Contents: What’s enough? 2013 money moves, “but where are the customers’ yachts”? making estate planning a priority, online vs. brick-and-mortar advice? deferred interest cards, US house prices up YoY, Toronto condo inventory up but number of under-construction skyscrapers highest in NA, model-based home appraisals deficient, demographics driven housing prices, consider an “expanded-CPP Plus”, ‘bogof’ (buy one, get one free’) pensions, struggle to protect Canadian pensions under bankruptcy continues, pension plan investments driven by “financial repression”, Spain dips into pension reserves, wealth grows even with aging population? Fed split on ending stimulus, “fiscal cliff” resolved but fiscal deficits continue, UK advisors now exclusively fee-only, Sauter investment philosophy, protecting your passwords.

Personal Finance and Investments

In the NYT’s “Sometimes, enough really is enough” Ben Graham is quoted on the difference between speculating and investing  “The speculator’s primary interest lies in anticipating and profiting from market fluctuations…The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.” “John Maynard Keynes, drew a similar distinction between investment or “forecasting the prospective yield of [an] asset over its whole life,” and speculation or “forecasting the psychology of the markets.” On the subject of ‘enough’, a story is told about the novelist Joseph Heller who, at a lavish party on Shelter Island, N.Y., was ribbed by another guest, author Kurt Vonnegut, that their host had probably made more money in a day than all the money Mr. Heller had earned from his best-seller, “Catch-22.”  Mr. Heller’s retort: “I’ve got something he can never have…enough.”

In the WSJ’s “Six money moves you should make in 2013” Brett Arends’s smart money moves include: calculating your retirement savings goal by multiplying by 20 your current income less your expected Social Security benefits, putting $5,500 into a Roth IRA, cut back (out) restaurant meals and cable/cell-phone bills drastically, and imagine that you are dead (do you have adequate life/disability insurance, do you have a will and is it up to date)

The Economist’s Rich managers, poor clients reports that “Over the past ten years, hedge-fund managers have underperformed not just the stock market, but inflation as well. After fees, investors in the average hedge fund have received a return of just 17%…Investors have paid too much for hedge-fund expertise. Better to focus on low costs than star fund managers.” The article makes the (usual) valid reasons for this poor performance: the massive growth of the hedge fund industry coupled with their high fees makes outperformance very difficult, and while there are always some who outperform “there is no reliable way of identifying them in advance, and past performance is a poor guide to future returns”. The article concludes that the best approach is using low-cost broadly diversified ETFs. While this is not an exciting strategy  “it will mean that more of their money stays in their own pockets, and less goes to buy other people’s mansions in Mayfair and the Hamptons.”

In the Financial Post’s “Why you should make estate planning a priority in 2013” Leanne Kaufman lists some of the serious collateral damage associated with failure to make estate planning a priority. Some of the common problems mentioned are: ignoring “effect of second (or subsequent) marriage”, “failure to understand the impact of separation/divorce”, “failing to reconcile a will with beneficiary designations” on RRSP/RRIF/TFSA and life insurance policies, impact of joint accounts.

In BloombergBusinessweek’s “Financial planners: On-line vs. bricks and mortar” Sam Grobart compares the cost and value derived from some online financial planning offerings (e.g. NestWise) with a fee-only brick-and-mortar financial planner. His conclusion is that for average families “Online services like NestWise may not provide as much of the handholding as traditional advisers, but many of us may not need it.” (Though it is not clear that it is an apple-to-apple comparison especially when it appears that the online planner also has a 1% “investment solutions” offering as one of the options)

In the WSJ’s “Consumers warned on deferred-interest cards”  Andrew Johnson warns that  “The deferred-interest credit cards offered by those (Apple, Walmart, Office Depot, Home Depot)  stores allow customers to pay for purchases interest-free for a set period. But borrowers who fail to pay off their initial purchases in full by the end of the promotional period must pay interest on the original amount that they charged—even the parts they have already paid off.” Among the worst offenders mentioned in the article are Apple and Amazon.

Real Estate

According to the just released October 2012 S&P/Case-Shiller Home Price Indices “The 10- and 20-City Composites recorded respective annual returns of +3.4% and +4.3% … Chicago and New York were the only two cities with negative annual returns in October… The October monthly numbers were weaker than September as 12 cities saw prices drop compared to seven the month before… Annual rates of change in home prices are a better indicator of the performance of the housing market than the month-over-month changes because home prices tend to be lower in fall and winter than in spring and summer… Looking over this report, and considering other data on housing starts and sales, it is clear that the housing recovery is gathering strength… One indication of the rebound is the gains from the bottom. The largest rebound is 24.2% in Detroit even though prices there are still about 20% lower than 12 years ago. San Francisco and Phoenix have also rebounded from recent lows by 22.5% and 22.1%…”

In the Financial Post’s “Is Toronto’s condo market at a crossroads? Mega-projects, towers flood city despite growing worries” Russ Blinch reports that “The Bank of Canada noted that the number of unsold condominiums in pre-construction has doubled, to 14,000, over the past year. Greater Toronto home sales have slowed after years of steady increases. Sales fell 16% in November from the same month a year ago, according to the Toronto Real East Board. So far, however, prices are flattening, not falling, as some analysts have predicted… More skyscrapers — 147 of them — are being built in Toronto than anywhere in North America…That is twice as many as in New York, a city with about three times the population.”

In the Globe and Mail’s “Shaky foundations: How Ottawa’s computers get Canadian home prices wrong” Robertson and Perkins discuss how Canadian banks used First American Financial to protect themselves against the risk associated with giving mortgages on model-based home appraisals rather than human appraisers and how FAF had to pay for losses. It turned out that with model-based appraisals when banks had to foreclose, the “homes turned out to be worth much less than believed.” “There are worries that the true worth of Canadians’ homes could be lower than what computerized methods spit out. There are also worries that unscrupulous human appraisers can manipulate home values. Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors. But the days of steady gains in real estate are gone…the banking regulator, OSFI, is concerned about the “relaxation of valuation policies” by the banks, as automated appraisals have come to dominate… It also concerns the bank regulator as well as industry members that automated programs do not examine the particulars of a home – such as an aging foundation or lack of upkeep.” The model-based appraisals are even more problematic upon refinancing which doesn’t even have the checks-and-balances of an actual transaction between a buyer and a seller. The article also discusses problems with human appraisals, including requests for specific appraised values.

In the Globe and Mail’s “Why housing prices aren’t coming back” George Athanassakos argues that “The evidence suggests that an increase in the proportion of people in their prime working years, between 20 and 64, has a positive effect on housing and real estate returns. The opposite is the case when the share of population that is younger than 20 or older than 64 increases.” He has an interesting graph which shows what he calls “a perfectly negative relationship – as the (population) ratio has fallen, home prices have shot up. That is just what you would expect.” He defines the population ratio as the ratio of people in their non-working years (<20 and >64) to people in their working years (between 20 and 65). He then concludes that “a perfect storm is coming in the housing market. Canada will experience significant “secular,” or long-term, decline in house prices starting around 2015, when the population ratio is about to turn upward based on Statistics Canada projections.” (See also the first article discussed in the Things to Ponder section below, on a related topic.)

Pensions

With the re-emergence of the expanded-CPP as an item on Canadian finance ministers’ pension reform agenda, in my new blog “Expanded-CPP Plus” I explore how a suitably expanded-CPP can in fact be a workable foundation for Canada’s pension reform, but only of it is expanded in more dimensions than current proposals contemplate.

In the Financial Times’ “Bogof- the easy way to fairer pensions” Neil Collins explores a new approach to financial incentives to save for retirement. Rather than the current tax incentives benefiting those with the highest incomes, a new proposal has been tabled in the UK based on ‘bogof’ (buy one, get one free), “where every pound saved into a special account is matched by a pound from the state, with every adult under 65 eligible to contribute, regardless of whether they are working… (this) shifts incentives on the lower paid”. To contain the cost, a cap might be required. (Very interesting idea, this not only shifts the benefit more equally across income groups but also extends them to those who do not have employment based income, like homemakers and care-givers.)

For those interested in the struggle to protect the already earned pension benefits of employees/pensioners when their employer declares bankruptcy with an underfunded DB pension plan, CARP Action’s “Uphill Battle – Protecting Retirees in Bankrupt and Under-Funded Pension Plans” reviews the history of the attempts to remedy this injustice by trying to raise the priority of pension plan shortfall in bankruptcy claims.

In the Globe and Mail’s “The great pension shift: Goodbye safe, dull government bonds” Silcoff, Mckenna and Curry discuss the challenges faces by Canadian DB pension plans struggling under the tyranny of the low-interest rate driven “financial repression”. The same challenges are faced by retiring or already in retirement individuals who have to build retirement nest-eggs almost double the size of that needed about a decade ago due to low interest rates and lower expected returns.

In WSJ’s “Spain drains fund backing pensions”  David Roman reports that Spain has been using its “Social Security Reserve Fund as a buyer of last resort for Spanish government bonds, raising questions about the fund’s role as a guarantor of future pension payouts”. The $65B fund is now 90% invested in Spanish government bonds compared to about 20% in 2005. Furthermore “In November, the government withdrew €4 billion from the reserve fund to pay pensions, the second time in history it had withdrawn cash. The first time was in September, when it took €3 billion to cover unspecified treasury needs.” This does not bode well for future borrowing capacity of the Spanish government or the security of Spain’s pensioners. (Some might also consider this a warning sign against putting too many eggs in one basket that has the potential to have investment policy “directed” by government. See also the Economist Buttonwood’s just out “Make it so”)

Things to Ponder

In the Economist’s “Getting old and getting rich” Buttonwood disputes Lawrence Siegel’s optimistic argument in the latest issue of the Financial Analysts Journal that humanity’s health and wealth will continue to improve in the future as it has done over the past 200 years and  “the prospect of a stable or even declining human population as wonderful news for the planet, making it much easier to solve environmental and resource problems and enabling greater per capital wealth and income to be achieved than would otherwise be possible”. However, Buttonwood provides a number of counter-arguments including Japan’s “GDP has been in the doldrums”, Japanese stock and property markets are well below their peaks which happened to have coincided with the peak of working population in Japan and others.

Tom Stoukas in Bloomberg’s “European stocks fall as Fed considers cutting stimulus” reports that “The Federal Open Market Committee minutes, released yesterday in Washington, showed a split on how long the bond purchases should last. Participants who provided estimates were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those in favor of continuing beyond that time.”

On the subject of the avoidance rather than resolution of the “fiscal cliff”, in the Financial Times’ “US has been let down by its leadership” Nouriel Roubini writes that “A deal that extends unsustainable tax cuts for 98% of Americans is no victory…” The fight will continue soon on tax reform alternatives such as: VAT, flat-tax, higher/lower income taxes, etc. The announced tax changes and some likely spending cuts will have a cumulative effect of about 1.4% drag on US growth rate; this will reduce the already anemic 2% or so US growth rate to close to zero in 2013. “Large fiscal deficits will remain the norm for the next few years, at least so long as the bond market remains quiet…” Roubini’s bottom line is that “the “mini deal” on the fiscal cliff dodged all the important questions”.The WSJ’s “Details of tax law changes spelled out” indicates that there will be an immediate lapse of the Social Security tax decrease from 6.2% to 4.2%, those earning in excess of $400,000  will see a tax rate increase to 39.5% and capital gains tax increase from 15% to 20%, estate tax exemption will stay unchanged at $5,000,000. The Economist’s  “Short-term relief, and little else”  points out that “The main elements of the fiscal cliff were the expiring Bush tax cuts; expiring extended unemployment insurance benefits; an expiring payroll tax cut; automatic spending cuts worth $110 billion per year, spread equally across defence and domestic programmes (called a sequester); and the debt ceiling, the statutory limit on how much the Treasury must borrow, which was reached on Monday. The current deal covers only the Bush tax cuts and enhanced unemployment-insurance benefits, which will continue for one more year. The payroll-tax cut will expire as scheduled, sapping workers’ purchasing power by roughly $1,000 each. Together with the higher taxes on the rich, that will impose a significant fiscal drag on the still-fragile recovery early in 2013.” MarketWatch’s “Cliff deal spares retirees- for now” indicates that Social Security and Medicare have (except for some minor “technical adjustments”) essentially remained unchanged in any way which might slow their growth.

The Financial Times’ “UK financial advisors- not free at last” looks at the changes that took effect in the UK this week whereby  advisers are now restricted to charging fees directly to consumers; commissions have been banned. The article points out that people who thought that the financial advice they received was free are about to undergo some painful transition. The transition will also be painful to managers of active funds who generally can’t even cover their fees with the excess returns with which they try to beat the indexes.

In an IndexUniverse interview “Retiring Vanguard CIO Gus Sauter looks back” Vanguard’s retiring CIO gives his core investment philosophy as: create a long-term strategic plan and stick to it, ”maintain broad diversification”, “maintain exposure to low-cost investments”.

And finally, in MarketWatch’s “Hacker-proof your password” Jennifer Waters discusses our challenges of generating (and remembering) passwords which might give us better protection against hackers. The article looks at the need for “better” passwords and different passwords for different sites. Some advocate developing “…a system to compartmentalize them. Think of a story — say, a situation or an experience that is unforgettable — and come up with three or more words to describe it…. but mix it up with a code… Use different stories for different groups of accounts.” Eventually we’ll have “one-time password that comes to a keychain or fob plus your own password or biometric for authentication.”