Personal Finance and Advisors

Tara Siegel-Bernard in the NYT’s “A boot camp to prepare for retirement” describes a very interesting approach for people within a couple of years to retirement to assessing financial readiness for retirement. “It’s a way for people to really wrap their arms around something that is so abstract, and scary and permanent.” The advisors (Tillotson and Kenefick) point out that in this new world of retirement there is no (structured) place to be each day, no pay checks, and you are starting to draw down your savings. The boot camp consists of a combination of activities like: (1) “pre-retirees complete a checklist of exercises, including taking a hard look at where their money is going and making sure they’re on (non-negotiable) track, for instance, to pay off the mortgage.” , and (2) being  forced to save disproportionate amounts to simulate spending during retirement . Spend-rate is the most important part of the exercise; it is to determine your “lifestyle cost” by logging all expenses for the one year, the duration of the boot camp (including vacations and insurance). The boot camp, which costs on the average 1.35% of the assets of participants, also looks at “net- worth”, insurance requirements, goal setting (retirement age and required asset to maintain “lifestyle”), increasing savings level, tax planning, estate planning, and charitable giving. (Quite an interesting approach, if you can do it; a controlled way of entering retirement)

A couple of interesting advisor related articles in the WSJ. Tergessen and Kim in “Wary investors are seeking out objectives voices” report that there is a shift under way away from Wall Street (brokers) to independent investment advisors. However, they warn that not all advisors are the same; they range from “solo practitioner specializing in financial planning to firms that manage millions and offer an array of services, including financial (including insurance), tax and estate planning. To further complicate matters, while more advisers are hanging out their own shingles, a growing number are simultaneously affiliating with independent brokerages” and “they aren’t all required to adhere to the same fiduciary standards“. It is essential to have visibility of advisors’ built-in conflict of interest and how that is managed. You also must understand how much you are planning to invest, what you can afford to spend on the advice and what services you expect (oversight of your entire financial plan or just a onetime financial plan with/without periodic reviews?) And, in a related article Mary Pilon writes about “Questions to ask your new financial advisor” The questions cover: experience, licensing/certification, compensation, client base/specialization, who else will see and service my account, SIPC membership, get copy of ADV (regulatory submission), expected effort, interface to other professionals supporting client, investment philosophy and approach, recent performance, reasons people leave you, what happens to account if you leave firm, your portfolio. (Great list of questions.)

Investments

Jeff Opdyke’s WSJ article “How to build a portfolio wisely and safely”discusses considerations that go into the building of your portfolio in case you have a “view” about: inflationary, deflationary or goldilocks economic future. The portfolio for each scenario is then “insured” with counterweighing assets in 15-30% of the portfolio.  For the goldilocks scenario it is 20% US equities, 20% foreign equities 30% US bond index, insured with 10% commodities, 10% long-term Treasuries and 10% cash. Opdyke’s suggested portfolios for all three scenarios are shown below with the insurance elements shown in red.

Rob Carrick’s  Globe and Mail article “An educated approach to RESPs”discusses some important considerations when making RESP (similar to 529 plans in the US) investment decisions: (1) no brainer investment for parents (it is tax deferred and $500/year government grant is available to match 20% of contributed amount up to $2,500 (a little more for lower income persons)-lifetime maximum of $7,200), (2) pay attention to asset allocation glide-path to protect assets as disbursements (e.g. tuition) are about to start (given the 18-20 year horizon of RESPs, can start more aggressively but need to reduce equity exposure 4-8 years before education expenses start; any funds that you expect to need in the next 5 years should be in cash and GICs/short-term bonds, any funds you don’t need for at least 10 years may be in stocks. (3) consider single or family RESP plan (it may also change the horizon for the invested asset.

The Financial Times’ Pauline Skypala reports that there is a clear shift away from multi-manager to multi-asset funds in “Hard to master multi-asset class” . Yale/Harvard were the model for the multi-asset class movement, but it has not provided the expected protection in the recent market crash; there are also questions about their suitability for “retail investors” who are unlikely to get access to the best of hedge/private-equity/real-estate funds. Even if gains are achievable when execution is good “if charges are too high, there is a strong risk of seeing whatever outperformance is produced disappearing into managers’ pockets rather than compounding in investors’ portfolios.” She suggests that perhaps an asset allocation fund may be the right approach for individual investors.

Sophia Grene writes in the Financial Times’ “(DC) Pension investors fail to get the message” that investor education is not hitting its mark. As  fewer and fewer employers and governments are prepared to assume market and longevity risk associated with pensions, individuals will have to get smarter and more knowledgeable or ““The entire retirement savings system needs to be designed to work for financially illiterate participants,” say the authors of The Retirement Plan Solution, a book by three pensions experts, Don Ezra, Bob Collie and Matthew Smith.” Given the lack of interest and understanding of the average investor, the question is how the default should be set so that “unsophisticated savers don’t lose out” yet their “needs and desires” are factored into the defaults. “T R Price has developed online systems that allow pension plan members to see what they are currently saving and what they might reasonably expect as a monthly income in retirement at that savings rate.” (This is long overdue approach; what has been missing is a feedback loop to tell investors/savers in their march toward retirement what is the likely outcome (retirement income or age of retirement) given current savings rate and market conditions.) Others suggest the use of a “risk communication and recognition tool…to help investors work out how they feel about risk.” The feeling is that development of such tool will benefit both investor (better savings and risk decisions) and fund managers (satisfied or at least not surprised investor will help with sustainability of industry).

Real Estate

The May 2009 Case Shiller Home Price Indices  were released this week and the numbers show slight price increases over April 2009  in 10 and 20 city indexes. Only Las Vegas had a large drop (-2.5%), Seattle, Phoenix, Los Angeles, Miami and Tampa are showing small decreases or were essentially flat. This was the first month on month increase in the 10 and 20 city indices since mid-2006. That’s good news; hopefully will continue. “New home sales up 11%, most since 2000” is another positive US indicator though on lower prices.    You may want to also read Timiraos and Evans’s “Home prices rise across U.S.” in the WSJ for more in depth analysis of the Case-Shiller data. Some of the reasons given for the price increase were: bargain hunting, low interest rates, first time buyer credit; however 9.5% and rising unemployment does not bode well for future home price increases.

The just released Teranet-National  Bank Canadian Housing Index covering May 2009 showed a 0.7% month-on-month increase in composite index, and a 6.9% and 8.2% drop from year earlier and from August 2008 peak. Largest month-on-month increases were recorded in Toronto (2%) and Montreal (1.5%), while the biggest drop was in Calgary (-2.2%). Difficult to say whether this is an indication of a reversal or just a one (or two or three) month wonder.

In the Herald Tribune’s “Florida condo figures perk up” they report a 39% increase in June condo unit sales over the previous year and 8% increase over the previous month’s sales. “The median sales price of $112,900 dropped 37 percent from a year ago and was roughly even with May”. In the Palm Beach Post’s “Home sale prices rise in Palm Beach County, fall in Treasure Coast”, Jeff Ostrowski reports that  “The median price of an existing single-family home in Palm Beach County rose to $250,300, up 7 percent from May and the highest level since October, the Florida Association of Realtors said Thursday. The number of sales in Palm Beach County also rose, hitting 859 in June, up 15 percent from a year ago.” Still not everybody is convinced that the corner has been turned, at least until they see several months’ worth of increased volumes and prices.

Things to Ponder

In the Financial Post’s “Coming back from the brink” Jonathan Chevreau argues that “One unfair aspect of the Canadian pension system is that when DB plans lose money, employers can make it up with large additional tax-deductible contributions. But RRSPs and DC plans that lost money last year do not get the same privilege. Not only do members of those plans lose the absolute amount of money but they also permanently lose the ability to tax shelter any replacement contributions.” He then supports a Malcolm Hamilton proposal whereby retroactive TFSA room is granted to help those who were hard hit by market losses in the RRSPs and DC pension plans. While I agree with the proposed “retroactive TFSA” proposal, I must take issue with the implication that somehow private sector DB pension plans have advantages over DC plans. Canada’s private sector pension system is (see my blog) in “Systemic Failure”; just ask any Nortel pensioner who was not permitted to contribute to her RRSP because she had a DB plan. The “unthinkable” happened; the almighty Nortel is undergoing liquidation with the Canadian pension fund claimed to be 69% (my suspicion closer to 60%) funded, and pensioners will be lining up with as unsecured claimants to pick at the remaining Nortel carcass as equals with vulture bond investor. Something is not well in Camelot!

The Financial Times’ Gillian Tett in “Uncertainty is order of the day”reports that while median inflationary expectations may appear mild, the divergence of views behind the numbers is striking. The reality is that investors, having become aware of fat tail risk (black swans), “are gripped by a phenomenon akin to the type of post-traumatic syndrome seen after a war: whenever they hear a “bang!”, they jump in panic, since they no longer dare assume that the world is benign – in relation to inflation, deflation or much else.” There is also a “lack of intellectual framework” required to understand the implications of the freezing of the securitization market, just as before the bubble burst there was lack of understanding of its impact. Commenting on the great variability of responses to inflationary/deflationary expectations in a recent survey “Such variations do not mean that surveys are useless: on the contrary, the question of how inflation expectations could affect outcomes needs even more research. But as Mr. O’Neill says: “It is very hard to forecast beyond six months now, with real confidence.”” (i.e. you’re on your own, even more so than usual.)

Brett Arends examines the asset   protection that personal bankruptcy gives a US person in “Rethinking bankruptcy”. While there are variations by state, generally “If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the children’s’ college funds, your car and your personal effects…you may even get your credit cards back pretty soon”. “Florida and Texas…offer virtually unlimited homestead exemptions.” Other states exempt your car and tools (necessary to earn your livelihood). Arends also points out that while medically related crisis is supposedly the root cause for two-thirds of bankruptcies, in reality it is the primary driver in only 29% of the cases.

The Economist’s “After the fall” reports that world trade which has increased by 20% in September 2008 over previous year has then collapsed to such an extent that by January 2009 it was 32% below the year earlier levels! The report then suggests that there are indications that things appeared to have now stabilized, but further downward movement is still possible. With increases in unemployment and savings, any increases in global trade will have to await increases in the world economy.

In the Financial times’ “Do speculators really affect commodity prices?” John Dizard argues that the contemplated legislation to put limits on speculators’ commodity holdings and improve disclosure and transparency associated with such holdings will be ineffective for reasons such as: one persons’ speculator is another’s investor, “dealers in, or holders of, off-exchange swaps won’t have the same restrictions so that the biggest players will continue to play, and “You cannot force up the price of a futures contract without control of the deliverable physical product”, which hasn’t happened in the past. The WSJ’s “Traders blamed for oil spike” discusses the same subject, and the debate continues.

And now for something different, in the Financial Times’ “A new type of investment is born to avoid volatility” Steve Johnson reports that on a new type of security that some call innovative and others call “smoke and mirrors”. Since the market crash, many investment trusts have been trading at very deep (40-60%) discounts to their NAVs. “An unlisted share class, always priced at NAV, offers a potential escape from this extreme volatility, which many in the industry believe is deterring some investors from even considering buying investment trusts specializing in more illiquid asset classes…(and)…shareholders will have the opportunity to switch repeatedly between the two share classes at monthly intervals…(and)…accounting rules allow investments that are intended to be held to maturity to be accounted for at face value. In Marwyn’s (the management company’s) view, this should only apply to securities that have a limited life…” (Hmm, I need to think about this a little longer.)

And finally,

I t is sad to see that the politicians who were elected to work in the interest of Canadians are instead focused at a shameful game of finger pointing at each other as described in McCarthy and Waldie’s Globe and Mail article “Pension liability clouds Nortel auction” . It is truly unbelievable!