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
Follow me on Twitter at JSTomenson

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.

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..........

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.

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/

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.