I was recently asked by a leading Canadian finance journalist what "themes or ideas" I was working on for the new year.
My response:
Let me preface this by stating my somewhat contrarian approach to the idea of "themes" which, experience has taught me, are usually being utilized to generate "turnover". The ongoing dilemma in our "industry" is that the folks that run the business are focused on the "turn rate" from a productivity perspective.
However, my responsibility to my clients is to protect them from unnecessary and potentially costly trading ideas.
My clients are encouraged to be "fee based" unless their portfolios are so static (bond ladders for example) that it is not economically viable. However, I do have a minimum annual commission/fee for my wealth management consulting work.
That being said, this is how I review client accounts at year end:
1) Cash flow analysis:
When I first sit down with a prospect, we have a "discovery" interview. From this interview we gather the information necessary to prepare a projected cash flow analysis prior to making any investment recommendations.
This cash flow analysis allows us to fully understand the clients needs and risk tolerance. It is my experience that even clients who think that they have a high tolerance for risk, do not, especially when that is put to the test in a declining market. If we know their lifestyle cash flow needs, we can actually see the risk that they can and should be taking.
At year end we review this and look forward for the next few years to make sure there is ample liquidity. It will depend on each specific clients needs: "portfolio builders" have usually net positive savings and higher risk tolerance, "portfolio utilizers" (who need their portfolios for lifestyle cash flow) have less room to take risk unless they need to generate significant amounts of income.
2) Portfolio diversity and re-balancing
If cash flow needs require portfolio adjustments, we look at total asset diversification, not just the portfolio but the clients entire net worth, including their exposure to real estate (home or vacation property) and their own business.
For example: a retired client needs $10,000 per month to cover lifestyle needs. They will need a minimum of $240,00 in cash/money market (2 years). Assume that this is 10% of their portfolio.
We will examine their portfolio holdings to ensure that income, dividends and capital growth are replenishing this pool of cash, because it is the clients wish to not reduce the principle (if possible) for estate planning reasons. (But they also have a participating life insurance plan to back up their needs).
This gives them the comfort of being able to be a little more aggressive to get the 10% annual return that they desire.
If any of the asset classes that they own have out-performed, we will re-balance: reducing exposure to the out-performers (i.e. taking profits) and redistributing it to the under-performers (who may just be the performers in the next phase of the cycle).
Most of our clients have 3rd party managers to whom we actively engage with these issues and we work through a number of combinations for adjustments:
Perhaps, for example, reducing exposure to Canadian Banks who have had a considerable capital return lately also making the portfolio "over-weight") and finding some diversification (and increased risk) in Income Trusts that have good yield and are expected to have limited impact on distributions when conversion occurs.
3) Tax efficiencies
We also confer with clients tax experts to ensure that we have a thorough understanding of the implications for clients on any transactions and work closely with the managers to find ways of minimizing the tax impacts of the portfolio adjustments (Tax Harvesting)
As in the above example, if the selling of a Canadian Bank was to have a significant capital gain, are there capital losses that could be taken to offset this without greatly impacting the portfolio? We often use sector ETF's to maintain exposure for the required 30 day period if we want to subsequently repurchase the sold position.
We like to keep things simple and boring and steady. We loathe volatility and find every way possible to reduce it, because we believe that over the long run, volatility is the enemy of any portfolio and wealth management plan. Recent history has proven our methodology to be correct. We have happy clients and that is why I am in this business: to make clients happy .
Want to be a happy client?
www.jstomenson.ca
http://twitter.com/JSTomenson
Thinking ahead of the curve.
Thursday, December 10, 2009
Saturday, November 21, 2009
Heading South? Converting to $US?
A client asked the question and since many clients may also want my opinion:
The $US is a very challenging topic for multiple reasons. There are greater minds than mine who all have opinions and I like to be on top of them, so I will break down the arguments for you.
First and foremost, despite what they may say publicly, the US administration under Obama want a weak $US to revive the US manufacturing and export sector. The consumer, historically 2/3 of the US economy, is not going to lead the recovery.
Also, while the growing economic powers are looking to move away from the $US as a reserve currency, that will take years to change.
But the market knows this and the large players in the foreign exchange world are already short $US.
The other side of the equation for you, of course, is the $Cda. The trend since 2003 has been towards a stronger $Cda (from the US 1.60 level to .96 pre meltdown).
The meltdown caused a flight away from risky assets and into $US, which took the $US/Cda back to 1.30. As the appetite for higher yielding and riskier assets came back and there were expectations of a stronger recovery for the Cdn economy, the $US/Cda improved to 1.02.
So basically that is, in a nutshell, the setting for thinking forward.
Predicting short-term fluctuations in currency movement is more technical than fundamental, but basically, right now it is a function of the risk trade, i.e. when capital market participants are willing to take on risk, equity markets rise and the $US/Cda will move towards parity (i.e. 1.00).
Also year-end is approaching and the holiday season, which has historically been favourable for the $US.
While the Global economy has still got considerable challenges, the appetite for risk going forward is a tricky call: There are significant amounts of liquidity in the system and this has forced investors into risk to get return, because the safe investments are yielding 0% (last week US T-bills auctioned at negative yields!). Arguably equity markets are ahead of themselves and a pull-back is not out of the question. A pull-back would entice a trade away from risk and likely force the $US higher. As foreign exchange participants are already short $US (and they may feel the pressure to buy in those positions as they get "offside"), that could add to a short-term $US rally which could get volatile with holiday and year-end liquidity drying up.
Longer-term, as economies recover, the liquidity will be withdrawn, but the timing on this is difficult. It may be 6 months or longer, depending on the recovery and how long it takes to get traction. The US will lag the rest of the world, because the consumer will not be participating. US housing and mortgage default issues are going to continue to be problematic well into 2010. So it is likely that the $US will continue to decline.
Also increasing demand for Cdn commodities from Asia will likely boost the $Cda and it will resume its upward trend, quite possibly beyond parity. As the Cdn economy out-performs the US economy, the Bank of Canada will start to drain liquidity sooner and interest rates in Canada may move up adding to demand for $Cda.
In summary, given the gradual recovery and Canada outperforming the US economically (I never like to underestimate the entrepreneurial spirit of the US, but their problems are deep and their government is as far left as any we've seen in since Roosevelt) I think the long-term play is to wait. Sorry for the long missive, but I wanted my arguments to be clear.
OCM diversifies across asset classes which means, ultimately, that you will likely hold between 15-25% $US in your portfolio, invested globally. You could always draw on this $US portion to avoid foreign exchange conversion hassles. One of the reasons OCM was able to keep volatility out of portfolios in the meltdown was that as equity markets crumbled in late 2008/early 2009, the $US soared and portfolio declines were mitigated.
Traditionally banks "rape and pillage" the consumer with surcharges of 4-5% (from the wholesale market) on currency transactions (inside info). We are much more competitive and I hate what the banks do, so rest assured, I will make sure that we are. Taryn (my associate) is well-trained in my thinking as we have a number of clients who "winter" south of the border and it is my fiduciary responsibility to ensure that they are not taken advantage of when they need to have their $Cda converted to $US.
Want to have a more thorough discussion? Call me, email me: jstomenson@wellwest.ca
www.jstomenson.ca
The $US is a very challenging topic for multiple reasons. There are greater minds than mine who all have opinions and I like to be on top of them, so I will break down the arguments for you.
First and foremost, despite what they may say publicly, the US administration under Obama want a weak $US to revive the US manufacturing and export sector. The consumer, historically 2/3 of the US economy, is not going to lead the recovery.
Also, while the growing economic powers are looking to move away from the $US as a reserve currency, that will take years to change.
But the market knows this and the large players in the foreign exchange world are already short $US.
The other side of the equation for you, of course, is the $Cda. The trend since 2003 has been towards a stronger $Cda (from the US 1.60 level to .96 pre meltdown).
The meltdown caused a flight away from risky assets and into $US, which took the $US/Cda back to 1.30. As the appetite for higher yielding and riskier assets came back and there were expectations of a stronger recovery for the Cdn economy, the $US/Cda improved to 1.02.
So basically that is, in a nutshell, the setting for thinking forward.
Predicting short-term fluctuations in currency movement is more technical than fundamental, but basically, right now it is a function of the risk trade, i.e. when capital market participants are willing to take on risk, equity markets rise and the $US/Cda will move towards parity (i.e. 1.00).
Also year-end is approaching and the holiday season, which has historically been favourable for the $US.
While the Global economy has still got considerable challenges, the appetite for risk going forward is a tricky call: There are significant amounts of liquidity in the system and this has forced investors into risk to get return, because the safe investments are yielding 0% (last week US T-bills auctioned at negative yields!). Arguably equity markets are ahead of themselves and a pull-back is not out of the question. A pull-back would entice a trade away from risk and likely force the $US higher. As foreign exchange participants are already short $US (and they may feel the pressure to buy in those positions as they get "offside"), that could add to a short-term $US rally which could get volatile with holiday and year-end liquidity drying up.
Longer-term, as economies recover, the liquidity will be withdrawn, but the timing on this is difficult. It may be 6 months or longer, depending on the recovery and how long it takes to get traction. The US will lag the rest of the world, because the consumer will not be participating. US housing and mortgage default issues are going to continue to be problematic well into 2010. So it is likely that the $US will continue to decline.
Also increasing demand for Cdn commodities from Asia will likely boost the $Cda and it will resume its upward trend, quite possibly beyond parity. As the Cdn economy out-performs the US economy, the Bank of Canada will start to drain liquidity sooner and interest rates in Canada may move up adding to demand for $Cda.
In summary, given the gradual recovery and Canada outperforming the US economically (I never like to underestimate the entrepreneurial spirit of the US, but their problems are deep and their government is as far left as any we've seen in since Roosevelt) I think the long-term play is to wait. Sorry for the long missive, but I wanted my arguments to be clear.
OCM diversifies across asset classes which means, ultimately, that you will likely hold between 15-25% $US in your portfolio, invested globally. You could always draw on this $US portion to avoid foreign exchange conversion hassles. One of the reasons OCM was able to keep volatility out of portfolios in the meltdown was that as equity markets crumbled in late 2008/early 2009, the $US soared and portfolio declines were mitigated.
Traditionally banks "rape and pillage" the consumer with surcharges of 4-5% (from the wholesale market) on currency transactions (inside info). We are much more competitive and I hate what the banks do, so rest assured, I will make sure that we are. Taryn (my associate) is well-trained in my thinking as we have a number of clients who "winter" south of the border and it is my fiduciary responsibility to ensure that they are not taken advantage of when they need to have their $Cda converted to $US.
Want to have a more thorough discussion? Call me, email me: jstomenson@wellwest.ca
www.jstomenson.ca
Wednesday, November 18, 2009
The Advisor "Checklist"
In his column from November 18, John Heinzl wrote:
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/investor-clinic/do-your-homework-to-find-adviser-best-for-you/article1367571/
Here's a checklist if you're shopping for a financial adviser, or if you want to evaluate the service you're getting from your current one. My comments in bold.
1. Fees are transparent
Low fees are one of the most important ingredients in a successful investing plan, but many investors have no idea how much they're paying or how their adviser is compensated.
Good advisers make the information available in plain English and are happy to answer questions. "It needs to be straightforward and in writing," Mr. Heath says.
We are fee based for most clients. Depending on complexity and size of investible assets, between .75 and 1.25%. That includes cash-flow and risk analysis, strategic asset allocation and tax efficient, comprehensive wealth management plan.
Portfolio management will cost an additional .60 to 1.0% depending on the manager, portfolio size and strategy complexity.
Also included is on-going monitoring and regular updates according to the client’s wishes.
2. They were recommended
Getting invited to a free dinner at a ritzy club may make you feel special, but it's no way to hire an adviser. The best advisers are those that come highly recommended by someone whose opinion you trust.
But don't stop there: Ask the adviser for a couple of other references, and be sure to call them. You'd do this when hiring a contractor, so do just as much research - if not more - when selecting someone to manage your money.
www.jstomenson.ca
http://www.wellingtonwest.com/advisors/jstomenson/WhatOurClientsSay.aspx
3. They pass the "like" test
Money can be a touchy topic, so if you want to have a productive relationship with your adviser, you'll have to feel comfortable opening up to him or her. But you won't do that if you don't hit it off on a personal level.
"You need to have someone you can confide in and somebody you can trust and tell them the whole story. If you can't tell them everything, you're not going to get the best possible advice," says Jim Ruta, author of Master Your Money Management: How to Manage the Advisors Who Work for You.
Too busy to come and see us? We’ll come to you if you want…we’ll even bring lunch!!
4. They use plain language
"The financial business is so overrun with jargon and complicated language that some folks say yes to things they don't understand," says Mr. Ruta, a Burlington, Ont.,-based consultant to the financial industry. "Unless you can understand your adviser they can't help you."
There is no such thing as a stupid question.
Read Stuart Lucas’ Wealth, we think it is accessible and very client oriented.
5. They have a process
The best advisers explain, in writing, the process they will follow to meet your financial goals. The "client connection letter," as Mr. Ruta calls it, might include a description of the investment products to be used (stocks, bonds, mutual funds or exchange-traded funds), how the adviser is compensated (commissions or asset-based fees) and the frequency of adviser-client meetings.
http://www.wellingtonwest.com/advisors/jstomenson/ourProcess.aspx
6. They favour lower risk
Instead of trading frequently and trying to make a big score on a speculative stocks, good advisers follow a boring approach.
"While they may hold stocks, they are usually just the big-name financials, utilities, resource companies, and they don't trade them," says Garth Rustand, founder of the Vancouver-based Investors-Aid Co-operative of Canada.
Good advisers also don't claim to have any special ability to predict what the market will do. Rather, they recommend indexing - buying and holding low-cost ETFs or mutual funds that track broad market indexes.
Lower risk, well balanced across multiple asset classes, lowers volatility. Volatility is in the long-term (20to 30 years) very harmful to a portfolio.
Read : The Informed Investor: Five key concepts for financial success under “our process” on our website.
7. They aren't into bling
The best investment advisers often drive sensible cars and live in modest houses. "Their small offices won't be cluttered with sales trophies," says Mr. Rustand, a former broker.
They are "personally frugal and try to keep their client costs at 1 per cent or below, knowing that the lower their costs, the better the client's return," he says.
Remember that every dollar that goes into your adviser's pocket is one that doesn't stay in yours.
I drive a Jeep Wrangler (4 door).
More info ? Call me, or email me: jstomenson@wellwest.ca
Follow me on Twitter at JSTomenson
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/investor-clinic/do-your-homework-to-find-adviser-best-for-you/article1367571/
Here's a checklist if you're shopping for a financial adviser, or if you want to evaluate the service you're getting from your current one. My comments in bold.
1. Fees are transparent
Low fees are one of the most important ingredients in a successful investing plan, but many investors have no idea how much they're paying or how their adviser is compensated.
Good advisers make the information available in plain English and are happy to answer questions. "It needs to be straightforward and in writing," Mr. Heath says.
We are fee based for most clients. Depending on complexity and size of investible assets, between .75 and 1.25%. That includes cash-flow and risk analysis, strategic asset allocation and tax efficient, comprehensive wealth management plan.
Portfolio management will cost an additional .60 to 1.0% depending on the manager, portfolio size and strategy complexity.
Also included is on-going monitoring and regular updates according to the client’s wishes.
2. They were recommended
Getting invited to a free dinner at a ritzy club may make you feel special, but it's no way to hire an adviser. The best advisers are those that come highly recommended by someone whose opinion you trust.
But don't stop there: Ask the adviser for a couple of other references, and be sure to call them. You'd do this when hiring a contractor, so do just as much research - if not more - when selecting someone to manage your money.
www.jstomenson.ca
http://www.wellingtonwest.com/advisors/jstomenson/WhatOurClientsSay.aspx
3. They pass the "like" test
Money can be a touchy topic, so if you want to have a productive relationship with your adviser, you'll have to feel comfortable opening up to him or her. But you won't do that if you don't hit it off on a personal level.
"You need to have someone you can confide in and somebody you can trust and tell them the whole story. If you can't tell them everything, you're not going to get the best possible advice," says Jim Ruta, author of Master Your Money Management: How to Manage the Advisors Who Work for You.
Too busy to come and see us? We’ll come to you if you want…we’ll even bring lunch!!
4. They use plain language
"The financial business is so overrun with jargon and complicated language that some folks say yes to things they don't understand," says Mr. Ruta, a Burlington, Ont.,-based consultant to the financial industry. "Unless you can understand your adviser they can't help you."
There is no such thing as a stupid question.
Read Stuart Lucas’ Wealth, we think it is accessible and very client oriented.
5. They have a process
The best advisers explain, in writing, the process they will follow to meet your financial goals. The "client connection letter," as Mr. Ruta calls it, might include a description of the investment products to be used (stocks, bonds, mutual funds or exchange-traded funds), how the adviser is compensated (commissions or asset-based fees) and the frequency of adviser-client meetings.
http://www.wellingtonwest.com/advisors/jstomenson/ourProcess.aspx
6. They favour lower risk
Instead of trading frequently and trying to make a big score on a speculative stocks, good advisers follow a boring approach.
"While they may hold stocks, they are usually just the big-name financials, utilities, resource companies, and they don't trade them," says Garth Rustand, founder of the Vancouver-based Investors-Aid Co-operative of Canada.
Good advisers also don't claim to have any special ability to predict what the market will do. Rather, they recommend indexing - buying and holding low-cost ETFs or mutual funds that track broad market indexes.
Lower risk, well balanced across multiple asset classes, lowers volatility. Volatility is in the long-term (20to 30 years) very harmful to a portfolio.
Read : The Informed Investor: Five key concepts for financial success under “our process” on our website.
7. They aren't into bling
The best investment advisers often drive sensible cars and live in modest houses. "Their small offices won't be cluttered with sales trophies," says Mr. Rustand, a former broker.
They are "personally frugal and try to keep their client costs at 1 per cent or below, knowing that the lower their costs, the better the client's return," he says.
Remember that every dollar that goes into your adviser's pocket is one that doesn't stay in yours.
I drive a Jeep Wrangler (4 door).
More info ? Call me, or email me: jstomenson@wellwest.ca
Follow me on Twitter at JSTomenson
Tuesday, October 13, 2009
Risk: too much or not enough?
Many of the new clients who have come to me in the last 6 months did not have a strong understanding of the composition of risk in their investment portfolios and in the structure of their net worth prior to the economic downturn and ensuing stock market volatility last year.
Just like any business enterprise , the composition of your family's net worth is crucial in determining where you sit on the risk spectrum.
Now that your investment assets ( stocks, bonds, managed funds, private equity holdings, etc. ) have bounced from the early March lows, it may be considerably less painful to spend the time to re-assess your current balance sheet.Breaking your holdings out into %'s on a relative basis will give you a general overview :
Assets:
1) Investment (non-reg. / reg (RSP/RIF)
a) Liquid
b) Less liquid (penalties for early selling/ limited market for re-sale)
- Asset class : Fixed Income (Bonds/Debentures), Preferred Equity, Common Equity, Private Equity (including your own business)
- Economic Sector
- Geographic Location
2) Fixed assets: property
Liabilities:
Debt should be assigned to any of the above asset classes for a true picture of (net assets) risk.
After establishing your Net Worth and the risk apportioned to each sector and/or sub-sector, it is necessary to create a cash flow analysis from which to regard your lifestyle needs.
Simply:
Income (less taxes) less Lifestyle Expenses = either positive cash flow to be added and apportioned to your investments or negative cash flow from which we need to draw from your liquid investments (and cash holdings).
Your cash flow, now and projected into the future (either negative or positive) will then determine how your investments need to be structured.
In which case you need to look back to those %'s that you attached to your assets and make sure that there is appropriate liquidity, appropriate (or not) income being generated, appropriate allocation (or not) to investments with greater potential for growth ( and likely greater volatility).
Now that your statements are looking a little better and interest rates are the lowest in years (and will likely not remain low beyond the next 6 months) it is worth taking the time to re-assess.
There is still considerable uncertainty over the fragility of the economic rebound, which has gathered strength with enormous assistance from government spending.
There is substantial debate amongst the experts as to the timing of the recovery and the possible consequences that may result.
Understanding the risk that you carry becomes even more important as a result of this uncertainty.
I have spent 28 years analyzing risk, let me know if i can help you.
Monday, September 14, 2009
The mistakes we make—and why we make them
The Wall Street Journal, September 2009
How investors think often gets in the way of their results.
Meir Statman looks into our heads and tells us what we’re doing wrong.
(Dr. Meir Statman, Glenn Klimek Professor of Finance at the Leavey School of Business at Santa Clara University, is an industry expert and consultant to the Nxt Funds and Wellington West Asset Management Inc. Investment Committee)
What was I thinking?
If there’s one question that investors have asked themselves over the past year and a half, it’s that one. If only I had acted differently, they say. If only, if only, if only.
Yet here’s the problem: While we know that we made investment mistakes, and vow not to repeat them, most people have only the vaguest sense of what those mistakes were, or, more important, why they made them. Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.
This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others.
The trick, therefore, is to learn to increase our ratio of smart behavior to stupid. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid.
Let me give you one example. Investors tend to think about each stock we purchase in a vacuum, distinct from other stocks in our portfolio. We are happy to realize “paper” gains in each stock quickly, but procrastinate when it comes to realizing losses. Why? Because while
regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it. Indeed, I’ve recently encountered an investor who procrastinated in realizing his losses on WorldCom stock until a letter from his broker informed him that the stock was worthless.
Successful professional traders are subject to the same emotions as the rest of us. But they counter it in two ways. First, they know their weakness, placing them on guard against it. Second, they establish “sell disciplines” that force them to realize losses even when they know that the pain of regret is sure to follow.
So in what other ways do our misguided thoughts and feelings get in the way of successful investing—not to mention increasing our stress levels? And what are the lessons we should learn, once we recognize those cognitive and emotional errors? Here are eight of them....
No. 1: Goldman Sachs is faster than you.
There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than either of us. The other says: It is not about whether the tiger is faster than either of us. It is about whether I’m faster than you. And with that he runs away. The speed of the Goldman Sachses of the world has been boosted most recently by computerized high-frequency trading. Can you really outrun them?
It is normal for us, the individual investors, to frame the market race as a race against the market. We hope to win by buying and selling investments at the right time. That doesn’t seem so hard. But we are much too slow in our race with the Goldman Sachses.
So what does this mean in practical terms? The most obvious lesson is that individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).
Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Too often cognitive errors and emotions get in our way.
to be continued..........
How investors think often gets in the way of their results.
Meir Statman looks into our heads and tells us what we’re doing wrong.
(Dr. Meir Statman, Glenn Klimek Professor of Finance at the Leavey School of Business at Santa Clara University, is an industry expert and consultant to the Nxt Funds and Wellington West Asset Management Inc. Investment Committee)
What was I thinking?
If there’s one question that investors have asked themselves over the past year and a half, it’s that one. If only I had acted differently, they say. If only, if only, if only.
Yet here’s the problem: While we know that we made investment mistakes, and vow not to repeat them, most people have only the vaguest sense of what those mistakes were, or, more important, why they made them. Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.
This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others.
The trick, therefore, is to learn to increase our ratio of smart behavior to stupid. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid.
Let me give you one example. Investors tend to think about each stock we purchase in a vacuum, distinct from other stocks in our portfolio. We are happy to realize “paper” gains in each stock quickly, but procrastinate when it comes to realizing losses. Why? Because while
regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it. Indeed, I’ve recently encountered an investor who procrastinated in realizing his losses on WorldCom stock until a letter from his broker informed him that the stock was worthless.
Successful professional traders are subject to the same emotions as the rest of us. But they counter it in two ways. First, they know their weakness, placing them on guard against it. Second, they establish “sell disciplines” that force them to realize losses even when they know that the pain of regret is sure to follow.
So in what other ways do our misguided thoughts and feelings get in the way of successful investing—not to mention increasing our stress levels? And what are the lessons we should learn, once we recognize those cognitive and emotional errors? Here are eight of them....
No. 1: Goldman Sachs is faster than you.
There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than either of us. The other says: It is not about whether the tiger is faster than either of us. It is about whether I’m faster than you. And with that he runs away. The speed of the Goldman Sachses of the world has been boosted most recently by computerized high-frequency trading. Can you really outrun them?
It is normal for us, the individual investors, to frame the market race as a race against the market. We hope to win by buying and selling investments at the right time. That doesn’t seem so hard. But we are much too slow in our race with the Goldman Sachses.
So what does this mean in practical terms? The most obvious lesson is that individual investors should never enter a race against faster runners by trading frequently on every little bit of news (or rumors).
Instead, simply buy and hold a diversified portfolio. Banal? Yes. Obvious? Yes. Typically followed? Sadly, no. Too often cognitive errors and emotions get in our way.
to be continued..........
Thursday, August 13, 2009
Capital Market Perspective
I have listened recently to quite a few portfolio managers offer their views on the future as they discussed their Q2 performances:
There are a wide spectrum of opinions:
Most pessimistic:
That we are 10 years into a 20 year Bear Market, which should end in 2020.
Basically, this camp has drawn the parallels to the market recovery that occurred in the 1930's post crash.
Obviously there are many significant differences between then and now:
One of those has been the ability of corporations to make adjustments. Something that has stood out in this economic crisis has been the flexibility and quickness that has been demonstrated by Q2 earnings results.
Over 75% of S&P companies beat earnings estimates. Not on revenue increases, but on cost cutting measures. Getting lean and in a hurry has had a significant impact.
Productivity
Nonfarm business productivity rose 6.4% at an annual rate last quarter, the Labor Department said Tuesday. The biggest gain in output per hour worked since the third quarter of 2003 suggested companies have adjusted to the recession by slicing jobs and workers' hours. The data help explain why companies can post good earnings figures, having moved quickly to cut costs.
As the economy recovers and demand increases, profit margins should benefit.
There is reason to be optimistic:
Yesterday the US Federal Reserve adjusted it's outlook: "Information received since the Federal Open Market Committee met in June suggests that economic activity is levelling out."
They have decided on a gradual removal of the excess liquidity that they had originally provided to stabilize the markets when they were in crisis.
In the interim Investors have been getting anxious about the extremely low rates offered in short-term "safe havens" in t-bills, GIC's and money market funds and there is plenty of money still parked there.
As equity markets defy the negative prognostications and better economic conditions begin to appear in the monthly statistics, Investors who have been waiting (and who are anxious because they have missed a considerable rally since early march) will be forced back to the equity markets and this will likely push them higher.
Each corrective pull-back in the equity markets has brought significant buying, which has further buoyed equity markets to continue to rally.
How far?
In all likelihood, farther than most think, because as momentum builds, risk appetite increases and further drives prices higher and those anxious about missing a further rally will be finally convinced to re-enter.
Unfortunately, as the markets got emotionally panicked on the downside in February, they will get emotionally euphoric on the upside (barring any negative economic or political shocks).
There could be some considerable upside potential building because for the time being short-term interest rates are not going up, confidence is returning and Investors appetite for risk is increasing.
For more regular updates you can follow me on Twitter: http://twitter.com/JSTomenson
Thinking Ahead of the Curve.
There are a wide spectrum of opinions:
Most pessimistic:
That we are 10 years into a 20 year Bear Market, which should end in 2020.
Basically, this camp has drawn the parallels to the market recovery that occurred in the 1930's post crash.
Obviously there are many significant differences between then and now:
One of those has been the ability of corporations to make adjustments. Something that has stood out in this economic crisis has been the flexibility and quickness that has been demonstrated by Q2 earnings results.
Over 75% of S&P companies beat earnings estimates. Not on revenue increases, but on cost cutting measures. Getting lean and in a hurry has had a significant impact.
Productivity
Nonfarm business productivity rose 6.4% at an annual rate last quarter, the Labor Department said Tuesday. The biggest gain in output per hour worked since the third quarter of 2003 suggested companies have adjusted to the recession by slicing jobs and workers' hours. The data help explain why companies can post good earnings figures, having moved quickly to cut costs.
As the economy recovers and demand increases, profit margins should benefit.
There is reason to be optimistic:
Yesterday the US Federal Reserve adjusted it's outlook: "Information received since the Federal Open Market Committee met in June suggests that economic activity is levelling out."
They have decided on a gradual removal of the excess liquidity that they had originally provided to stabilize the markets when they were in crisis.
In the interim Investors have been getting anxious about the extremely low rates offered in short-term "safe havens" in t-bills, GIC's and money market funds and there is plenty of money still parked there.
As equity markets defy the negative prognostications and better economic conditions begin to appear in the monthly statistics, Investors who have been waiting (and who are anxious because they have missed a considerable rally since early march) will be forced back to the equity markets and this will likely push them higher.
Each corrective pull-back in the equity markets has brought significant buying, which has further buoyed equity markets to continue to rally.
How far?
In all likelihood, farther than most think, because as momentum builds, risk appetite increases and further drives prices higher and those anxious about missing a further rally will be finally convinced to re-enter.
Unfortunately, as the markets got emotionally panicked on the downside in February, they will get emotionally euphoric on the upside (barring any negative economic or political shocks).
There could be some considerable upside potential building because for the time being short-term interest rates are not going up, confidence is returning and Investors appetite for risk is increasing.
For more regular updates you can follow me on Twitter: http://twitter.com/JSTomenson
Thinking Ahead of the Curve.
Tuesday, July 21, 2009
Wealth
http://www.wealthstrategistnetwork.com/
In our continual search to upgrade our own education in how to better look after our clients Wealth Management needs we come across a significant number of publications.
Currently we are reading one that we think is very accessible and certainly is very client oriented. (link above for more info).
"Wealth" (by Stuart Lucas) is written for anyone concerned about wealth creation, wealth management, families with wealth, retirement planning, and multi-generational estate management. Most of the book's guidance applies whether you are worth a few hundred thousand dollars or a few hundred million, and whether you are a wealth owner or advisor. Affluent professionals and successful entrepreneurs can use "Wealth" to adopt a strategic, focused, and disciplined approach to growing and diversifying their financial assets. "Wealth" is equally useful to wealth industry professionals who want to strengthen their relationships with clients by better serving their long-term interests.
We have also just finished reading the Capgemini and Merrill Lynch Global Wealth Report, 2009.
This report focuses on and analyzes the macroeconomic factors that drive wealth creation and helps us (wealth management consultants) better understand the key trends that affect High Net Worth Individuals (HWNI's) around the globe.
Some highlights:
At the end of 2008, the world's population of HNWI's was down 14.9% from the year before.
Their wealth dropped 19.5%
Equities as a % of HNWI portfolios dropped from 33% to 25%.
Cash holdings increased by 7% to 21%
HNWI's are expected to remain fairly conservative in the short-run.
More than 1/4 of HNNI clients surveyed withdrew assets from their wealth management firm or left that firm altogether in 2008, fueled by lack of trust/confidence.
Service quality was by far the top driver of client retention in 2008.
On-line access and capabilities was deemed very important by 66% of clients.
Risk management and due diligence capabilities, 73%
Fee Structure, 48%
There is plenty more at http://www.capgemini.com/resources/thought_leadership/2009_world_wealth_report/
In our continual search to upgrade our own education in how to better look after our clients Wealth Management needs we come across a significant number of publications.
Currently we are reading one that we think is very accessible and certainly is very client oriented. (link above for more info).
"Wealth" (by Stuart Lucas) is written for anyone concerned about wealth creation, wealth management, families with wealth, retirement planning, and multi-generational estate management. Most of the book's guidance applies whether you are worth a few hundred thousand dollars or a few hundred million, and whether you are a wealth owner or advisor. Affluent professionals and successful entrepreneurs can use "Wealth" to adopt a strategic, focused, and disciplined approach to growing and diversifying their financial assets. "Wealth" is equally useful to wealth industry professionals who want to strengthen their relationships with clients by better serving their long-term interests.
We have also just finished reading the Capgemini and Merrill Lynch Global Wealth Report, 2009.
This report focuses on and analyzes the macroeconomic factors that drive wealth creation and helps us (wealth management consultants) better understand the key trends that affect High Net Worth Individuals (HWNI's) around the globe.
Some highlights:
At the end of 2008, the world's population of HNWI's was down 14.9% from the year before.
Their wealth dropped 19.5%
Equities as a % of HNWI portfolios dropped from 33% to 25%.
Cash holdings increased by 7% to 21%
HNWI's are expected to remain fairly conservative in the short-run.
More than 1/4 of HNNI clients surveyed withdrew assets from their wealth management firm or left that firm altogether in 2008, fueled by lack of trust/confidence.
Service quality was by far the top driver of client retention in 2008.
On-line access and capabilities was deemed very important by 66% of clients.
Risk management and due diligence capabilities, 73%
Fee Structure, 48%
There is plenty more at http://www.capgemini.com/resources/thought_leadership/2009_world_wealth_report/
Monday, July 13, 2009
The Elite Circle
Last Tuesday I presented two of my investing team at One Capital Management: Andrew Buckley, a retired Special forces Green Beret, sniper team leader(Alpha company) in the U.S. Armed forces and now a client services associate and Patrick Bowen, President, with previous experience in Private Client Wealth Management at two of the finest Wealth Management institutions (Bernstein, Oppenheimer) in the U.S.
In a Q and A format, Pat quizzed Andrew about some of his experiences in the special forces and Andrew regaled us with some powerful stories (he could only tell us of things that were not "classified" ) with some very interesting slides to accompany them:
Like the time in Haiti when he was dropped in to secure a section of the city and ensure that senior negotiators had safe passage to their location for talks.
Interrupted by an ambush, Andrew and his team of 15 had to ensure the safety of very high level VI P's : Colin Powell and Jimmy Carter.
As Andrew told a riveted audience quite succinctly: the first 1.8 seconds of an ambush is crucial to survival.
He also told us that each team member had a very specific role to play in any circumstance which required 100% trust in each member: believing that they could perform their role as you carried out yours, was the only way that the team would be able to survive that first 1.8 seconds.
This was called "The Elite Circle".
According to Andrew: casualties occurred only when one of the team members stepped out of this circle of trust. Taking on a role that was not theirs to perform.
One can draw many parallels to a "team" situation that are not as life and death oriented, but the message is clear: In times of crisis, we need to count on our team members to perform their roles, so we better have 100% faith their abilities.
We have just endured a significant economic setback, some have referred to it as a crisis.
Tony Fell, retired chairman of RBC Capital Markets and one of the most highly regarded investment professionals in Canada recently described the last 2 years as the most devastating that he had witnessed in his 50 years in the investment industry.
How have you fared through this time?
Has your financial team been working with you in a consultative, coordinated and comprehensive manner?
Do you have 100% confidence that they are looking out for your best interests?
What are your end goals? and where abouts are you on the path to achieving them?
Andrew and Pat will be back with their stories in the fall, if you would be interested in hearing them, let me know.
In a Q and A format, Pat quizzed Andrew about some of his experiences in the special forces and Andrew regaled us with some powerful stories (he could only tell us of things that were not "classified" ) with some very interesting slides to accompany them:
Like the time in Haiti when he was dropped in to secure a section of the city and ensure that senior negotiators had safe passage to their location for talks.
Interrupted by an ambush, Andrew and his team of 15 had to ensure the safety of very high level VI P's : Colin Powell and Jimmy Carter.
As Andrew told a riveted audience quite succinctly: the first 1.8 seconds of an ambush is crucial to survival.
He also told us that each team member had a very specific role to play in any circumstance which required 100% trust in each member: believing that they could perform their role as you carried out yours, was the only way that the team would be able to survive that first 1.8 seconds.
This was called "The Elite Circle".
According to Andrew: casualties occurred only when one of the team members stepped out of this circle of trust. Taking on a role that was not theirs to perform.
One can draw many parallels to a "team" situation that are not as life and death oriented, but the message is clear: In times of crisis, we need to count on our team members to perform their roles, so we better have 100% faith their abilities.
We have just endured a significant economic setback, some have referred to it as a crisis.
Tony Fell, retired chairman of RBC Capital Markets and one of the most highly regarded investment professionals in Canada recently described the last 2 years as the most devastating that he had witnessed in his 50 years in the investment industry.
How have you fared through this time?
Has your financial team been working with you in a consultative, coordinated and comprehensive manner?
Do you have 100% confidence that they are looking out for your best interests?
What are your end goals? and where abouts are you on the path to achieving them?
Andrew and Pat will be back with their stories in the fall, if you would be interested in hearing them, let me know.
Wednesday, June 3, 2009
Current Thoughts on the state of Capital Markets 2
On Dec. 14th, 2008, in this blog, I wrote that I expected markets to turn in March or April of '09.
The TSX bottomed on March 6th at 7479.96. Yesterday, June 2nd, it closed approx 40% higher at 10,588.79. The TSX is still some 30% below it's June 08 highs of 15,154.77.
In Sept. '00 the TSX hit a high of 11, 423.70, before falling 50% to 5678.28 in Oct. '02.
If one were to have bought the TSX index in Oct 2002, at current levels you would be up approx 10% yr/yr. after approx 8.5 years. Some would say that is a reasonable return.
But what a ride to get there!! Most, it appears, have no stomach for the violent volatility of seeing a portfolio cut in half at any given time.
What are your goals?
Why are you investing in the first place? You have a goal, usually it is a lifestyle goal (sometimes it is a legacy goal) : you want to achieve and maintain a certain lifestyle once you have moved to the next stage of your life.
When do you need the money?
How can you even begin to understand what risk you can take if you do not have a grasp of your cash flow: now, in 5 years, 10 years, 20 years, 30 years....do you have an idea?
How can you invest if you do not understand what risk you can take?
Many advisors will sell you an investment, touting it's merits for potential appreciation. But how does it fit into your cash flow plan, that is really the key. It has to fit into your plan. You have to have a plan.
The markets will go up, the markets will go down. If you need cash flow and the markets are down and you have no liquidity then your plan (if you have one) is not working.
Did you invest new money when the market was down?
If you were too emotionally charged by the on-going media circus of negativity and were unable to participate, then you need 3rd party money managers who understand the necessity to remain emotionally detached and systematically capture the opportunities that are available when the market makes new lows.
What is the next move in capital markets?:
1) The expectations that are being built into current markets are for economic recovery:
The TSX bottomed on March 6th at 7479.96. Yesterday, June 2nd, it closed approx 40% higher at 10,588.79. The TSX is still some 30% below it's June 08 highs of 15,154.77.
In Sept. '00 the TSX hit a high of 11, 423.70, before falling 50% to 5678.28 in Oct. '02.
If one were to have bought the TSX index in Oct 2002, at current levels you would be up approx 10% yr/yr. after approx 8.5 years. Some would say that is a reasonable return.
But what a ride to get there!! Most, it appears, have no stomach for the violent volatility of seeing a portfolio cut in half at any given time.
What are your goals?
Why are you investing in the first place? You have a goal, usually it is a lifestyle goal (sometimes it is a legacy goal) : you want to achieve and maintain a certain lifestyle once you have moved to the next stage of your life.
When do you need the money?
How can you even begin to understand what risk you can take if you do not have a grasp of your cash flow: now, in 5 years, 10 years, 20 years, 30 years....do you have an idea?
How can you invest if you do not understand what risk you can take?
Many advisors will sell you an investment, touting it's merits for potential appreciation. But how does it fit into your cash flow plan, that is really the key. It has to fit into your plan. You have to have a plan.
The markets will go up, the markets will go down. If you need cash flow and the markets are down and you have no liquidity then your plan (if you have one) is not working.
Did you invest new money when the market was down?
If you were too emotionally charged by the on-going media circus of negativity and were unable to participate, then you need 3rd party money managers who understand the necessity to remain emotionally detached and systematically capture the opportunities that are available when the market makes new lows.
What is the next move in capital markets?:
1) The expectations that are being built into current markets are for economic recovery:
- the fear of "depression" has been taken out of expectations
- some improvement in consumer attitudes is being built in
2) Investors are coming back, equity mutual fund sales are improving
- there is still a significant amount of "fear" money parked on the sidelines in money market funds earning close to no return
3) As economic statistics are announced there could be surprises that either do or do not meet expectations, the markets will be vulnerable to those, especially if they are negative, because the markets are expecting better things moving forward.
4) TSX is likely to be bound by a trading range until there is more clarity: 9,000 to 11,500.
- remember the trading range on Oct. 14, 2008 was 9065 to 10,700 , approx. 18%. One day!
5) Early next year, 2010, providing global economic recovery stays on track and rising interest rates (governments funding deficits and inflation) do not choke it off (and there are no unforeseen economic shocks) we may be able to break out of this range to the upside.
How are you positioned?
Are you positioned to take advantage of the opportunities that exist now to positively impact your future goals?
Do you have an idea of your future cash flows?
Do you have a strategic plan?
We can help: www.jstomenson.ca
Thinking ahead of the curve: Solutions to your Challenges.
Thursday, April 30, 2009
"For Sale By Owner"
I had a conversation with a prospective client the other day, someone unhappy with her current advisor. The conversation was not centred around the state of the markets or their portfolio, it was about contact. She just did not feel that her advisor was staying in touch.
The discussion at a certain point turned to fees. Turns out that she is very cost conscious and has a diversified basket of global index funds or ETF's, which mimic various indexes (the S&P 500 for example) around the world. It is a good strategy, because, historically, few portfolio managers are able to beat the indexes (approx. 30% or less). This means that paying a portfolio manager 2% or more (most mutual funds) vs. the fee for an index fund which is a fraction of the cost (approx 0.5% depending on the index) is not worth it.
Problem for her, she paid an up-front transaction fee for the advisor to buy the fund, 1%, based on the advisor's asset allocation model. When the advisor wants to earn another bit of commission, he "updates" the asset allocation model and will call the client to do so. But that's the only time he calls.
This same prospect told me that it was difficult to understand the "wealth management model". Why pay the fees?
It really depends on what you are trying to accomplish:
If you are a do-it-yourself person and feel that you have all the tools that you need to accomplish your financial goals, then by all means.
It reminds me of the house that sat on the corner of our street that had the "for sale by owner" sign out front for about 2 years. After giving up on that method the owner tried the "old fashioned" but more costly method of hiring a real estate agent and it was sold in a month.
As a professional "Wealth Management Consultant", I will charge you for our services, depending on the size of your portfolio and the complexity of your financial affairs, somewhere between .75% and 1.5% (of your invested assets, annually). In most cases add between .50% and 1.0% for an experienced portfolio manager who have proven to me that they have the ability to beat "the indexes" (some of whom will add a performance fee when they do) . In most cases and on average, clients pay 1.5%-1.75% all in.
What do they get?
Stewardship: a consultative, comprehensive and coordinated plan that we create (according to their goals), implement and monitor for as long as they and their family (we work with multi-generational families) are happy with what we provide.
Contact: regular emails, phone calls, monthly webcasts (multiple wealth topics), quarterly or at least semi-annual face to face meetings to discuss progress and any necessary adjustments that need to be considered.
We earn our fees and you have the right to question them at every meeting. If we aren't earning them, we'll adjust them.
visit our website: www.jstomenson.ca
or contact me at jstomenson@wellwest.ca
The discussion at a certain point turned to fees. Turns out that she is very cost conscious and has a diversified basket of global index funds or ETF's, which mimic various indexes (the S&P 500 for example) around the world. It is a good strategy, because, historically, few portfolio managers are able to beat the indexes (approx. 30% or less). This means that paying a portfolio manager 2% or more (most mutual funds) vs. the fee for an index fund which is a fraction of the cost (approx 0.5% depending on the index) is not worth it.
Problem for her, she paid an up-front transaction fee for the advisor to buy the fund, 1%, based on the advisor's asset allocation model. When the advisor wants to earn another bit of commission, he "updates" the asset allocation model and will call the client to do so. But that's the only time he calls.
This same prospect told me that it was difficult to understand the "wealth management model". Why pay the fees?
It really depends on what you are trying to accomplish:
If you are a do-it-yourself person and feel that you have all the tools that you need to accomplish your financial goals, then by all means.
It reminds me of the house that sat on the corner of our street that had the "for sale by owner" sign out front for about 2 years. After giving up on that method the owner tried the "old fashioned" but more costly method of hiring a real estate agent and it was sold in a month.
As a professional "Wealth Management Consultant", I will charge you for our services, depending on the size of your portfolio and the complexity of your financial affairs, somewhere between .75% and 1.5% (of your invested assets, annually). In most cases add between .50% and 1.0% for an experienced portfolio manager who have proven to me that they have the ability to beat "the indexes" (some of whom will add a performance fee when they do) . In most cases and on average, clients pay 1.5%-1.75% all in.
What do they get?
Stewardship: a consultative, comprehensive and coordinated plan that we create (according to their goals), implement and monitor for as long as they and their family (we work with multi-generational families) are happy with what we provide.
Contact: regular emails, phone calls, monthly webcasts (multiple wealth topics), quarterly or at least semi-annual face to face meetings to discuss progress and any necessary adjustments that need to be considered.
We earn our fees and you have the right to question them at every meeting. If we aren't earning them, we'll adjust them.
visit our website: www.jstomenson.ca
or contact me at jstomenson@wellwest.ca
Thursday, April 16, 2009
IPP vs. RRSP...Business Owners...take note!!
An Individual Pension Plan (IPP) is a registered defined benefit plan that typically has only one or two members.
An IPP is a pool of assets set up to fund a retirement income to a single beneficiary (employee). In most cases the plan is set up for the principal in an owner-operated business or partnership but plans may also be used for key employees.
1. Every 3 years an actuarial evaluation is completed to determine the funding requirements for the following 3 years.
2. Each year a contribution is made by the company on behalf of the employee, in an amount established by the actuarial evaluation. The contribution is tax deductible to the company.
3. If the employee/beneficiary retires before reaching age 65 they may also benefit from terminal funding. Terminal funding allows for additional lump sum contributions to be made to add indexing, bridge benefits or various other options to the pension plan. This could result in over $100,000 in additional tax deductible expenses in the year of retirement.
4. Upon retirement, the beneficiary employee has three options:
- The beneficiary employee may withdraw the prescribed annual pension amount from the plan. The plan sponsor remains responsible for ensuring that the IPP can meet its obligations
- Alternatively, the beneficiary employee may “commute” their pension. Commuting the pension is a process where a lump sum related to the cost of providing the future pension is withdrawn from the pension plan and paid to the employee. The employee then becomes responsible for managing their own retirement income.
- The final option is the purchase of a life annuity with the value of the funds.
5. Unlike most conventional defined benefit plans, payments do not necessarily end with the death of the pensioner’s spouse. If assets remain in the pension plan at the time of the employee’s death, the remaining value will be used to pay a survivor pension to the spouse. Upon the spouse’s death the remaining assets transfer to the employee’s estate. In short, all of the assets accumulated in the plan are paid out for the benefit of the employee.
The Benefits of an IPP :
Avoiding the damage of a bear market
IPP members have an edge over RRSP investors in the event of weak investment performance. Under pension legislation, if a pension plan has fewer assets than will be required to meet its income obligation the company can increase tax deductible contributions to the plan to increase the asset base. RRSP investors can only envy this ability.
Creditor protection
As a registered pension plan, the IPP is creditor protected, providing an additional benefit to small business owners and incorporated professionals.
Individual Pensions are a complicated product and you should always seek professional advice prior to initiating a plan. But if you meet the following criteria, the benefits certainly make it an option worth investigating!
Age 40 or above
Employee/owner of corporation engage in active business
Corporation has surplus income and cashflow
Have a T-4 Income of $100,000
We can help. Call us. Visit our website : www.jstomenson.ca
An IPP is a pool of assets set up to fund a retirement income to a single beneficiary (employee). In most cases the plan is set up for the principal in an owner-operated business or partnership but plans may also be used for key employees.
1. Every 3 years an actuarial evaluation is completed to determine the funding requirements for the following 3 years.
2. Each year a contribution is made by the company on behalf of the employee, in an amount established by the actuarial evaluation. The contribution is tax deductible to the company.
3. If the employee/beneficiary retires before reaching age 65 they may also benefit from terminal funding. Terminal funding allows for additional lump sum contributions to be made to add indexing, bridge benefits or various other options to the pension plan. This could result in over $100,000 in additional tax deductible expenses in the year of retirement.
4. Upon retirement, the beneficiary employee has three options:
- The beneficiary employee may withdraw the prescribed annual pension amount from the plan. The plan sponsor remains responsible for ensuring that the IPP can meet its obligations
- Alternatively, the beneficiary employee may “commute” their pension. Commuting the pension is a process where a lump sum related to the cost of providing the future pension is withdrawn from the pension plan and paid to the employee. The employee then becomes responsible for managing their own retirement income.
- The final option is the purchase of a life annuity with the value of the funds.
5. Unlike most conventional defined benefit plans, payments do not necessarily end with the death of the pensioner’s spouse. If assets remain in the pension plan at the time of the employee’s death, the remaining value will be used to pay a survivor pension to the spouse. Upon the spouse’s death the remaining assets transfer to the employee’s estate. In short, all of the assets accumulated in the plan are paid out for the benefit of the employee.
The Benefits of an IPP :
Avoiding the damage of a bear market
IPP members have an edge over RRSP investors in the event of weak investment performance. Under pension legislation, if a pension plan has fewer assets than will be required to meet its income obligation the company can increase tax deductible contributions to the plan to increase the asset base. RRSP investors can only envy this ability.
Creditor protection
As a registered pension plan, the IPP is creditor protected, providing an additional benefit to small business owners and incorporated professionals.
Individual Pensions are a complicated product and you should always seek professional advice prior to initiating a plan. But if you meet the following criteria, the benefits certainly make it an option worth investigating!
Age 40 or above
Employee/owner of corporation engage in active business
Corporation has surplus income and cashflow
Have a T-4 Income of $100,000
We can help. Call us. Visit our website : www.jstomenson.ca
Friday, March 20, 2009
This Too Shall Pass
I listened to Steve Cowley speak this week and what a contrast in perspective between what he has to say and what the overly sensational media continues to report.
Steve is a certified financial analyst and portfolio manager at LA based One Capital Management, LLC, a portfolio management and strategy firm that I have worked closely with over the last few years.
Steve is busy looking for value in and amongst the myriad of companies who's stock prices have been battered in the wake of the meltdown in global equity markets resulting from the financial and liquidity crisis that peaked in the final quarter of 2008.
Steve's voice is one of reason in a world that has been shaken to the core and is still reeling from the erosion of personal wealth.
To Steve the future is exciting from a global growth perspective (once we get beyond 2009) and current valuations therefore represent "the best we've seen in years"! In 5 years returns have significant upside as the economy reverts back to a normal, non-recessionary environment.There are tremendous opportunities that exist for investors right now, especially in Financial Services (currently one of the most depressed sectors in the economy).
As Steve wrapped up his discussion he summed it up by saying that "this too shall pass" and that, despite what we are reading and hearing in the media, this downturn is not as severe as either the 70's or 80's recessions. Nowhere near the Great Depression. We are in the midst of some fairly difficult times, but that the future is exciting.
The future.....the future has tremendous upside potential.
Time to stop worrying about what is now and get busy positioning ourselves appropriately to take advantage of what the future is going to bring.
Listening to Steve was like a fresh breeze blowing in bringing a new weather system.
I will be hosting Steve at my next Webinar event on April 8th at 4pm. Tune in if you would like a "fresh" perspective.
Title: This Too Shall Pass
Date: Wednesday, April 8, 2009
Time: 4:00 PM - 4:30 PM EDT
After registering you will receive a confirmation email containing information about joining the Webinar.
Reserve your Webinar seat now at:
https://www1.gotomeeting.com/register/832044908
If you missed the webinar: visit this site for a replay:
http://www.onecapital.com/ourcomments.html
and click on the webcast for "This Too Shall Pass".
System RequirementsPC-based attendeesRequired: Windows® 2000, XP Home, XP Pro, 2003 Server, Vista
Macintosh®-based attendeesRequired: Mac OS® X 10.4 (Tiger®) or newer
Steve is a certified financial analyst and portfolio manager at LA based One Capital Management, LLC, a portfolio management and strategy firm that I have worked closely with over the last few years.
Steve is busy looking for value in and amongst the myriad of companies who's stock prices have been battered in the wake of the meltdown in global equity markets resulting from the financial and liquidity crisis that peaked in the final quarter of 2008.
Steve's voice is one of reason in a world that has been shaken to the core and is still reeling from the erosion of personal wealth.
To Steve the future is exciting from a global growth perspective (once we get beyond 2009) and current valuations therefore represent "the best we've seen in years"! In 5 years returns have significant upside as the economy reverts back to a normal, non-recessionary environment.There are tremendous opportunities that exist for investors right now, especially in Financial Services (currently one of the most depressed sectors in the economy).
As Steve wrapped up his discussion he summed it up by saying that "this too shall pass" and that, despite what we are reading and hearing in the media, this downturn is not as severe as either the 70's or 80's recessions. Nowhere near the Great Depression. We are in the midst of some fairly difficult times, but that the future is exciting.
The future.....the future has tremendous upside potential.
Time to stop worrying about what is now and get busy positioning ourselves appropriately to take advantage of what the future is going to bring.
Listening to Steve was like a fresh breeze blowing in bringing a new weather system.
I will be hosting Steve at my next Webinar event on April 8th at 4pm. Tune in if you would like a "fresh" perspective.
Title: This Too Shall Pass
Date: Wednesday, April 8, 2009
Time: 4:00 PM - 4:30 PM EDT
After registering you will receive a confirmation email containing information about joining the Webinar.
Reserve your Webinar seat now at:
https://www1.gotomeeting.com/register/832044908
If you missed the webinar: visit this site for a replay:
http://www.onecapital.com/ourcomments.html
and click on the webcast for "This Too Shall Pass".
System RequirementsPC-based attendeesRequired: Windows® 2000, XP Home, XP Pro, 2003 Server, Vista
Macintosh®-based attendeesRequired: Mac OS® X 10.4 (Tiger®) or newer
Tuesday, February 17, 2009
Private Equity : Diversify Your Wealth
As an independent business owner who has put years of hard work into your successful enterprise, it is pretty important to take stock and have a good look at your Diversification Risk.
How much is your business worth and how much of your wealth is tied up in it?
In many cases owners are so focused on their business that they do not get an opportunity to step back and look at their over-all financial picture.
In some cases owners are not even sure what their business is worth.
From a planning perspective, this becomes difficult, because at some point you are going to need an idea of your net worth and exactly how you will strategically create an income stream for yourself (and your family) in your next stage of life: post ownership (we used to call it retirement!!)
"Succession planning is all about taking the helm and setting the course for your eventual exit from the business...Failure to plan, communicate, and manage succession is the greatest threat to the survival of a business" (Succession Planning Toolkit for Business Owners, Weigl et al).
Even if the next stage (of life) is years away, there may be a significant amount of risk in having most of your wealth tied up in one asset: your business.
In her book Money Magnet: How To Attract Investors To Your Business, Jacoline Loewen discusses some very interesting ideas for not only taking some of your hard-earned wealth out of your business, but also getting a capital injection at the same time so that you can continue to maximize its growth potential.
Diversification (to make your wealth manager happy) and the ability to continue to grow your business, sounds like getting your cake and eating it too!
How? Private Equity , or as Jacoline so eloquently puts it : "O.P.M. (other peoples money)".
"Money Magnet is a guide for entrepreneurs interested in accessing capital from the private equity market. It is addressed to entrepreneurs, in accessible language, by an author who has spent a career helping businesses grow.
Undoubtedly, owners and founders of businesses need capital, but too often a trip to the dentist seems more appealing than dealing with financing."
http://www.moneymagnetbook.ca/
Succession planning and Private Equity can work hand in hand to help business owners diversify and strategically plan their (and their families) future.
It only makes sense to click on the above link and delve a little further into this great option. Can I help? Contact me to explore the possibilities!
How much is your business worth and how much of your wealth is tied up in it?
In many cases owners are so focused on their business that they do not get an opportunity to step back and look at their over-all financial picture.
In some cases owners are not even sure what their business is worth.
From a planning perspective, this becomes difficult, because at some point you are going to need an idea of your net worth and exactly how you will strategically create an income stream for yourself (and your family) in your next stage of life: post ownership (we used to call it retirement!!)
"Succession planning is all about taking the helm and setting the course for your eventual exit from the business...Failure to plan, communicate, and manage succession is the greatest threat to the survival of a business" (Succession Planning Toolkit for Business Owners, Weigl et al).
Even if the next stage (of life) is years away, there may be a significant amount of risk in having most of your wealth tied up in one asset: your business.
In her book Money Magnet: How To Attract Investors To Your Business, Jacoline Loewen discusses some very interesting ideas for not only taking some of your hard-earned wealth out of your business, but also getting a capital injection at the same time so that you can continue to maximize its growth potential.
Diversification (to make your wealth manager happy) and the ability to continue to grow your business, sounds like getting your cake and eating it too!
How? Private Equity , or as Jacoline so eloquently puts it : "O.P.M. (other peoples money)".
"Money Magnet is a guide for entrepreneurs interested in accessing capital from the private equity market. It is addressed to entrepreneurs, in accessible language, by an author who has spent a career helping businesses grow.
Undoubtedly, owners and founders of businesses need capital, but too often a trip to the dentist seems more appealing than dealing with financing."
http://www.moneymagnetbook.ca/
Succession planning and Private Equity can work hand in hand to help business owners diversify and strategically plan their (and their families) future.
It only makes sense to click on the above link and delve a little further into this great option. Can I help? Contact me to explore the possibilities!
Friday, January 30, 2009
The Educated Investor and the Psychology of Investing
Professor Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University, Santa Clara, Calif.,
Taken from :
The Monitor, The Voice of the Investment Management Consultants Association,
May / June 2005: What is Behavioral Finance, The Monitor, 2005.Cognitive Biases Series: a collection of articles from IMCA's publication, The Monitor.
"I describe financial advisers as financial physicians. Good physicians promote both health and well-being, and good financial advisers promote both wealth and well-being. Good physicians ask, listen, and empathize with their patients; they diagnose what’s wrong; they educate; and, finally, they treat. Good physicians must possess all the relevant knowledge and tools of medicine, and they must also have the handholding and educational abilities of good psychologists. Good physicians must play psychologist because body and mind are not separate.
The same is true for financial advisers. Some financial advisers prefer to keep away from the wellbeing issues of their clients; they only want to find good money managers and calculate accurate alphas. I say to them what I would say to a physician who prefers not to deal with patients: be a pathologist.Confine yourself to a back room where you can choose money managers and evaluate their performance. Let someone else help live human investors."
So for all you "live, human investors"...many of you clients, some thinking about being clients and others perhaps looking for someone who really does care about you.......
In light of the current Investment environment, I have tried to find a good synopsis on Behavioral Finance theory, which can explain the thought process and research behind broadly diversified, less actively- managed portfolios. It is a bit long and a little technical, but I think it underscores what is important. The highlights (bold) are mine. I plan to build on this theme with a "webinar" ( a conference call seminar with live internet feed to your computer) shortly.Psychology is the basis for human desires, goals, and motivations. Psychology is also the basis for a wide variety of human errors that stem from perceptual illusions, overconfidence, over-reliance on rules of thumb, and emotions.
Errors and bias cut across the entire financial landscape, affecting individual investors, institutional investors, analysts, strategists, brokers, portfolio managers, options traders, currency traders, futures traders, plan sponsors, financial executives, and financial commentators in the media.Successful investing requires taking the psychological propensities of others into account.
Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, they rely on flawed intuition, based on rules of thumb called heuristics. By using heuristics people render themselves vulnerable to errors and biases. That is why the first theme of behavioral finance is called heuristic-driven bias.
A frame is a description. Frame dependence means that people make decisions that are influenced by the manner in which the information is presented. Frame dependence manifests itself in the way that people form attitudes towards gains and losses. Many people make one decision if a problem is framed in terms of losses, but behave differently if the same problem is framed in terms of gains. An important reason for this behavior is loss aversion. Hedonic editing is the practice of choosing frames that are attractive relative to other frames. People with self-control problems often use hedonic editing to help them deal with those problems.
Markets are efficient when prices coincide with intrinsic value. Heuristic-driven bias and frame dependence combine to render markets inefficient. Representativeness leads to the winner–loser effect, whereby investor overreaction causes prior long-term winners to become future long-term losers, and prior long-term losers to become future short-term winners. Conservatism leads security analysts to underreact to earnings surprises, thereby generating short-term momentum in stock prices. Frame dependence leads investors to frame stock returns in terms of short horizons instead of long horizons. As a result, investors require a larger equity premium than they would if they framed returns using longer horizons. Prices can deviate from fundamental value for long periods, with excess volatility the result.
Wall Street strategists are susceptible to gambler's fallacy. In general, four important behavioral elements affect the market predictions of investors: overconfidence, betting on trends, anchoring and adjustment, and salience. Although gambler's fallacy generally afflicts Wall Street strategists, it typically does not afflict individual investors and technical analysts—they succumb to other errors. This point leads to a discussion about some of the key illusions that most people have about randomness, and why these illusions bias their predictions. Inflation adds an additional element of confusion.
Many investors believe they can make money by betting against the market predictions contained in advisory newsletters. Yet, they are wrong. Investors are wrong about advisory newsletters, and they hold fast to mistaken beliefs. And the issue goes beyond the predictions of newsletter writers. The general question is why people hold views that fly in the face of empirical evidence. The general explanation centers on overconfidence, overconfidence that stems from the tendency to overlook disconfirming evidence. Consequently, overconfident investors come to hold invalid beliefs. They succumb to what psychologists Robin Hogarth and the late Hillel Einhorn call the illusion of validity.
The third theme of behavioral finance is inefficient markets. In recent years scholars have produced considerable evidence that heuristic-driven bias and frame dependence cause markets to be inefficient. Scholars use the term “anomalies” to describe specific market inefficiencies. For this reason, Eugene Fama characterizes behavioral finance as “anomalies dredging.” Market efficiency is a direct challenge to active money managers, because it implies that trying to beat the market is a waste of time. Why? Because no security is mispriced in an efficient market, at least relative to information that is publicly available. Inside information may be another story.
Placing funds with an active money manager is typically a bad bet. Yet, institutions continue to hire active money managers. Why? The short answer is that the individuals who serve on institutional investment committees exhibit frame dependence and heuristic-driven bias. When it comes to framing, committee members tend to think of portfolios as a series of mental accounts, with associated reference points known as benchmarks. Therefore, they tend to mistake variety in manager “styles” for true diversification. In addition, reference point thinking tends to make people give opportunity costs less weight than out-of-pocket costs of the same magnitude. In addition to frame dependence, members of institutional investment committees bear responsibility for the performance of the portfolio. Consequently, they are vulnerable to regret. Choosing active managers enables committee members to shift some of the responsibility for performance onto the managers, thereby reducing their own exposure to regret. Heuristic-driven bias stems mostly from reliance on representativeness. Specifically, representativeness underlies the mistaken belief in a “hot hand,” an effect that leads sponsors to believe, mistakenly, that they have the ability to pick managers who can beat the market.
Abstracts from:
Beyond Greed and Fear
Understanding Behavioral Finance and the Psychology of Investing
Shefrin, Hersh Holds the Mario L. Belotti Chair in Finance, Leavey School of Business, Santa Clara University
Print publication date: 2002 (this edition)Published to Oxford Scholarship Online: November 2003Print ISBN-13: 978-0-19-516121-2doi:10.1093/0195161211.003.0006
If you made it through and want to discuss this further, feel free to contact me.
Next blog I'll devote to Private Equity financing and specifically, Jacoline Loewen's new book Money Magnet - Attract Investors to Your Business http://canadianprivateequity.blogspot.com/.....so stay tuned!!
Monday, January 12, 2009
The WOW Service Checklist
Here are the guidelines we use to ensure that our clients have the optimal client experience:
Investment Satisfaction:
1) Makes an exceptional effort to understand each client's unique needs.
2) Works with each client to define those needs in considerable detail.
3) Provides well thought-out and viable alternatives suited to solve those needs.
4) Investment advice is appropriate based on each client's objectives.
5) Investment performance is dependable.
6) Investment performance is good relative to the indices.
7) Portfolio performance, at a minimum, meets client expectations.
Services Satisfaction:
1) Clients are extensively involved in the decision-making process.
2) Clients needs are understood and have high priority.
3) Client privacy and confidentiality are strictly maintained.
4) Client queries are responded to on a timely basis.
5) Clients are updated on a regular basis and immediately following a major event.
6) Administrative errors should not occur (but if they do, they are quickly and efficiently dealt with).
7) All deadlines are strictly adhered to.
Relationship Satisfaction:
1) There are no "stupid" questions.
2) Client feedback is invited and used to further enhance service.
3) Stewardship is the on-going monitoring and regular contact to ensure that established goals are being met or otherwise strategy is adjusted accordingly.
4) Is this a comfortable relationship for the client?
5) Is there a feeling of Trust for the client?
Success = Results - Expectations
Is your client experience optimal?
Investment Satisfaction:
1) Makes an exceptional effort to understand each client's unique needs.
2) Works with each client to define those needs in considerable detail.
3) Provides well thought-out and viable alternatives suited to solve those needs.
4) Investment advice is appropriate based on each client's objectives.
5) Investment performance is dependable.
6) Investment performance is good relative to the indices.
7) Portfolio performance, at a minimum, meets client expectations.
Services Satisfaction:
1) Clients are extensively involved in the decision-making process.
2) Clients needs are understood and have high priority.
3) Client privacy and confidentiality are strictly maintained.
4) Client queries are responded to on a timely basis.
5) Clients are updated on a regular basis and immediately following a major event.
6) Administrative errors should not occur (but if they do, they are quickly and efficiently dealt with).
7) All deadlines are strictly adhered to.
Relationship Satisfaction:
1) There are no "stupid" questions.
2) Client feedback is invited and used to further enhance service.
3) Stewardship is the on-going monitoring and regular contact to ensure that established goals are being met or otherwise strategy is adjusted accordingly.
4) Is this a comfortable relationship for the client?
5) Is there a feeling of Trust for the client?
Success = Results - Expectations
Is your client experience optimal?
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