Contents: Clements: financial beliefs (you can build on), DIYs: advisors needed? “daily money manager”, fund managers going the way of the horse-and-buggy? Canadian investors must diversify, human-assisted robo-advisors in Canada, US home price increases slowing, global retirement savings shortfall: $100T? Target-date glide-paths a trade-off between lifetime income and risk of capital loss, hedge funds: getting the same return with higher risk and lower liquidity/transparency is no great deal, 401(k)/IRAs: identifying hidden fees, coming price war in investment advice, reducing portfolio volatility: low-volatility funds or just reduce stock allocation? P/E ratios not all the same, Shiller’s CAPE: pros & cons.

Personal Finance and Investments

All should pay attention to Jonathan Clements list of 13 financial beliefs in the WSJ’s “Financial beliefs you might not like”. Among them are: (1) focus on investment cost, taxes and risk (asset allocation) since you like everyone else have no idea on where the market is going, (2) investing in actively managed funds is a triumph of hope over reality, (3) “insurance is waste of money- if you’re lucky” at least for losses that you could afford to pay for, (4) home is not an investment-i.e. you won’t make money on it, (5) paying mortgage off is a great low risk investment”, (6) forget about budgeting, just “make sure you save enough every month” (i.e. pay yourself first), and save at least 10% of your income, and many more on the likes of credit card debt, matching employer contributions, etc (Well worth reading.)

In Reuters’ “How investment advisers can win DIY clients” Hilary Johnson quotes a financial advisor on what drives DIYs to advisers: “when they’ve made a disastrous investment, or when they have a health scare, and they realize there’s no co-pilot aboard”, a holistic financial picture including “wills and trusts, and life insurance”, The article also quotes advisors suggesting that “inside every self-directed investor is a client who needs an adviser”. But I just received a couple of great quotes this week on the subject suggesting otherwise: (1) from Bert Hill (previously on the high-tech beat of the Ottawa Citizen) referring to Shakespeare’s Much Ado About Nothing recommending “Let every eye negotiate for itself/ And trust no agent”  and another one from (Fund Observer’s) Ken Kivenko referring to Dilbert creator Scott Adams in which he opines that “…in many cases the biggest risk to the personal investor is the individual giving them the advice…”.  (I don’t agree that advisors are necessarily a threat or that everyone needs an advisor, but some people do and when they get one it should be for the right reasons (active portfolio management is not one of them) and advice should be on the basis of a fiduciary level of care. If/when a DIY investor notices early signs of deteriorating ability to make financial decisions, and spouse is unable/unwilling to step in to manage financial matters then it is certainly time to get an adviser, under the appropriate supervision; you recall President Ronald Reagan advice: trust but verify! )

In the Globe and Mail’s “When your aging parents need a daily money manager” Lewis Braham discusses the sad circumstances when elderly parents don’t recognize when they are exposed to scams, don’t remember their passwords to financial records, or forget to pay their bills. Often children and family are too far away or are too busy to assume responsibility to manage parents’ financial and other day to day needs, but the article notes that professional help is available in such cases: CPAs who are prepared to step in as a “daily money manager…(who) receives her clients’ mail, pays their bills, balances their check books and helps them keep to a budget if they are on a fixed income.”  The article notes the existence of the unregulated “American Association of Daily Money Managers (AADMM) (http://www.aadmm.com/default.htm), the profession’s primary trade group, has only about 700 members nationwide.” So care must be taken with the selection and monitoring of such managers, including limiting access to only the pool of funds necessary to meet near-term client expenses. When “health, long-term care or other complex issues become part of the mix, (other/more) expertise may essential. Cost of managers is typically $90-150/hour depending on location and services covered.

In the WSJ MoneyBeat’s “The decline and fall of fund managers” Jason Zweig writes that “Active fund management is outmoded, and a lot of stock pickers are going to have to find something else to do for a living.” Veteran financial insider (and author of the must read “Winning the loser’s game”) Charles Ellis notes that the debate of active vs. passive is over! The reasons given are: growing market efficiency, the importance of low-cost for best outcomes, even though some managers will outperform due to skill or luck. Investment in passive funds is now at 28% of total fund assets compared jut 9% in 2000. He suggests that many surplus portfolio managers will find work in financial planning. You can read Ellis’ CFA Institute Financial Analysts Journal article at “The rise and fall of performance investing”. (I also discussed Charles Ellis’ article in the August 11, 20014 “Hot Off the web”) On the same subject you can read MarketWatch’s “Passive investing will keep gaining ground” where Victor Reklaitis interviews a member of vanguard’s investment strategy group a number of active vs. passive questions such as: are we heading to everyone indexing eventually? (No due to profit motive.) Reasons why some wouldn’t want to index? (Desire to outperform peers, tax advantages of portfolio of individual securities.)

In the Financial Post’s “Don’t double-double on Canadian stocks- take a global balanced approach” Martin Pelletier warns readers not to chase recent Canadian markets’ outperformance of US ones as it exposes them heavy exposure to financial services and their inherent risk which comes with their Canadian customers’ “household debt to disposable income has now reached an all-time high at 165% and is continuing to expand at an alarming pace”.

In the Financial Post’s “Robo-advisors bring low fees, ‘light advice’, to Canada” Jonathan Chevreau reports on the (impending) arrival robo-advisor-like (e.g. WealthFront) low-cost automated investment management services using a passive ETF-based implementation intended to deliver asset allocations matching investors’ financial objectives with automatic rebalancing. He mentions NestWealth.com, WealthSimple and SmartMoneyInvest.ca which appear to fit more into the ‘light-advice’ rather than ‘robo-advice’ service level somewhere in-between full automation and full human adviser level with somewhat higher fees as well.

Real Estate

The just released June 2014 S&P Case-Shiller Home Price Index is accompanied by a great table on How the Cities Did June 2014 which shows current/peak/through house price levels as well as peak-to-through, peak-to-current and recovery-from-lows percentages. The index report entitled  Widespread slowdown in home price gains indicates  “sustained slowdown in price increases” with National index up 6.2%, and 10- and 20- City Composites up 8.1% over the previous 12 months and “Every city saw its year-over-year return worsen”. The monthly increase of the National index was 0.9%, while the 10- and 20- City Composites increased 1.0%. “The Sun Belt cities – Las Vegas, Phoenix, Miami and Tampa – all remain a third or more below their peak prices set almost a decade ago.”

Pensions and Retirement Income

In a CFA Institute blog contribution David Larrabee reviews/discusses some of Richard Marin’s concerns about the “Global pension crisis” . Some of Marin’s concerns are: $100T in global retirement savings shortfall, deteriorating old-age dependency ratios, higher taxes will be a given, France/Germany/Japan with “pension liabilities in excess of annual GDP and even the US with shortfall about 50% of GDP. In addition to higher taxes there will be higher retirement ages, continued phase-out of DB plans and even privatization of many public pension systems.

In CFA Institute Investment Risk and Performance’s “Evaluating target-date glide paths for defined contribution plans” Fullmer and Tzitzouris writes that target-date glide “requires a compromise between the competing goals of (1) generating an adequate level of lifetime income consistently over the course of retirement and (2) limiting the risk of capital loss near and during retirement, which is particularly important for participants who withdraw balances over shorter horizons”. DC plan sponsors with similar participant demographics might subjectively choose higher or lower equity glide-path due to sponsor’s preference for preference for higher income replacement rate vs. more stable account balances. In their paper they define a “potential” for each goal to examine the trade-off between the two competing goals. “Because no single glide path can simultaneously satisfy both goals optimally, a compromise is required.” (…much like in the case in selecting the risk tolerance of individuals’ asset allocation)

In ETF.com’s “Nails in the hedge fund coffin” Larry Swedroe writes that following the 1%/year loss for the S&P 500 in the 2000-2009 period, many pension plans dialed up risk and turned to private equity and hedge funds. “…it seems such efforts have only worsened the situation. The only winners are the purveyors of such alternative investment vehicles, who earn much higher fees than those charged by passively managed funds—for example, index mutual funds and ETFs—invested in publicly available securities.” He then brings examples of pension funds’ experiences such as: NYCERS. CalPERS, LA fire and police pension plan, etc. Even when performance is similar comparing the two outcomes is an apples to oranges comparison, because when one invests in private equity and hedge fund one forgoes: safety of “largest and strongest companies” “liquidity, transparency, broad diversification, daily pricing and, for individuals, the ability to harvest losses for tax purposes”, as well as one assumes much greater volatility. So getting the same return for higher risk, lower liquidity and transparency doesn’t sound like a great deal; so individual investors should stay away.

TechCrunch’s “FeeX Raises $6.5M Series B To Identify Hidden Fees In Users’ Retirement Accounts” reports that “FeeX uses algorithms to identify and reduce hidden advisory, investment, and expense ratio fees in investment and retirement accounts, including IRA, 401(k), 403(b), 457, and brokerage accounts. The startup claims that fees can claim a third or more of the funds in a retirement savings plan and that the average American household ends up paying $155,000 in hidden 401(k) fees over the lifetime of the account.” (Thanks to MB for referring.)

Things to Ponder

In the NYT’s “An emerging price war in the world of investment advice” Ron Lieber takes the readers through the coming opportunities for investors in accessing low-cost advice. Right now the costs at Fidelity, BlackRock and Merrill charge of the order of 1% of assets, whereas the robo-advisors charge 0.15-0.5%. Charles Schwab is planning to announce a new service in this space shortly. “In some ways, the future has already arrived. Even before we know what Schwab will do, Vanguard, in its Personal Advisor Services offering, recently began providing investment advice and financial planning for just a 0.3 percent annual fee.” Lieber adds a note of caution when he writes that “Brands also matter plenty when it comes to where people store their life savings. It remains to be seen how many people will trust new companies and their software to control their money. The start-ups are betting that younger adults raised on technology will have plenty of confidence.”

In the WSJ’s  “Strategies for a smoother ride in stocks” John Wasik reports that investors have been pouring money into “low volatility” funds which “assemble a portfolio of stocks that have been less vulnerable to big price moves…(but) By reducing stockholdings and holding cash instead…investors can get similar protection in a market downturn and have money set aside to plow back into stocks when conditions are more favorable.” Low-volatility funds are more expensive, usually tilted to a couple of sector (e.g. utilities, financials and healthcare).

In ETF.com’s “Why ETF P/E ratios lie” Dave Nadig discusses the need to understand the numbers behind the numbers, when he discusses different ways that people calculate ETF (rather than single stock) P/E ratios. A fund P/E ratio: may combine bank and fruit company earnings, some include other exclude negative earnings, some average P/Es while others weight P/E ratios, yet others divide the total market cap of stocks in the fund by total earnings of stocks in the fund, and so on; the resulting P/E ratios will differ depending on how you calculate it. “But whomever you lean on for data, the most important thing is to make sure you’re comparing two identical methods of calculation.”

And finally, speaking of P/E ratios, in Bloomberg’s “Your weekend reading on the CAPE” Barry Ritholtz discusses “the pros and cons of CAPE, giving airtime to all sides of the argument”. CAPE is Shiller’s 10-year Cyclically Adjusted Price-to-Earnings ratio, developed to help investors determine “whether equities were likely to outperform their median returns during the next decade”. CAPE pros mentioned are: indicator of future equity returns, signal of (proximity of) market tops and bottoms. CAPE cons mentioned are: currently it is a poor indicator due to “financial crisis distorted earnings”, accounting changes will affect numbers, ultra low interest rates and CAPE’s poor track record (“failure to mean revert over the last 23 years”). “The bottom line seems to be that CAPE is useful as a measure of valuation. It isn’t especially good for market timing, though it is better at bottoms than tops.”