Hot Off the Web- Aug 18, 2014

Contents: Keeping portfolio on-track, investor self-knowledge questions, vacation house a financial mistake, real estate ups Canadians’ wealth, 401(k) retirement complex screwing Americans, lower money velocity kept inflation in check-so far, preparing for parents’ loss of independence, brokers lure government retirees away from gold standard of 401(k) plans.

Personal Finance and Investments

In the WSJ’s “Keeping your portfolio on track, for the long term” Jonathan Clements writes that investors are mostly clueless about where markets are heading to next. He recommends three questions to ask yourself in or der to keep you on the straight and narrow: (1) what if any information/insights I have to think I can outsmart the market? (The honest answer for most would be an unqualified “none”), (2) “What can I confidently say about investing? (Diversify broadly to reduce chance that concentrated investment will seriously damage our portfolio, lowering costs/taxes allows us to keep the most of any gains), and (3) if you were starting today would you buy your current portfolio? (“Articulating your reasons for sitting tight may be enough to make you realize you ought to change.”)

In the WSJ’s “Investor, know yourself” Meir Statman suggests a quiz that will help investors figure out how their behavior influences their investment decisions: (1) what you’re prepared to lose to have a portfolio with a 50% chance to increase by 50%? (the lower your answer the more you want to avoid the pain of loss than the joy of gain), (2) Do bad choices bug you? (how badly you fear the regret that another choice in retrospect has resulted in a better outcome), (3) Think you can beat the world? (Few can beat the averages sustainably), (4) Attention to detail? (Conscientious people are better at saving), (5) Life of the party? (Extroverts are not introspective, take too much risk and don’t listen to others), (6) Generous spirit? (Don’t get conned) (7) A vivid imagination? (Open/idea-focused people are not detail oriented should be more conscientious to insure adequate savings) (8) A worrywart? (Fear and pessimism prevents you from having the portfolio necessary to achieve your retirement objectives)

Real Estate

 In Bloomberg’s “Bought a new vacation home? I am so sorry” Ben Steverman writes that vacation home buyers don’t understand what they are signing up to when they buy a vacation home. Vacation “properties are for family memories, not capital appreciation”; “There are also utilities, association fees and lots of taxes, all often high in resort areas. In South Carolina, beach town property taxes can be almost twice as high for non-residents as for residents (in Florida property taxes of 10x for non-residents compared to residents are also common.) Renting is not the solutions and it “means letting strangers into your dream house”. He concludes with: “A second home “fulfills a dream” and “gives you bragging rights,” he says. “If you’ve got the money, why not?””

In the Globe and Mail’s “Rise in asset values pushes up Canadians’ wealth” Janet McFarland reports that “Canadians saw their net worth climb by nearly 8 per cent last year as real estate and investment values soared, pushing average household wealth levels to a new high… the average household in Canada had total assets of $564,834 at the end of 2013 and average debt of $122,705, for average net worth of $442,130.” (I always struggle with wealth definition when real estate is a significant portion of the assets. Real estate can be a highly volatile asset and I have first-hand experience of feeling suddenly wealthier and smart when the Florida condo tripled in value, just before it dropped about 60%. The enjoyment of the condo is still the same; I just don’t feel as smart. Lesson is that you can’t “bank it’ until you sell it.)

Pensions and Retirement Income

In InvestmentNews’ “The 401(k) retirement complex: Retooling Americans’ nest egg” Jerry Schlichter writes that America’s retirement crisis is not because Americans haven’t saved enough but because they have been robbed blind but the “the 401(k) retirement complex… that has arguably damaged millions of Americans trying to save for retirement”. A combination of uninformed plan participants, opaque 401(k) plans, excessive fees for decades, overcomplicated investment options, egregious conflicts of interests such as fees “subsidizing employer expenses through workers’ 401(k) assets”. “The 401(k) retirement complex needs to retool itself so that it works primarily in the best interests of American savers. That has yet to happen, and that is the real crisis we face.”

Things to Ponder

In’s “Easy money policy= Inflation?” Larry Swedroe argues that despite all the predictions the outcome of easy money provided by the Fed under QE1, QE2 and QE3, has not resulted (so far) in high inflation. “While loose monetary policy—along with our massive budget deficits—does create the risk of (or potential for) rising inflation, it certainly isn’t a guarantee that rising inflation will occur… the velocity of money has been falling sharply, from 2.0 at the end of 2007 to 1.5 at the end of the second quarter of 2014. If velocity were to increase, the Fed would have to undo its bond buying program to shrink the monetary base and prevent inflation from becoming a problem. And that could put pressure on interest rates.” Japan’s deflation for the past 25 years is given as the most recent demonstration of how easy money and massive government deficits do not necessarily lead to inflation.

In the WSJ’s “When elderly parents lose their independence” Tom Lauricella discusses some of the right and wrong ways to approach the transition when “older adult needs to give up his or her independence”. It is always best to give older adults an opportunity to make their own choices”. So even the stage setting question should not come from “we want your input should we have to make a decision in case of an emergency” but instead “we want to do the best job carrying out your wishes”; the latter question is empowering the older adult to be in charge. Other topics discussed involve the type of residence/facility, what will be taken in the usually downsizing experience, how finances will be handled and who will execute the relocation.

An finally, in the “isn’t that sick?” category is Bloomberg’s Brokers Lure Soldiers Out of Low-Fee Federal Retirement Plan” John Hechinger reports that undercover investigation shows that “brokers were encouraging federal workers to ditch their top-flight retirement plan…(even though the) Thrift Savings Plan, (is) considered the gold standard of 401(k)-type programs for its rock-bottom fees. Yet all but one company told him to roll over all his money into individual retirement accounts. On average, stock funds charge almost 50 times more than the government plan…. Alicia Munnell, director of Boston College’s Center for Retirement Research, has some simple advice for anyone approached by a broker seeking to roll over money from the government plan: “Don’t move out. You can’t duplicate those fees anyplace else.””


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