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 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
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