Poor’s downgrade of the United States’ credit rating, the solution to the world’s debt problem was already in motion. No, not cost cutting by Congress. Lower oil prices…the price of oil has begun to fall. This will likely continue, either because the West descends into a recession and uses less, or because the West forces oil producers to charge less. It’s inevitable.”

And finally, in the Atlantic Magazine’s “Can the middle class be saved?” Don Peck reports from a 2005 Citigroup analysis that “America was composed of two distinct groups: the rich and the rest. And for the purposes of investment decisions, the second group didn’t matter; tracking its spending habits or worrying over its savings rate was a waste of time. All the action in the American economy was at the top: the richest 1 percent of households earned as much each year as the bottom 60 percent put together; they possessed as much wealth as the bottom 90 percent; and with each passing year, a greater share of the nation’s treasure was flowing through their hands and into their pockets. It was this segment of the population, almost exclusively, that held the key to future growth and future returns. The analysts, Ajay Kapur, Niall Macleod, and Narendra Singh, had coined a term for this state of affairs: plutonomy….According to Gallup, from May 2009 to May 2011, daily consumer spending rose by 16 percent among Americans earning more than $90,000 a year; among all other Americans, spending was completely flat. The consumer recovery, such as it is, appears to be driven by the affluent, not by the masses. Three years after the crash of 2008, the rich and well educated are putting the recession behind them. The rest of America is stuck in neutral or reverse…A thinner middle class, in itself, means fewer stepping stones available to people born into low-income families. If the economic and cultural trends under way continue unabated, class mobility will likely decrease in the future, and class divides may eventually grow beyond our ability to bridge them…As a society, we should be far more concerned about whether most Americans are getting ahead than about the size of the gains at the top. Yet extreme income inequality causes a cultural separation that is unhealthy on its face and corrosive over time. And the most-powerful economic forces of our times will likely continue to concentrate wealth at the top of society and to put more pressure on the middle. It is hard to imagine an adequate answer to the problems we face that doesn’t involve greater redistribution of wealth.” (Some interesting perspectives even if you don’t agree with the author’s conclusions. Thanks to Carrick’s Reader for recommending.).


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