Hot Off the Web– May 24, 2010

Personal Finance and Investments

Jonathan Chevreau in the Financial Post’s “Investor book never out of style” reminds readers about the must read book by Charles Ellis entitled “Winning the Loser’s Game”. (If you haven’t read it (in a while) you shout definitely (re-)read it! It is a classic and gem!)

In the Globe and Mail’s “How to protect yourself from ETF pain” John Heinzl gives a simple overview of what went wrong a couple of weeks ago over about 20 minutes of hectic trading when prices of some stocks (and ETFs) suddenly dropped dramatically. He also provides some simple lessons from this event: no market orders and no stop-loss orders when there is high market volatility (how about, always treat market orders with great respect, if you must use them.) Other interesting articles discussing the severe market volatility of a couple of weeks ago can be read in “Flash crash may prove blemish for ETFs”, “Two managers, one winner”, “The machines that ate the Market” and the “solution” tabled last week by the SEC in “’Flash Crash’ plan: a circuit breaker for every stock”.

In the Financial Times’ “Diversification is back but with a twist or two”Sophia Grene discusses new ideas suggested in response for the (apparent) failure of traditional approaches to asset allocation. Instead of asset allocation, “the concept of risk allocation, whereby asset allocation is led by a decision about the percentage of risk in a portfolio that should come from a given asset class, is gaining ground.” “The other change in thinking is the realization that the characteristics of asset classes are not set in stone. Volatility and correlations vary over time, so setting asset allocation on the assumption they are static is doomed to disappoint.” (i.e. there may be or in fact are multiple regimes that need to be considered. I’ll discuss this elsewhere when I report on the CFA conference later on this week); this may lead to “dynamic asset allocation” replacing or complementing the traditional strategic asset allocation or (in case of DB pensions) the asset-liability management (ALM) based approach. (Not everybody agrees with these views and some might (un-complimentarily) characterize these as an attempt at market timing.)

In the Financial Post’s “Healthy retirees may end up spending more on healthcare because of longer lives” Jonathan Chevreau writes about new research showing that the healthy retirees may in fact spend more on healthcare than the sick due to: longer life, being healthy now but could still have a chronic illness later and they may need more long-term care or nursing home level support. This makes sense, but the conclusion that Canadians should be buying long-term care insurance is not nearly as obvious (see my Long-Term Care Insurance (LTCI-II)- Musings on the Affordability, Need and Value: A (More) Quantitative Viewblog)

Ted Rechtshaffen in the Globe and Mail’s “RRSPs are our friends…or are they?” reminds reader that while adding more money to RRSPs is good for most, there are instances when this is not so, depending on the differences between current and future tax rates that you will be subject to. (A related topic is covered in my blog TFSA or RRSP? 401(k) or Roth 401 (k)? Tax-free or tax-deferred account?-)

You might find of interest an interview with Harry Markowitz in the Journal of Financial Planning entitled “Harry Markowitz on Modern Portfolio Theory, the Efficient Frontier and his life’s work”He is still a believer in MPT and EF (mentioned in the title), but he also believes in spending less than you make and simplicity in investing (forget about the financially engineered products).

WSJ’s Tom Lauricella discusses the corrosive effects of inflation on an un-indexed annuity in “Inflation’s toll on annuity payouts”.Potential solutions suggested are: indexed annuity with or without a cap, increasing annuity, phased annuitization.

Real Estate

In the Financial Post’s “Vacation property best left rented” Jonathan Chevreau warns readers against buying a vacation property with its associated high recurring costs, and suggests that renting is more sensible. (It is tough to argue against his thesis. Vacation homes are a real high cost luxury.)

The Herald Tribune’s “Home sale prices up 8 percent”on Florida’s west coast compared to first quarter in 2009 during the worst sentiment of the recent crisis. (I wouldn’t bet that we are on the way up, given the reference point for this “good news” story.)

The Financial Post’s Garry Marr reports in “New housing listings soar as experts expect slowdown”  that “Canadians listed their homes for sale in record numbers in April” and “just about everybody tracking the sector – from economists and builders to real estate executives – say there is nowhere else to go but down in prices and sales.”


In the Financial Post’s “Pension bill creates more risks” John Manley thinks that “preferred creditor status for pensions would weaken their sponsors”. What else would you expect from the CEO of the Canadian Council of Chief Executives? (He sold his body and soul, and advocates trampling on the rights of pensioners to their deferred wages that were often looted by management to maintain the company’s ‘apparent’ earnings for the benefit of stockholders (higher share prices) and/or management (higher bonuses).)

SIPA (Small Investor protection Association) posted one of my recent emails discussing the ”systemic failure” of Canada’s private sector pension system in general and of the DB pensions in particular at Pension Issue. You might find it interesting reading.

Benefits Canada reports that “Pension chiefs call for political action on retirement reform” . The good news is that the pension chiefs agree that Canada’s retirement income system has (politically gently) “opportunities for improvement” (an understatement), however the bad news is that  they recommend that Canada’s Minister of Finance “strike an impartial Federal-Provincial Task Force with mandate to identify the best possible solution to Canada’s Pension coverage”. (Not another study or consultation or task force; just about any of the major proposals tabled so far, from the expanded CPP to the CSPP would be better than the status quo, as long as there is a credible transition addressing the needs of the current pensioners (protecting existing DB promises) and the retirement income needs of the wave of boomers now approaching retirement.) By the way Tara Perkins in the Globe and Mail’s “More in danger of outliving savings” reports that Sun Life Financial’s CEO also thinks that Canadians will outlive their retirement savings. (No doubt the life insurance industry is working closely with the Federal government to craft policy to “help” Canadians reach their retirement goals. Is that a good thing, given their history?)

And for some comic relief you can read the NYT article by Williams Walsh and Schoenfeld entitled “Padded pensions add to New York fiscal woes”Is something broken here? Some would say an unbelievable scam, not necessarily by the NYC policemen, but by management who should know better; this won’t end well.)

Things to Ponder

In the Financial Times’ “Scant truth in ‘investment beliefs’” Pauline Skypala discusses the value of the invested beliefs guiding pension plans. Given that pension plans have in-house and/or can buy the top investment expertise and most of their “investment beliefs” are nothing more than hot air, can you imagine how these beliefs would apply to the average or even superior retail investor? “Judging by the results of this study, pension funds should focus on asset allocation via the lowest cost route available, including using internal resources where feasible.” A look at six ‘beliefs’ concluded that only diversification (free lunch) and the drive for low cost have any merit, the rest have little or no demonstrated merit: the ‘best managers’, ‘exploiting of inefficiencies’, value of ‘illiquidity premium’ (via “real estate, private equity or other alternative investments”) and ‘exploiting of inefficiencies’. When there has been better performance, it is generally achieved or offset by the higher risk taken.

In the WSJ’s “Legendary investor is more worried than ever” Jason Zweig reports on his on-stage interview with Seth Klarman at last week’s CFA conference. Some quotes from the article: “There is nothing natural in the markets. Everything is being manipulated by the government.”, “The government is now in the business of giving bad advice.” Later, he got more specific: “By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.” “Will money be worth anything,” asked Mr. Klarman, “if governments keep intervening anytime there’s a crisis to prop things up?” Brett Amends’ take on the interview can be found in his WSJ article “Klarman: Why investing is like chess” .

In the Globe and Mail’s “Is austerity the future for the West? Not if generals can be useful” Avner Mandelman in describing possible solutions to the recent/current financial crisis and suggests cheaper oil, if necessary by force. “You may consider North American austerity and European debt riots more equitable than more foreign conflicts, but countries with powerful armies have never tightened their belts if they could force others to tighten theirs instead. It has always been thus and always will be.” (Well, time will tell!?!)

The NYT editorial “Financial reform”, while discussing the regulatory changes passed last week in the Senate and the House, argues “that weak regulation is a recipe for disaster. And open and transparent markets, with clear roles for regulators, are essential to the nation’s financial health.” The article discusses the specific changes that are required in the areas of: derivatives, permitted activities for banks (Volker rule), too big to fail, consumer and investor protection, including fiduciary duties to be imposed on brokers (long overdue, but nothing happening in Canada in this space.) (Thanks to Dan Braniff of the Common Front for Retirement Security for bringing article to my attention)

And finally, Diane Francis in the Financial Post’s “Debacle of Omaha” thinks that the “Oracle of Omaha is now drinking Wall Street’s Kool-Aid.” “He was the guy who believed in value investing, taking long-term positions in sound companies with integrity” but given his huge derivatives and Goldman investments, his defence of Goldman Sachs’s actions (from an ethical or legal perspective) “is not surprising. But the nature of that defence reveals that the contagion of cowboy capitalism has reached conservative Omaha.”


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