Personal Finance and Investments
In Globe and Mail’s “Target date funds missing their mark” Shirley Won discusses some of the problems with target-date funds. There are actually two types of these funds discussed in the article: the structured product types which include guarantees and (2) the age-dependent asset allocation glide-path ones. The structured product type funds with built-in principal guarantees are causing particular problems for the creators since little or no non-fixed income component remains in the product in the post-crash world; many of the product creators have capped investment in the funds and/or “are getting out of the niche. These principal guaranteed products are another instance of lose-lose product which is almost always bad for the customer (due to high fees) and sometimes even bad for the seller. Ms. Won also quotes me as to the inability of being able to place the fixed income portion of such fund into a tax-deferred account and the solution being to build your own target date fund (with the characteristics of the guaranteed ones or the age-dependent glide-path ones) from ETFs (zero coupon bonds and GICs)at much lower cost. Bottom line is stay away from the “principal guaranteed” type of target-date funds. The age-dependent asset allocation glide path ones also have their own problems (see Target-Date Funds and Target-Date Funds II ).
So far, I only got a chance to skim a few chapters from Jim Otar’s new book entitled “Unveiling the Retirement Myth” mentioned in a Chevreau blog last week (I plan to read it in full, looks like it’s full of interesting topics.) The book, just like some of his earlier papers that I have read, looks full of tools/approaches of looking at financial planning and investments, and much good advice for practitioners and clients. I loved the section on zones, luck and the use of actual historical data (though I think of simulation with historical data as complement to rather than instead of .Monte Carlo approaches coupled with stress testing and worst-case scenarios.) A couple of areas that I am yet to be convinced about are: (1) an apparent endorsement of GMWBs (see my analysis and take on GMWB II) especially since the benchmark was 2% MER mutual fund rather that 0.1% ETF; but I am looking forward to re-reading that chapter more carefully), and (2) the use of inflation adjusted annual draw in the various models/simulations. (I know that I personally don’t behave that way; I tend to adjust my spending to reflect the current value of my assets. Therefore using an annual draw of 4-5% of last year-end portfolio value is a model that I think is worth considering seriously as a sustainable approach for a large number of retirees.) I recommend it for your reading list, even if you want to skip the some of the more analytical sections. (I will do a more in depth review once I get back to read it more carefully.)
In WSJ’s “Small investors face big hit in ETF push” Brian Baskin argues that the proposed restrictions on commodity (oil, gas, gold) based ETFs, “targeting the big-time speculators suspected of artificially inflating prices”, will in fact affect small investors only. “Limiting the size of ETFs will result in higher costs for investors, ranging from individuals to banks and hedge funds with multimillion-dollar positions, because legal and operational costs have to be spread out over a fewer number of shares.” The pros will continue trading on the futures markets which much less accessible to the individual investor than ETFs.
The Globe and Mail’s Chaya Cooperberg in “Caring for our health in tough economic times” discusses the differences in health insurance coverage available to those in the generous public vs. often more thrifty private sectors. For those without insurance plans, even in Canada, “visits to the dentist were a luxury “, and “paying for more insurance is probably the last thing you want to think about”. She suggests “another way to manage your health costs if you’re self-employed is to establish a health spending account”. These are trust funds which if set up properly, allow contributions to be tax deductible and can be used for medical expenses later. (I haven’t heard of these before; it may be an option for some to consider, but it does not cover catastrophic expenses since there is no risk pooling, so I am not sure that there is a lot of value here from the very superficial info that I have on this. If any of the readers have tried this, I ‘d love to hear about it.)
Meir Statman in WSJ’s “The mistakes we make- and why we make them” writes about how “our misguided thoughts and feelings get in the way of successful investing” and some things that we could do about it; among his list of fixes are: (1) don’t try to trade your way to profit against Goldman Sachs, just buy-and-hold, (2) forget the prognosticators, (3) don’t let regret keep you away from stocks, (4) don’t believe that statistics presented (by a company or fund) showing success, they are often based data selected to show them in a positive light, and more.
“HSBC joins European scramble to provide ETFs” ETFs are marching on according to Ruth Sullivan “Both retail and institutional investors are increasingly switching to passive investment vehicles, such as ETFs, in a backlash against the often high fees and poor performance of active fund managers.” (Hopefully more investors will see the light for their own good.)
Pensions (Nortel only this week)
In MacLean’s “Pressure rises to protect our pensions” they summarize the crisis of ex-Nortel employees resulting from their firm’s bankruptcy and the fight undertaken to get “the federal government to make an emergency amendment to the Bankruptcy and Insolvency Act to give preferred status to the claims of pensioners, the disabled and severed employees—essentially putting workers at the front of the line.” (While I have argued for this for some time, given the likely residual Nortel estate in Canada, even if all of it was used toward Canadian pension fund shortfall, it may still be insufficient to make it whole.)
For those recently fired and wondering what to do with your pension entitlement you might want to read my last Friday’s blog Q&A: Take Commuted Value (CV) or “pension”? Just laid-off from Nortel (summer 2009). The answer depends on the level of your pension and your assessment of the probabilities/sizes of various upside outcomes versus the possibility of being forced into an annuity with little or no additional funds flowing into the Canadian pension plan.
The S&P Case-Shiller Home Price Index for June is out yesterday and according to the WSJ’s Nick Timiraos the “US home prices rise for the second month” with the 20 city composite June was up 1.4%; but “Economists and real-estate professionals warn that a recovery in housing is likely to be bumpy: Home prices could drop again as job losses drive foreclosures higher.”
As far as the Canadian housing market is concerned, The Teranet-National Bank House Price Index released today also shows the “second consecutive monthly price rise in June” with a 1.6% rise for the six city composite. Toronto, Ottawa, Vancouver and Montreal were up 2.3%, 2.1%, 1.6% and 1.2% respectively.
There is no doubt that this is a lot better news than if the indexes continued their downward trek. But there are still forces countering the expectation that good times are here again.
Here is a mix of other optimistic and pessimistic reports.
The Washington Post’s Renae Merle writes that “Troubled mortgages hit record high” “About 9.24 percent of borrowers were delinquent on their mortgage during the second quarter, according to the survey, and 4.3 percent more were somewhere in the foreclosure process. Overall, one in eight, or 13.16 percent, of mortgage loans were delinquent or in the foreclosure process during the quarter, according to the group.” “The majority of the problem remains in the Sun Belt states like California and Florida, which accounted for about 35 percent of the foreclosures started during the second quarter.”
In WSJ’s “Improving home sales belie market reality” Paul Vigna wrote that “A survey conducted in June of 1,500 real-estate agents sponsored by the trade publication Inside Mortgage Finance found that (only) 36% of all sales involve “non-distressed” properties. Of the non-distressed sales, only 31% were what the survey described as “unforced or optional.” The rest were sales by homeowners in some kind of financial or personal crisis.” Then quoting John Mauldin: “Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage.” And only a third of the remaining one-third — roughly 10% of overall sales — comes from “something we could call a normal selling process.” (This does not sound like good news.)
In Florida things are also moving up according to Sun-Sentinel reported statistics showing that “July home sales up 56% in Broward, 32% in Palm Beach County” and prices show some indication of stabilization driven by lower prices, cheap mortgages and government incentives.
In the Herald tribune’s “Breaking a condominium death spiral” Tom Bayles reports on new approaches in dealing with the impact of large numbers of abandoned condo units which lead to no maintenance fees coming into the condo association to cover expenses. “Without that money, a condominium and its remaining residents can be forced into a death spiral: Fewer residents mean fewer dollars. Fewer dollars mean fewer repairs. Fewer repairs lead to fewer people wanting to live there. Low occupancy rates lead to stricter, often prohibitive, lending requirements for the few who do want to move in. And so it goes until the remaining residents find themselves in units they cannot sell in a condo that is beginning to crumble around them.” In southwest Florida a mortgage company stepped in to give “an association the money it is owed in exchange for the right to go collect that money, plus all the accrued interest, late fees and attorney costs allowable under Florida law.” (Sounds like a possible solution that may be workable on a larger scale.)
And on a more positive note Hagerty and Timiraos in WSJ’s “Housing lifts recovery hopes” have a lot of historical data; the home sales numbers are showing improvement in the past few months.
In Globe and Mail’s “Is a cottage a good investment?”Roma Luciw reinforces that buying that cottage is not an investment, but a lifestyle decision. It doesn’t mean that you shouldn’t buy, but make sure you so for the right reason and with full understanding of the carrying cost.
Things to Ponder
Gillian Tett in the Financial Times’ “Eliminate financial double-think” discusses the hypocrisy/double-standard of many in the financial industry who for years were arguing against Japan’s “complex (business) distribution chains and numerous middlemen”. Tett then indicates that “amid all that debate about American efficiency, one point that western commentators almost never discussed was the proliferation of middlemen in America’s financial world.” Compared to 21stcentury banking “the Japanese dairy industry might seem positively rational. Yet, for many years the apparent contradiction went almost entirely unnoticed, by western politicians, bankers, and consultants alike. Middlemen were regarded as bad in Japan; but they were somehow overlooked in America’s financial world.” Then she gets to the interesting part of the story, which is why/how this happened was “that elites in a society typically maintain their power not simply by controlling the means of production (i.e. money), but by dominating the cultural discourse too (i.e. a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored.” (Agree or not, it’s interesting reading.)
Boyd Erman in Globe and Mail’s “Buffett, Pimco warn of greenback’s decline” reports on warnings from Buffett and Gross “that U.S. dollar is doomed to long-term decline unless policy makers find a way to rein in government spending growth”.
In Globe and Mail’s “When you are drowning in knowledge, it’s experience that counts” Dan Richard argues that with the arrival of the internet and the resulting democratization of information, key to successful money management is no longer information but experience (I would argue that experience is not enough either, what’s even better than experience perhaps, is wisdom and judgement!).
In the Financial Post’s “Predicting the unpredictable” Jonathan Chevreau discusses the futility of trying to pay attention to the talking heads and other prognosticators; it’s nothing more than noise. A very apt quote is mentioned from Jason Zweig “If you can plug your ears to every attempt (by anyone) to predict what the markets will do, you will outperform nearly every other investor alive over the long run. Only the mantra of ’I don’t know, and I don’t care’ will get you there.”
In the Globe and Mail’s “The trillion-dollar buyback threat” Eric Reguly argues that the stock buyback frenzy by companies, considered a good way of constraining management from wasting the money on boondoggles (and a way of transforming dividends into capital gains), in fact is bad social policy for the government to encourage as it reduced the much needed funds required for R&D and innovation. (Interesting perspective.)
Allan Sloan Fortune article “The next great bailout: Social Security” argues that while the Social Security is considered “solvent” from a trust fund perspective for another 26 years, it in fact has an imminent cash flow problem because while on paper it is a trust fund, in reality it is a pay-as-you-go system.
The latest (September 2009) issue of Consumer Reports magazine asks the question “The next financial fiasco? It could be reverse mortgages” because: (1) loan bailouts soared from about $80M in 2004 to $380M in 2008, (2) taxpayer subsidy for shortfall is budgeted at $800M for 2010, (3) marketing can be misleading (high costs are often not disclosed/emphasized), (4) borrowers are encouraged to buy other financial products with proceeds. The article not only raises the spectre that “reverse mortgages” can become another systemic financial issue, it also covers well what’s wrong with reverse mortgages for the potential clients. (You’ve read about that in the Reverse Mortgages blog at this website.)
The Globe and Mail’s Kevin Carmichael in “Bank of Canada takes on soaring loonie” reports on Bank of Canada’s concern that the soaring “loonie risked derailing Canada’s fragile rebound from recession by hurting exporters”. Furthermore they threatened “to join the U.S. Federal Reserve, the Bank of England and other central banks in the business of creating money to buy government debt, an extreme tool of monetary policy called quantitative easing.”
And finally you might also find interesting the related Financial Times article by Krishna Guha entitled “Towards the next peak” on the changing role of central bankers globally. The recent orthodox view that the role of Central Bankers was inflation targeting and if that done successfully it would assure financial stability. Other pre-crisis assumptions have turned out to be flawed as well, e.g. system-wide risk did not have to be monitored and that liquidity was not going to be an issue in the wholesale markets. The Central Banks argue that if their role includes a mandate for financial stability than they need the powers/tools to execute the mandate. Otherwise, the article quotes Mervyn King, the Bank is left “in a position rather like that of a church whose congregation attends weddings and burials but ignores the sermons in between”. There is a complementary FT article on “Israel’s monetary policy” the since Bank of Israel governor Stanley Fischer “former IMF deputy managing director and was US Fed chairman Ben Bernanke’s PhD supervisor” and Mr. Bernanke may be watching his former thesis advisor’s approach carefully.