Outstanding Financial Pornography

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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kcowan
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Post by kcowan »

George$ wrote:
kcowan wrote:The only thing misleading is the name Premium (unless they mean for CIBC).
Not sure what you mean. Tom's point was that the promotional text with this product was confusing and misleading. Here is a longer version of his blog ...
If upsides are all arbitrarily 10% (after 3 years) and downsides are actual to 25%, I don't see how this would be attractive for any investor (but might be good for CIBC if lots of them are sold). I am in enthusiastic agreement.
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Post by arnyk »

Feel free to move this if it don't fit, I just found this article oddly (random clips, some parts in order):


Retail structured products, or RSPs, are investments that give a return using a calculation based on stocks, commodities, or other assets. They can also often have hedging strategies built right into the structure, which helps to reduce an investor's risk, and may offer guaranteed protection for your initial investment.


----

Common examples of RSPs include exchange traded funds, which trade like a stock on an exchange but whose value is based on an underlying index, commodity, or group of assets. (Topic = ETFs, ok)

When investors buy RSPs, "it gives them access to things they can't get themselves or do themselves," Mr. Mitchell said. (Ok..)

Buyers are typically investors who hold stocks and are "buying some expertise out there so you don't have to do all the legwork," added Mr. Smith. "You're paying [the seller] a fee to do that for you." (Hold on, what? Are we talking actively managed funds now? Note that these paragraphs are all in succession, so I'm not sure how they're trying to mesh ETFs, active management, and flow-through shares together)

To earn these fees
, the street has been focused on developing many areas of retail structured products, including resource limited partnerships, Mr. Smith said. (And now onto flowthroughs?)

These are investments that take advantage of the Canadian government's incentives to encourage investors to finance exploration for resources.

In the mining as well as the oil and gas sectors, companies sell flow-through shares that share in the tax deduction for these exploration and development expenses.

By putting pools of funds together, the investment managers can form a limited partnership to flow the tax through to the partners, he said, which helps diversify risk. The street sold $900-million of these types of RSPs last year, and it's up to $1.2-billion already for 2006, Mr. Smith added.

----

Another type of RSPs are principal-protected notes, which offer an investor potential returns based on the performance of an underlying investment and a guarantee that, upon maturity, the investor will receive no less than what he or she put in. PPNs include market-linked GICs, and linked-notes.

This has caught the attention of Canadian Securities Administrators, which, on July 7, 2006, issued a notice of its concerns. In particular, the notice states the CSA's concern that "investors are not getting sufficient disclosure to allow them to make an informed investment decision. They are not getting sufficient disclosure about how PPNs are structured, how they work, and the fees and investment risks associated with them." (the only thing I found mentioning anything potentially negative)

In some cases, when a return on an RSP is linked to a volatile investment, for every $10 put in by the investor, $5 might be used in another security that provides the guaranteed return, such as a zero-coupon bond or insurance product.

If the volatile investment does indeed do poorly, the brokerage might take money out to apply it to the guaranteed protection. If the volatile investment does well, they may apply more money to the underlying asset. (Buy low, sell high?)
(PS: My bolded and italicized crap is also in there)

The bulk of the article I'll let pass for now, but did she have to use "RSPs" to describe investments like PPNs, and Flow-Thrus? I'm still confused as to how a paragraph on ETFs quickly leads to active management and then flow-through shares one paragraph immediately after the other.

Anyways, the reason I posted was because I recall numerous posts in the past where relatively new investors would post, "How do I buy RSPs?". To which fellow posters would answer, "An RSP is a tax-deferred investment vehicle, not an actual investment product.". And now with his article out, I'm confuzzled all over again. ;)
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Post by brucecohen »

[Merged into older thread - ModeratorA]

I thought there was a topic with this name, but couldn't find it.

Anyway, today's Globe ran an ideal candidate:
Housing values up by average 264% in 25 years: survey
VIRGINIA GALT

Globe and Mail Update

Residential housing values have increased by an average of 264 per cent in the last 25 years in Canada — rising from $72,061 in 1981 to an estimated $277,000 in 2006, according to a Re/Max real estate survey released Wednesday.

The buying power of baby boomers — who are purchasing homes for themselves and their kids — and a steady influx of new Canadians seeking to put down roots have fuelled demand and pushed up prices, said Re/Max.

“Residential housing values in virtually all major Canadian centres have posted significant gains since 1981, with almost half reporting double-digit appreciation annually. Leading the charge is Barrie, Ont., with an exceptional 372 per cent increase in average price ($51,665 to $244,000) over the 25-year period,” the firm reported.

Despite the cyclical nature of the business, an analysis of 17 housing markets across the country found that price appreciation topped 240 per cent in seven areas: Barrie (372 per cent), St. Catharines (329 per cent), Hamilton-Burlington (325 per cent), Ottawa (297 per cent), Greater Toronto Area (290 per cent), Greater Vancouver Area and Halifax-Dartmouth (242 per cent increase), the firm reported.

“Conventional wisdom used to be that real estate was a relatively safe, long-term investment that typically appreciates at a rate of five per cent annually,” says Michael Polzler, the firm's executive vice-president and regional director in Ontario and Atlantic Canada.

“These statistics clearly tell a different tale. In the top 10 markets, real estate values rose at least eight per cent or more on an annual basis.
Even the worst performing market in the country experienced an increase of close to six per cent annually since 1981.”
The 25-year CAR for top-market Barrie, Ont. is not 8% as Polzler claimed but 6.4%. That was well below the 10.8% CAR the S&P/TSX Composite Index posted for the same period.

The average increase in the CPI over that period was 3.0%, according to PALTrak. So average annual real returns were 3.3% for the average house in Barrie and 7.6% for the S&P/TSX Composite.

And, of course, RE/Max did not factor in transaction costs and other expenses. Image
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Post by investor99 »

I read that article and thought the exact same thing...
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Post by uhoh »

or this one from today's Toronto Star and the mutual fund companies:
(the Star, BTW, running a series of plaintive articles about how the minimum wage should be re-set to 10$, regardless of the impact on small business owners)

Freedom 75: Are you ready to retire?
KEN FAUGHT/TORONTO STAR


. . . or should you be retiring at all?
Stark message to Canadians is they need to plan better, or else
January 24, 2007
Tara Perkins
staff reporter

Be scared, be very scared. You could spend your retirement years flipping burgers.

That's one emerging theme of this year's RRSP season, now in full swing and heading toward the March 1 deadline for contributions.
Last edited by uhoh on 24 Jan 2007 09:15, edited 1 time in total.
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Post by millergd »

I look at real estate as a mutual fund with a high ongoing MER (property taxes-- usually 1%+/year, plus 1% of the purchase price for maintenance), front end charges (land transfer taxes), and deferred sales commission (typically 5% upon sale).

Has anybody run the math to see how those assumptions impact the post-commission returns on real estate?

~millergd~
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Post by Brix »

millergd wrote:I look at real estate as a mutual fund with a high ongoing MER (property taxes-- usually 1%+/year, plus 1% of the purchase price for maintenance), front end charges (land transfer taxes), and deferred sales commission (typically 5% upon sale).

Has anybody run the math to see how those assumptions impact the post-commission returns on real estate?
To get the full picture you'd have to include rental revenue on one hand and imputed rent on the other, bearing in mind the difference in capital gains tax status.

Beyond that, however, (as I've lately discovered to my chagrin) lack of liquidity and associated difficulties of risk management can make residential property rather unattractive to own directly as an investment asset unless you enjoy the thrills of speculation for their own sake -- or else hold so much of it as part of a vast portfolio you can sell and buy a portion of your real estate as the situation might require.
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Post by googlo »

I agree with most of the postings. However a home buyer is willing to mortgage (margin) 250,000 home. I doubt many canadians , if offered, will take the option of buying 250,000 worth of TSX on loan because it has higher
return. So we also have to consider these factors. Also it forces them to save money i.e. pay mortgage on their houses and hopefully accumulate home equity as oppose to neither investing nor saving. So I would say even 3% return for vast majority would not be that bad as oppose to have nothing.
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Post by Bylo Selhi »

uhoh wrote:Be scared, be very scared. You could spend your retirement years flipping burgers.
I guess you didn't read the whole article. It seems to be saying that this year's RRSP ad campaign, especially the Altamira ads, are engaging scare tactics when in fact the retirement situation is rosier than most people imagine.
Richard Shillington, an independent policy analyst in Ottawa who runs a website called "Retirement Planning for the Rest of Us" said "this is the opposite of Freedom 55," when he saw the Altamira ads. "All of the RRSP advertising that I've seen tends to downplay or ignore government programs that you're going to be eligible for," he added. "I think that, for many seniors, their retirement income is going to be more comfortable than they've been led to believe."...

David Trahair, author of Smoke and Mirrors: Financial Myths That Will Ruin Your Retirement Dreams, said the industry is engaged in some fear mongering. "Many of the big financial institutions have brilliant marketing departments, or external marketing firms, dreaming up brilliant scare tactic ads," he said. "They tend to twist the message in a way that makes them more money," he said...

Janet White, Altamira's director of marketing and communications, said her company's ad campaign was based on research that showed 60 per cent of Canadians don't think they will be able to retire by age 60. "The campaign's about realism," she said.
Come on Janet, my dear, just because Canadians "think" something doesn't make it true. If you want to encourage "realism" why not educate them rather than pander to their worst fears?
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Post by Brix »

googlo wrote:[A] home buyer is willing to mortgage (margin) 250,000 home. I doubt many canadians , if offered, will take the option of buying 250,000 worth of TSX on loan because it has higher return. So we also have to consider these factors. Also it forces them to save money i.e. pay mortgage on their houses and hopefully accumulate home equity as oppose to neither investing nor saving.
It would help considerably if homeowners could readily hedge the risk they're so massively exposed to when acquiring and disposing of a residence. Then households could follow the best minimalist advice ("Buy a house if you want to live in a house") with much less stress over opportunity cost vs. lifecycle needs.
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Post by brucecohen »

Brix wrote: It would help considerably if homeowners could readily hedge the risk they're so massively exposed to when acquiring and disposing of a residence. Then households could follow the best minimalist advice ("Buy a house if you want to live in a house") with much less stress over opportunity cost vs. lifecycle needs.
They can in the US, through the Chicago Mercantile Exchange though I have no idea of how large/efficient the market is.
In May, the Chicago Mercantile Exchange started trading futures and options contracts on home-price indexes for 10 individual metro areas including San Francisco, plus an index representing all 10 cities.

<snip>
Suppose you own an expensive house in San Francisco and are afraid it will plummet in value, but you don't want to sell it and move. You could stay in the house and sell futures or buy put options on the San Francisco housing price index. If home prices in San Francisco do fall, the value of your house will probably go down as well, but you will make money on your futures contracts. If you bet wrong, you will lose money on your contracts, but the value of your house will probably go up.

Unfortunately, futures and options have a steep learning curve, too steep for the average homeowner who wants to place a one-time bet. And the housing contracts are quite costly today because they are so thinly traded.

That could change. The costs will come down as trading volume builds. And the contracts could be used to create more consumer-friendly products.
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Post by Brix »

BruceCohen wrote:They can in the US
Though, as the passage quoted confirms, not readily. Institutions make up the bulk of the market for such instruments at the moment, I suspect.
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Post by parvus »

uhoh quoted:
Be scared, be very scared. You could spend your retirement years flipping burgers.
Or at Wal-Mart.

I'd prefer to be running a second-hand bookstore. :wink:
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Post by Bylo Selhi »

I saw Young Adults face 'Catch 22' when it comes to investing, says TD Waterhouse yesterday and was tempted to post it here. Good thing I didn't bother because Carrick does a good job on it today in Under 25? Live it up! Financial advisers can wait.
Yesterday, for example, the financial advice arm of TD Waterhouse issued the results of a poll it commissioned in which it was found that people between the ages of 18 and 24 are less likely to have consulted a financial planner, broker or investment adviser than other age groups. TD's point was that young people are most in need of professional financial help, and yet they're the least likely to get it. You're between the ages of 18 and 24 and you're thinking about consulting a financial adviser? Get a life, would ya! There's no need to let the financial industry get its hooks into you just yet...

TD is offering no-charge consultations to young adults, with an eye toward building relationships that will grow as these clients have more money to invest. My advice to people in their early 20s is to live a little, and then visit an adviser when you really need to. It could be because you're starting to pull down a decent salary or you're getting married, having kids or buying a home. Life gets more complex at these points and expert help can be indispensable if financial matters baffle you. TD's own poll commentary offers up a classic example of why it's smart to be wary of the financial industry at any age. It talks about today's young people needing to have more in retirement savings because of "such trends as pressure on the Canada Pension Plan." News bulletin: There is no pressure on the CPP. It's solid and anyone who tells you otherwise is probably trying to sell you investments.
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Post by parvus »

What's interesting about the study is that post-64 investors are also more likely to use discount brokers and ditch the planner.

- Those aged 65-69 are more than twice as likely to use a discount
broker than the average of all age groups (18% vs. 7%).

- The incidence of using a financial planner, full-service broker,
private investment counsellor, portfolio manager or investment
manager increases directly with age up to 64, then drops
precipitously from the 50-64 year-old age group (33%) to the 65-69
year-old group (19%).
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Post by Bylo Selhi »

pitz wrote:From the CBC
Not really. They pulled it off Canadian Press wire and the expertbozo who's being quoted is a "director of BMO Mutual Funds" :roll:
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Post by brian3 »

Is this pornography on behalf of working in financial industry ?

Number of years men can expect to live after 60

Financial Services 26.2

Aerospace and Defence 26.1

Insurance 25.3

Telecoms 25.2

Media 25.0

Health Care and Pharmaceuticals 24.6

Banks 24.4

Chemicals 24.0

Travel and Leisure 23.8

Retail 23.6

Household, Personal and Leisure Goods 23.6

Food and Beverages 23.5

Utilities 23.3

Support Services and Industrials 23.3

Mining and Metals 23.2

Oil and Gas 23.0

Construction and Materials 22.4

Tobacco 21.6

I was in aerospace so I feel surprised at the above ranking. We had severe market crashes every ten years or so and it was highly stressful and moreso during staff reductions. Then again it's UK data so your MMV.

Source :

http://business.timesonline.co.uk/tol/b ... 361781.ece
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Bylo Selhi
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Post by Bylo Selhi »

From How to make ETFs less risky: buy even more
Jonathan Wellum, chief investment officer and chief executive officer at AIC Ltd. of Burlington, Ont., says a good portfolio manager can always outperform the index without the added risk.
Mr Wellum is also a fund manager. According to GlobeFund, his AIC American Advantage fund's record is:

Code: Select all

Returns as of January 31, 2007
        Fund 	Group Avg 	Index*
1 year 	14.48% 	18.31% 	17.51%
3 year 	3.89% 	12.46% 	12.62%
5 year 	0.37% 	7.62% 	8.64%
10 year 	n/a 	11.01% 	n/a

3 year risk 	9.84 	10.04 	8.26
3 year beta 	0.96 	1.02 	1.00
and his AIC Diversified Canada fund's record is:

Code: Select all

Returns as of January 31, 2007
        Fund 	Group Avg 	Index*
1 year 	13.29% 	10.72% 	11.84%
3 year 	9.63% 	14.35% 	17.56%
5 year 	5.69% 	10.45% 	13.44%
10 year 	8.02% 	8.50% 	9.76%

3 year risk 	6.90 	9.29 	9.99
3 year beta 	0.46 	0.81 	1.00
What does that say about Mr Wellum's "goodness"?
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Post by millergd »

Marketing hype:

CIBC: House prices expected to double in 20 years
TORONTO (Reuters) - Canadian house prices are likely to double over the next 20 years, despite the downsizing of homes by seniors and a shrinking number of younger, first-time buyers, a report by CIBC World Markets said on Wednesday.

Fears of a house-price decline thanks to an aging population and other changing demographics are "highly exaggerated," Benjamin Tal, senior economist at CIBC World Markets, said in the report.
...
"Assuming a 2 percent annual inflation rate, this means that house prices in Canada are expected to double by 2026," said Tal.
It's not what was said but how it was presented that qualifies this one as financial pornography:

--Doubling every 20 years = CAGR of 3.5%.

--The article doesn't mention that this will be a slower rate of price appreciation than what most of Canada has seen this decade.

--Housing historically has grown at the rate of inflation plus 1% to 2%. As long as the BoC hits its 2% core inflation target, their prediction is merely an extrapolation of historic norms.

If something in the future will be like it was in the past, what makes it newsworthy?

Once you look at it that way, their story is no different than TD Economics' long term prediction from September 2006 that projected a "close to 4% average annual rate over the next 25 years."

There are now a host of excited REALTORs out there who will be pointing naive homebuyers to this data.

~millergd~
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Post by kcowan »

Using the Royal Lepage data, a condo in West Van has increased from $163k to $415k in the last 25 years, for an annual CGR of 3.8%, ignoring taxes, condo fees, maintenance, leaky condo assessment, realtor fees, interest on the mortgage...

But hey it's taxfree and you are saving thowing away your money on rent :!:

BTW CPI for that same 25 years was 2.97% CAGR. :o

I would be interested if others can do the same for where they live.
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Post by flywaysuzy »

Yesterday, on the radio: Average property tax increase this year in Vancouver= 8+%. Expect that # to go up with furthur olympic bills coming in over the next few years... who will be surprised when the increased price of houses also triggers a hefty increase in the cost of house insurence?
I'm not whining personally, only because our property taxes have yet to arrive.
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Post by kcowan »

I agree with your concern on tax increases. Vancouver is a bit of a special case this year because they are trying to give business owners a break after hosing them for years. Of course, such equalization measures might go on for many years if the politicians survive the next election. :oops:

PS I just did North Toronto where the family home is located and the CAGR for a bungalow is 5.79% since 82, much better than WV condos. And standard condos there did 7.29% so location and type of housing makes a huge difference.

So is Toronto more super-heated now or just a better long term investment?
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Post by yielder »

I'd prefer some fat dividends

The writer has listed securities that have been called. He uses current yield rather than yield-to-worst. He doesn't distinguish between div paying prefs and interest paying COPrs. As for risk, "Generally, the higher the yield on a preferred share, the more risk. In other words, many of these preferred shares have low credit ratings and can be volatile." That's a bit of an understatement. He goes on to say "Some preferred shares are also structured products or so-called split trusts funds. These can be complicated, and therefore are likely riskier that most preferred shares.". No kidding!!!!

In this world of yield chasing, people will buy these things without understanding the risks: bond convenants cause common divs to get cut first and then pref divs. If you wouldn't buy the bonds, why would you buy the prefs unless you like the thrill of trying to catch a falling knife? :roll:
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Post by IdOp »

Ok, maybe Carrick's latest article about bond funds isn't all-out fin-pr0n, but its phoney "premise":
lots of investors only have access to mutual funds and simply aren't ever going to set up the brokerage account they need to buy bonds directly.

...

Buying actual bonds is much more difficult. You need a brokerage account ...

...

we're focusing on bond funds for people who don't deal with a broker and thus have access only to conventional mutual funds.
AFAIK simply isn't true. You can buy bonds and T-bills at a bank branch, all you need is, say, a bank account (or perhaps another financial relationship with them). The rest of the article isn't too bad, but could be better. ADDED: E.g., he doesn't mention low-fee bond index mutual funds, nor warn that some managed funds try to overcome their fees by tilting towards higher-risk higher-yield bonds.
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