Hot Off the Web– June 29, 2010

Personal Finance and Investments

David Aston in’s “Retirement Home 2.0” looks a the cost and range of available public and private senior care options, from retirement homes to nursing homes depending on the level of care one needs/wants. The article includes a box on whether one might or might not need long-term care insurance (LTCI) to pay for one’s stay at such facilities. He quotes my views and that I wouldn’t buy LTCI for myself due to high costs, high load factors, and difficulty in qualifying for benefits until one is very frail; the superior option for many Canadians might be to self-insure (for more details see Long-Term Care Insurance (LTCI-II)- Musings on the Affordability, Need and Value: A (More) Quantitative View) He also provides a useful link to for those looking for retirement residences in different Canadian communities. (The Summer 2010 issue of Money Sense is available now at newsstands and should be available online at MoneySense.cain a few weeks.)

David Berman in the Globe and Mail’s “Divided dividends” warns investors that that should not assume that similar sounding ETFs focused on dividend paying stocks are necessarily the same, and one must pay attention to what’s inside the funds. The examples given are iShares XDV and Claymore’s CDZ on the on Canada’s TSE. The former has 61% financial and 7% energy allocation, while the latter has a corresponding 35% and 22% to same sectors.

In the Financial Post’s “A good annuity strategy can help you beat inflation” Jonathan Chevreau discusses immediate annuities with and without inflation indexing, if you do annuitize you should annuitize registered rather than non-registered assets and the tax advantages of “prescribed” annuities when using non-registered funds (“smooth out ratio of interest and return of capital”). He also mentions that most of the few Canadian life insurance companies which offer them, when they say “indexed annuities” they don’t mean inflation indexed annuities, but annuities which increase by a constant annual percent, independent of the actual inflation; also an indexed annuity starts with a significantly lower annual payout. The example given is “A couple aged 62 with $175,000 in an RRSP, with no guarantee period, would receive $525 a month for life (or 3.6% annually). But a comparable regular un-indexed annuity generates a much heftier $826 a month (or 5.66% annually).”  (Nothing has changed in my view. Annuities are a very expensive way to decumulate one’s assets in retirement (but better than GMWBs), except for the most conservative investors. A well thought out systematic withdrawal plan, especially with pure longevity insurance when it finally arrives to Canada, is far superior approach for more retirees. See for example GMWB II and Annuity I, Annuity II, Annuity III, Annuity IV)

In Forbes’s “Five myths about asset allocation” Richard Ferri lists five asset allocation myths such as: it protects from bear, tactical asset allocation is preferred during high volatility, there is an optimal strategic asset allocation(what’s really most important is the stock/bond allocation), you need to rebalance continuously and more funds mean better diversification. (Referred to by Rob Carrick’s Personal Finance Reader)

WSJ’s Kelly Greene in “Beyond estate planning: Bankers tackle elder care” reports that many banks and trust companies are helping “older clients sort out medical bills, hire in-home care or even manage the sale of a home. Wells Fargo’s “Elder Services”, Bessemer Trust’s “health advisory” and Merrill Lynch’s “Stand Ready” services are mentioned as offering these types of services to wealthier clients. (Clearly sounds like a useful addition to financial services offered, and a great way to attract and keep clients.)

Tom Bradley in the Globe and Mail’s “Morningstar research doesn’t get respect it deserves”looks at Morningstar’s new “Stewardship Grades”. “Stewardship, which is the degree to which mutual fund companies’ interests are aligned with their unit-holders, is subjective and tough to measure, but it plays an important role in selecting an investment manager. There are four components to the grading system – corporate culture, manager incentives, fees and regulatory history.” “With respect to culture, they attempt to answer the following questions. Does the company have a thoughtful, repeatable investment process? Does it offer clear, pertinent disclosure? Is it a responsible marketer? And the biggie, do talented managers spend much or all of their careers at the firm? In the manager incentives category, they assess whether fund managers are invested alongside the clients and the degree to which they are rewarded for long-term returns (as opposed to asset growth and short-term numbers).” Bradley explains why these are more important than the usually doled out useless information on “economic forecasts and market projections, all of which have little impact on portfolio returns. They’re shown fund comparisons based on year-to-date and one-year performance, which are totally random and of no use to anyone.” (Very well put!)

In the Financial Times’ “The fine art of portfolio rebalancing” Jonathan Davis reports on a new research report from Vanguard comparing different rebalancing strategies (frequency of and trigger for rebalancing) based on U.S. stock and bond prices from 1926 to now. Highest return, accompanied by high volatility, resulted with no rebalancing of an original 60/40 stock/bond portfolio. Monthly rebalancing resulted in 8.4% return. “The Vanguard study confirms that a formal rebalancing discipline would have proved beneficial in forcing investors to go back into equities during all the worst equity market falls of the past century.” “…the most surprising finding of the research is how little difference changing the frequency or the trigger for rebalancing seems to make to portfolio characteristics. The annualized returns and volatility of a 60/40 portfolio turn out to have been similar historically whether it is rebalanced monthly, quarterly or annually. Similarly the risk and return figures do not change much if the threshold for portfolio changes is reduced to a 1 per cent deviation from target, or increased to 10 per cent.” They conclude that the frequent rebalancing results in a cost burden and annual or semi-annual frequency gives the best balance “between portfolio efficiency and cost minimization, and that anything more frequent adds little additional value.”

Steve Johnson in the Financial Times’ “Investment industry set for big shift into passive management”reports that “The investment industry is set for a “massive rebalancing” from active to passive fund management as disillusionment about the ability of active managers to beat benchmark indices persists, according to an authoritative report.” And the corollary of this will be that “If this flow materializes then within three to five years the process will begin to reverse because there will be too many opportunities outside the indices. Far from active management suffering an ice age, soon people will get out of passive and into active again.” “Great stock pickers will have a field day. Paradoxically active management will prosper as passives become more popular.” (I always wondered what would happen if everyone suddenly indexed…interesting thoughts.)

Leslie Scism in WSJ’s “Regulators rein in murky life policies” discusses the fraud associated with Stranger-Originated Life Insurance “controversial policies that older people take out and then sell to investors. The investors pay the premiums and collect proceeds when the original owner dies.” “The practice was legal in many states during the prior decade, though disliked by regulators because it skirted the intent of “insurable interest” laws. Those laws prohibit taking out a policy on someone without having a stake in the person’s well-being.”

Real Estate

The April  were released today. The indices “improved…(but) home prices do not yet show signs of sustained recovery”. The 10 and 20 city indices increased over last year by about 4%, but prices are still close to the April 2009 lows and the indices are 33% below the 2006 peak. All but 2 of the 20 cities in the index showed month-over-month increases in April except for New York and Miami. S&P Case-Shiller Home Price Indices“Other housing data confirm the large impact, and likely near-future pullback, of the federal program. Recently released data for May 2010 show sharp declines in existing and new home sales and housing starts. Inventory data and foreclosure activity have not shown any signs of improvement. Consistent and sustained boosts to economic growth from housing may have to wait to next year. ”

James Hagerty in WSJ’s “Outlook for home prices looks darker” reports that “Since April 30, new purchase contracts have plunged as buyers no longer have the incentive of a federal tax break, builders and real estate agents say. Lawrence Yun, chief economist for the Realtors, estimated that contracts signed in May were 10% to 15% below the weak level of a year earlier.” And the Economist’s “Falling again” suggests that “There is little mystery to what’s happening. Inventory levels remain high because of overbuilding and months’ worth of record foreclosure levels. Millions of homeowners are underwater while the unemployment rate remains near 10%. The tax credit changed none of those fundamentals. And Americans are now left wondering when housing’s second dip will find its bottom and real recovery begins.”

On the Florida real estate front Michael Braga in Herald Tribune’s “Investors dominate housing market in Sarasota area” reports that “More than 1,000 single-family homes changed hands for the second month in a row, a pace not matched since the boom year of 2005. Sales have not declined in the market since June 2009. The median sales price in Sarasota-Bradenton rose to $166,400, a 6 percent increase from a year ago and up 1.7 percent from April, according to an analysis of data released Tuesday by Florida Realtors, the former Florida Association of Realtors. The Palm Beach Post’s Kimberly Miller in “Existing home sales in Palm Beach County up 20% over last year”indicates 20% increase in single family home sales over May 2009, but volume is still 33% lower than May 2005; median prices at $235,200 are within 1% of previous year’s level. However a significant proportion of the sales are short-sales and foreclosures.

In Herald Tribune’s “Florida’s population growth hits wall” Antony Cormier reports “that no Florida city with more than 100,000 people ranked in the country’s top 75 for growth last year. It represents a stunning reversal in the state’s recent demographic history and signals the challenges Florida faces trying to rebuild a growth-based economy when growth is largely absent.” “The state has always appealed to three groups: retirees who came in search of fair weather; people in their 20s, 30s and 40s looking for jobs; and immigrants from Mexico and other nations…” There are fewer retirees coming due to difficulties in selling their homes up north and there are fewer young people coming due to limited job opportunities, but “immigration (“from Mexico and other nations”) continues to be the area fuelling what growth Florida is getting.”


In the Globe and Mail’s “Your company pension plan: Demand a great deal” Ted Rechtshaffen suggests that Canadians who have company group RRSP and/or   other DC plans need to understand if they have a good deal. If not, they should start pushing their employer to secure a better deal (better fund selection and lower costs). The key issues that need to be looked at according to him are: fees, investment options, performance against other options, guidance received, and can you move out of the plans once company match has been secured or you are locked in?

On the Nortel pension front the NewsObserver in “Nortel wants to dump retirees” reports that in the U.S. Nortel “has asked a federal court to terminate insurance coverage for more than 4000 retirees and dependents”, while in Canada The Citizen’s Bert Hill reports that “Former Nortel Networks employees and other creditors in Canada will have to wait longer to file claims for unpaid severance, lost supplementary pensions and unpaid bills in the 17-month-old bankruptcy proceedings” in “Nortel creditors face another delay over process”. Canadian creditors appear to continue to be at the mercy of the U.S. bankruptcy a court which seems to drive the entire process, no doubt in the ultimate interest of U.S. creditors. (I guess nothing has changed since the bankruptcy proceedings have started, neither the Ontario court nor the federal or provincial governments are willing or able to insure that Canadian pensioners get a fair shake out of these proceedings)

In a sign of things to come The Guardian’s “Retirement age rise plan attacked by charities and unions”reports that in the U.K. “The state pension age for men is now due to rise from 65 to 66 from 2016, and to 68 by 2046. Women will move to a state pension age of 66 a few years after men.”

And a really interesting article in the Juneau Empire by Pat Forgey entitled “Alaska’s pension suit settled for $500M” where it is reported that the state of Alaska had “won a record actuarial malpractice settlement from a consulting firm they say knowingly gave bad advice to the Alaska Retirement Management Board, costing the state billions.” The settlement secures a payment of $500M from “Mercer, the actuarial consulting subsidiary of Marsh & McLennan”. (This is part of the same Mercer group of actuaries who were and still are Nortel’s pension plan actuaries. This suggests that there may be an opportunity to closely examine Mercer’s share of responsibility for the Nortel pension disaster (as I suggested earlier in Systemic Failure in Canada’s Private Pensions: Who could have prevented it? What could be done now? ); my guess is that it wouldn’t be difficult to find “actuarial malpractice” resulting in minimization/elimination of pension plan contributions by means of very aggressive actuarial assumptions.) (Article sourced from Dan Braniff leader of the Common Front for Retirement Security.)

Things to Ponder

A couple of WSJ articles attempt to summarize the U.S. finance legislation in “How changes could affect you”   and “Consumers get a watchdog agency”. The changes include: a consumer-protection agency with authority to “deal with unfair, abusive and deceptive practices” retail financial products, deposit insurance of $250,000 became permanent, stricter mortgage origination rules, cash discounts may be provided by retailers when used instead of credit/debit card payment, SEC instructed to “study whether a “fiduciary” standard—requiring stockbrokers, financial planners and insurance agents to put their clients’ interests first—is appropriate.” (It should require too much study; fiduciary model is the right one when dealing with other people’s investments.) (Things are not better as far as protection of Canadians against financial industry practices, so hopefully the Canadian government will follow in the footsteps of the U.S. to increase protection.)

Chaya Cooperberg in the Globe and Mail’s “Why you shouldn’t retire early” reports that “It’s time to retire retirement, argued Ken Dychtwald, a gerontologist and psychologist, in a NY Times blogearlier this year. (He) believes that as life expectancy rises, seniors have good reasons to stay in the workforce.” She concludes with “The era of people seeing retirement as their birthright – as an entitlement – is coming to an end, Mr. Dychtwald predicts. “In the years to come, we will see more older men and women starting their engines and jumping back into the work force, and maybe even having the most productive years of their lives.” “Seeing one’s retirement savings shrink is depressing, to be sure, but it may be time to rethink what retirement will look like for most of us.“

In the Financial Times, James Mackintosh discusses “The risk premium”. “This is often called the most important number in finance. It is also the most elusive. Theoretically, it is the amount of equity investors need to earn above the “risk-free rate” (government bonds, although it is stretching English to call them risk-free) to compensate for the dangers of owning shares. The higher the rate, the cheaper shares need to be now to provide this reward in future.” The author argues that the risk premium should be higher (and therefore share prices lower) than in pre-Lehman times because “developed world governments have used up their firepower” and “further stimulus packages are out of the question”. Since “…every 0.2 percentage point increase equal to about 100 points off the S&P500 on a simple dividend discount model, any increase is bad news.”

And finally, Martin Wolf in the Financial Times’ “Why it is right for central banks to keep printing” argues that while “The conventional wisdom is that a strong and co-ordinated structural fiscal contraction, focused on spending, will promote the growth of a thousand private blooms. I hope this will prove true. But I doubt it. Governments should hurry slowly. If they all hurry quickly, they – and we – may regret it nearly as soon.” (If Mr. Wolf is right G20 leaders should hurry slowly on executing some of their resolutions.)


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