blog30mar2008

Hot Off the Web
In “Dancing bears at your retirement party”  WSJ’s Tom Lauricella discusses the challenges faced by somebody considering imminent retirement in an environment of falling equity and real estate prices. He refers to “timing risk”, referring to the increased probability of running out of money during retirement if there is poor market performance during the first five years immediately after retirement. (You can explore the probability of outliving your assets using Jim Richmond’s Monte Carlo based planner that I have discussed before flexibleretirementplanner.com) Suggested remedial actions mentioned are: retire later, don’t cut back on your equity exposure in the hope of riding out the downdraft as it is virtually impossible to time the market for re-entry and not miss out on the gains, reduce your withdrawal rate until assets rebuild (and have fewer years left in retirement) and until a the probability of running out of money reduces to an acceptable level.
Jon Chevreau in financial Post’s “Barclays campaign will target Canada’s high fund MERs”  tells us to look out for upcoming campaign by Barclays targeting financial advisors and challenging some of the current Canadian industry practices: world’s highest MERs, value of “brand-name” funds, funds consistently underperforming the benchmarks, conflict of interest generated by the transaction and trailer fee based compensation, fee-based (rather than fee-only) compensation mechanisms.
In “Risk and reward: A guide to the ABCP mess” Rob Carrick of the Globe and Mail enumerates the four lessons to learn from the ABCP mess: (1) if you can’ afford to lose it, only buy safest investments, (2) advisor’s recommendation does not make the investment safe, (3) better check what cockroaches still lurking in your portfolio and (4) retail investors have no clout. In fact on his last point, about the retail investor having no clout, investor advocate Ken Kivenko of CanadianFundWatch.com sent me a note about John McCallum, Liberal finance critic, who is rallying support for hearings where the testimony of Canadian retail investors burnt by the ABCP fiasco can be heard. The objective is to take steps to minimize the current damage and prevent recurrence by means of appropriate government/regulatory action. The fragmented and ineffective Canadian financial regulatory structure combined with the dysfunctional dispute resolution system makes it difficult for a retail investor to get a fair hearing. Ken is preparing a submission and is encouraging others to do the same.
A topic related to ABCP’s, to the extent that investors in their reach for yield may be tempted to buy investment vehicles that they don’t understand or they don’t understand the true risk inherent in them, is in WSJ’s “Popular ‘reverse convertibles’ offer lucrative payouts but could cause steep losses”  Eleanor Laise introduces readers to ‘reverse convertibles’. When prevailing interest rates are 2-3% and somebody offers you 10-20% for the next 3-12 months, you must step back and ask “am I prepared to lose a significant portion of my investment” in order to get this yield? With ‘reverse convertibles’ if the stock price falls below a pre-specified trigger level, you will become the proud owner “beaten-down shares of stock instead of cash. If the stock is down 50%, for example, they get shares worth half of their original investment.” Watch out, even relatively sophisticated investors can fall into traps, given the almost daily “surprise” revelations from (financial) companies.
E.S. Browning in WSJ’s “Stocks tarnished by lost decade” reminds readers that in spite of the relentless rise of stock markets over the past 200 years, in the last 10 years the S&P 500 returned a meagre 1.3% a year once dividends and inflation are factored in. While it is not often to have 10 years of such underperformance, this usually occurs after a period when significant above average performance was sustained (as in stock market bubble of the 90s or real estate bubble of the past decade). Pessimists are not convinced the last 10 years of stock market underperformance is over, given current level of valuations.
As you are preparing to sit down and do your tax return, you may find interesting to read the Financial Post’s “Tax Centre FAQ”  It covers from tax changes, the budget, all the to maximizing retirement tax benefits and income splitting. The WSJ’s Brian Blackstone brought attention in “Household wealth rises as retirees age” to a recent research paper “Trajectory of Wealth in Retirement”  by Love, Palumbo and Smith who look for new insights in the spending habits and motivations of retirees as they move toward end of life. The authors develop a “new measure of household resources that converts total financial, nonfinancial, and annuitized assets into an expected annual amount of wealth per person. We use this measure, which we call “annualized comprehensive wealth,” to investigate spend-down behaviour among older households”. The authors conclude that while real household wealth declines as retirees age, the annualized real household wealth, when life expectancy is factored in actually increases. They then develop actual model that factor in retirees’ considerations of “uncertain longevity, uncertain medical expenses, and (for higher-income retirees) intended bequests” which then explain the observed behaviour of retirees. (Interesting results, though perhaps not surprising upon reflection. I’ll have to read the paper again to see how we can use this new metric and insight).
Globe and Mail’s Rob Carrick rightly asks who benefits from Manulife’s IncomePlus product in “Costly protection for retiring type” . Time and again when something sounds too good to be true, it usually is. Here is a product with a guaranteed withdrawal rate of 5% of the original investment, but then you can’t make much more either once you pay for the guarantee and other costs. The suggestion is that this may still have some merit for risk-averse investors. (While I haven’t read their voluminous disclosure documentation, I have read enough to know that Rob (and Tward and Mr. Rechtshaffen who are referred to) are 100% right. On the question that could this only make sense for ultraconservative investors, who would otherwise invest in GICs only or even for the fixed income portion of the asset allocation of an investor? Perhaps not even there, especially if inflation takes off and GIC rates follow, while you are stuck with a 5% guarantee).
And finally, William Hanley’s “(Banks get creative)- Snowbirds beware: Steep property taxes for Florida non-residents are driving some out of their winter gateways” exposes Florida’s ongoing discriminatory treatment of non-resident (non-homesteaded) property owners. Bill very perceptively notes that “Florida’s economy is driven by tourism in general and snowbirds in particular. It’s unfathomable why the state would treat so shabbily out-of-state residents who have helped to build the economy. But politics will always trump principle” and Governor Crist “is enormously popular in Florida. So, he can help pluck the snowbirds with impunity.” I must say the response was overwhelming. My inbox is in overload and so am I, trying to respond to the questions and comments that people have sent to me on Florida’s property taxes and retirement finance in general. Keep the mail coming, though it will take me some time to respond to all, especially since I’ll be on the road for the next 7-10 days. Those wanting to take some action on the Florida tax situation can do so by sending a petition to Maxime Bernier, Canada’s Foreign Affairs Minister (if Canadian) or to your respective AGs in your state (if Americans) and ask them to prepare or sponsor an Amicus Brief in support of the Constitutional challenge under way in Florida. You can get more information on petition text at browact.org .
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