Posts Tagged ‘personal finance’

New Zealand’s universal pension is in danger

Saturday, June 16th, 2018

New Zealand has a universal pension scheme that is the envy of the world. It is simple, affordable, and eliminates poverty in old age. When a qualified resident reaches the state pension age, he or she receives a basic, flat pension, regardless of income, wealth or employment history. This benefit, called ‘Superannuation’, is financed from general government revenue. Earmarked taxes are not levied to support it, but benefits are taxable as regular income, so net benefits are lower for pensioners who have income from work or from savings. (more…)

tips for personal investors

Monday, February 19th, 2018

It is best to ignore short-term fluctuations in financial markets. “Staggering amounts of time and intellectual energy,” writes Miles Johnson, Capital Markets Editor of the FT, “are expended by market watchers who treat the latest leg up or down in US Treasuries or stock markets as imbued with meaning, only to reverse their view the following week.”

Benjamin Graham (1894-1976), a British-born American economist and investor, would agree. A prudent investor should either buy-and-hold, when prices are steady, or purchase assets when the price is low, and sell when they are high. Most investors do the opposite. Graham’s seminal text on investing, The Intelligent Investor, was first published in 1949, and reprinted many times before and after his death. It is still relevant today, and continues to be ignored by most investors.

Ben Graham, the famed father of value investing, used the analogy of the market as a business partner so mentally unstable he would on some days offer to sell you his share for a rock bottom price, and on better days would ask for a stratospheric valuation. This character, Mr Graham noted, would be a fantastic person to do business with.

“Price fluctuations have only one significant meaning for the true investor,” he wrote. “They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market.”

Miles Johnson, “Beware the all-knowing macro forecasting genius“, Financial Times, 19 February 2018 (gated paywall).


longevity insurance (annuities)

Saturday, August 5th, 2017

Here is excellent advice from a British expert in personal finance. Longevity risk – the risk of outliving one’s savings – is underestimated or ignored by many.

[T]he most important type of risk that most people fail to buy insurance against is living too long — longevity risk. Many people are now shunning using at least some of their pension fund to buy a level or inflation protected guaranteed annuity, because they focus on the perceived poor value of annuities, compared with the rates on offer 10 years ago.

Jason Butler, “Insurance — a vital component of financial planning”, Financial Times, 3 August 2017 (gated paywall).

Amazon battles Walmart

Saturday, June 10th, 2017

The competition is different than you might expect, folks. There is a strong focus on finance, in addition to ecommerce.

The dominant US ecommerce company [Amazon] has been dabbling in lending for nearly six years, and has made $3bn in loans to some of the small businesses that sell through its online platform.

Now Amazon is substantially expanding its offer of instant loans and considering whether to provide other bank-like services. ….

The Seattle-based juggernaut also this week stepped up its battle with the world’s largest retailer, Walmart. Targeting the lower income customers that have long been Walmart’s bread and butter, Amazon said it would offer substantial discounts on its Prime membership programme to US shoppers who are on public assistance. ….

Over the short term, both initiatives sound like great news for consumers and small businesses. Amazon’s move into banking has already created new borrowing opportunities for businesses that had struggled to get bank loans. And its offer to low-income customers will give them more equal access to the benefits of the digital economy.

Brooke Masters, “Amazon’s quiet domination merits greater scrutiny“, Financial Times, 10 June 2017 (gated paywall).

Walmart Financial Services provides credit cards and other bank-like services, including cash transfers to Mexico and other countries, in addition to transfers within the United States and Canada.

deregulating sale of financial products

Sunday, February 5th, 2017

Here is a follow-up to an earlier post.

President Trump and his team are moving quickly to kill the “Fiduciary rule” intended to protect consumers from financial advisers who look after their own interest (commissions on sales) rather than the interest of their clients.

President Donald Trump has begun killing off an Obama-era retirement-savings rule unpopular with Republicans and some financial-industry executives who say it would harm consumers more than help…“We think it is a bad rule. It is a bad rule for consumers,” said White House National Economic Council Director Gary Cohn in an interview with The Wall Street Journal on Thursday. “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”

Lisa Beilfuss and Michael Wursthorn, “Trump Moves to Kill Off Obama’s Landmark Retirement Rule“, Wall Street Journal, 3 February 2017 (gated paywall).

This is NOT fake news, folks; nor is it satire.

Wall Street and the White House

Friday, February 3rd, 2017

The relationship between Wall Street and the White House is closer than ever. Donald Trump will soon begin to release Wall Street from controls that President Obama imposed on banks and financial advisers.

President Donald Trump is on Friday due to take his first steps towards undoing parts of the Dodd-Frank reforms that reshaped US banking in the aftermath of the financial crisis.

Mr Trump will also cheer financial professionals who offer retirement advice by directing his officials to consider scrapping a rule that orders them to act in the best interests of their clients, a senior White House official told the Wall Street Journal. [Emphasis added.]

Gary Cohn, the former Goldman Sachs executive who is now director of the White House’s National Economic Council, said Mr Trump would sign executive orders preparing the way to fulfil a campaign pledge to dismantle parts of Dodd-Frank. ….

The so-called “fiduciary rule” on retirement advice, which is in the White House’s crosshairs, has been the target of fierce lobbying by broker-dealers and other financial advisers since it was proposed by the Obama administration in 2015.

Although not yet in force, it will require them to recommend the best product for their clients, not just a suitable product. [Emphasis added.] ….

Steven Mnuchin, the hedge fund manager nominated to be Treasury secretary, has promised to “kill” parts of the [Dodd-Frank] law, including the Volcker rule, which put curbs on banks placing bets with their own money.

Barney Jopson, “Trump to take first step towards dismantling Dodd-Frank reforms“, Financial Times, 4 February 2017 (gated paywall).

reaction to guaranteed active management

Monday, January 9th, 2017

The FT letters section is becoming something of a blog. Last week reader Jason MacQueen promoted “guaranteed active management”, a scheme to guarantee investors a return higher than that offered by managers of passive funds. Fund managers would assume all of the downside risk and reap any upside rewards.

MacQueen’s letter drew a lengthy response from reader Jon Hay, who wrote (in part):

It is nice for any one fund manager to be able to claim that it has outperformed a benchmark. But it is quite wrong and misleading to cultivate the idea that investors should generally expect their managers to outperform. That is self-evidently impossible. That the average active manager underperforms the benchmark after costs is necessarily always true. ….

[F]und performance … often — even if it may underperform a benchmark — delivers capital growth and income in absolute terms. That can only be the true goal of fund management.

Jon Hay, “Benchmark obsession is a distraction from fund management’s true goal“, letter to the editor, Financial Times, 9 January 2017 (gated paywall).

Mr Hay is Corporate finance editor of GlobalCapital, a magazine published by London-based Euromoney Institutional Investor. His letter attracted not letters, but short comments from ‘HoundDog’ and ‘EconLarry’. The second pseudonym belongs to the writer of this blog (Thought du Jour). (more…)

guaranteed active management

Thursday, January 5th, 2017

Investors have been moving in droves from active to passive funds, i.e. from funds with high fees to those with low fees, from managers who promise higher than market returns to those who track some broad market index, such as the S&P 500, Russel 1000, FTSE 100 or Nikkei 225.

Critics point out that active managers, on average, perform no better than the market. After fees they perform much worse than the market, so investors are better off placing their savings with passive managers who charge lower fees. An added advantage of passive management is that the return will never be much worse than the index that the chosen fund is tracking.

FT reader Jason MacQueen has found a way to silence these critics. His solution is “guaranteed active management”. The manager places his own money in the fund, along with that of the client, and promises a return equal to the market (index) return plus, say, 0.5%. Instead of fees, the manager pockets all returns in excess of the guaranteed amount.

In short, the investor secures returns that are guaranteed to beat (by a fixed percentage) returns promised by passive funds. Moreover, all the downside risk is borne by the manager. How is this possible? Mr MacQueen explains. (more…)

rent or buy?

Friday, November 18th, 2016

I am often asked whether it is better to rent or to purchase a home. As I am an economist, friends assume that I have an answer. But, precisely because I am an economist, my response is usually “It depends”.

University of Oregon economist Tim Duy has drafted a very useful answer (It depends!) on his blog. I agree with his post, but would like to add a few points that are missing.


declining home ownership

Monday, November 7th, 2016

Washington Post columnist Catherine Rampell notes that US millenials (young people born between 1982 and 1994) are purchasing few homes compared to older generations. “Millennials want to buy houses”, writes Ms Rampell, “but they simply can’t afford to.” Indeed, they often cannot afford even to rent, so continue to live with their parents or move in with other relatives.

Ms Rampell does not see declining home ownership in itself as a problem. Indeed, she describes it as something we might celebrate.

The reasons behind this homeownership slide are certainly nothing to celebrate. But the slide itself might be.

We as a society tend to overvalue homeownership, at least from a financial perspective. Were it not for the psychic and sentimental benefits of homeownership, it’s otherwise hard to imagine financial advisers counseling their clients to dump all their savings into a single, giant, highly illiquid asset.

Especially one that, on average, shows such meager returns.

Over the past century, home prices have risen an average of about 0.6 percent per year, according to data from economist and Nobel laureate Robert J. Shiller. Investing in an index fund has, on average, far higher returns than owning, even after you take into account the costs of renting and the tax subsidies for buying.

For millennials, a mass lifestyle shift away from owning and toward either renting or crashing with relatives could be especially advantageous. That’s because buying a house not only locks up your savings; it also locks you, the owner, into a specific geographic location.

For workers who are just figuring out their careers … this seems especially wrongheaded. We want young workers to be mobile and to have as few frictions for job-hopping as possible.

Catherine Rampell, “Millennials aren’t buying homes. Good for them“, Washington Post, 22 August 2016.

HT Alphachat podcast of 4 November 2016 (free link), where Catherine Rampell discusses, with host Cardiff Garcia, her columns on shifting marriage trends and their potential significance.

I share Ms Ramplell’s view that home ownership is a poor investment; it is illiquid and promises poor returns compared to other investments. See, for example, my previous TdJ posts on the subject here, here, here and here.

Purchasing a home, even one paid almost entirely with borrowed money (a mortgage), is useful, though, in a way not mentioned in the column: the need to pay off a mortgage amounts to forced saving for retirement and old age. At least it used to be treated as forced saving. In the United States, for the past three decades homeowners have instead drawn on their equity, increasing their mortgage debt for spending on cars, furniture, holidays, all manner of consumer goods. Behavioural economist Richard Thaler explains how what used to be an accepted social norm changed so radically.

For decades people treated the money in their homes much like retirement savings; it was sacrosanct. In fact, in my parents’ generation, families strived to pay off their mortgages as quickly as possible, and as late as the early 1980s, people over sixty had little or no mortgage debt. in time this attitude began to shift in the United States, partly as an unintended side effect of a Reagan-era tax reform. Before this change, all interest paid, including the interest on automobile loans and credit cards, was tax deductible; after 1986 only home mortgage interest qualified for a deduction. this created an economic incentive for banks to use a home equity loan to finance the purchase of a car rather than a car loan, because the interest was often lower as well as being tax deductible. But the change eroded the social norm that home equity was sacrosanct.

Richard H. Thaler, Misbehaving: The Making of Behavioral Economics (Norton, 2015), p. 77.