Posts Tagged ‘personal finance’

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.

investment advice for football pros

Saturday, October 29th, 2016

This is excellent advice for all of us!

Many footballers lose all their money after they retire. England’s Professional Footballers Association has estimated that 10 to 20 per cent of ex-players go bankrupt. This is something Raiola thinks about a lot. “Look, you now have players who can earn €50m to €200m [over their careers]. How do you invest that — or not? Players are always getting offers from people.” He puts on an overexcited young voice: “‘Mino, a friend of mine has a real estate company, and they’re going to do this, and I’ll get 14 per cent, guaranteed!’

“But you also have to watch out for banks. Banks want to sell you products too. I now have an [investment] portfolio for various players, which if you add it all up is worth about €900m. And we’re more conservative than conservative. I always say to players, ‘We do not invest.’ We just want the player to finish his career with the money he earned, and more — but not less. What I suggest is, ‘Buy your own house fast, buy bricks, and otherwise keep your money in the bank, even if it’s at low interest. You don’t have to live off the interest. Don’t put it into businesses you know nothing about.

“All my players, in the beginning, want a restaurant, a hotel or a café. I come from the restaurant business and I say, ‘Don’t come to me with that, zero. Because I know what that is.’”

Simon Kuper, “Mino Raiola: meet the super-agent behind Pogba and Ibrahimovic“, Financial Times Magazine, 29 October 2016 (metered paywall).

Carmine “Mino” Raiola (born 1967) is an Italian-born Dutch football agent. In his youth, he worked in his family’s Haarlem restaurant. At the same time, he completed high school and studied law (not business or finance!) for two years. At the age of 19, writes Mr Kuper, “he became a millionaire by buying a local McDonald’s and selling it to a property developer”.

Raiola currently resides in Monaco, speaks seven languages, and represents more than 20 well-known players from European leagues.

retirement savings (cartoon)

Monday, October 3rd, 2016

Consumers who save via pension are financially worse off than if they had invested the money themselves, according to new research.

FTfm: This week’s cartoon“, Fund Management, Financial Times, 3 October 2016 (metered paywall).

Details are provided in a column published last week:

Consumers who save via a pension fund are financially worse off than if they had invested the money themselves, according to new research. High fees, opaque commissions and taxes have been criticised for putting the retirement incomes of millions of European savers at risk. ….

Better Finance, the investor rights group that carried out the research, said … a direct investment — 50 per cent in equities and 50 per cent in euro bonds — at the turn of the century would have returned 105 per cent gross of fees and taxes, or 47 per cent in real terms. That is an average of 2.5 per cent a year.

In contrast, some French pension savers lost an average of 0.8 per cent a year since 2000, while those in Spain and Italy also experienced losses over the same period after accounting for inflation.

Attracta Mooney, “Value of saving via pension funds questioned”, Financial Times, 27 September 2016 (metered paywall).

Wells Fargo, bad bank

Tuesday, September 13th, 2016

This is an update to my September 8th post on this scandal.
A US government agency has fined Wells Fargo $185m for illegal practices. Wells, in turn, has fired more than 5,300 employees for malpractice. Top executives, meanwhile, keep their hefty bonuses, and in most cases their jobs.

Wells Fargo is facing calls to claw back bonuses paid to senior executives … as the fallout over its sham account scandal intensifies.

Two top institutional shareholders … have demanded answers over payments to Carrie Tolstedt, who headed the division where the episode took place. ….

Wells said in July that Ms Tolstedt, 56, was retiring …. She was paid $9.05m last year [including $6.5m in bonuses] ….

One large investor told the Financial Times that Wells should reclaim bonuses from the Wells executive, who has received at least $45m in total pay since 2011. ….

Bernie Sanders, the US senator who ran unsuccessfully for president this year, also weighed in, calling the pay for Ms Tolstedt a “disgrace”. ….

John Stumpf, chairman and chief executive, said when Ms Tolstedt’s departure was announced that she had been a “standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership”.

Wells would not comment on the terms of Ms Tolstedt’s departure nor the investor complaints.

Alistair Gray and Stephen Foley, “Wells Fargo urged to clawback bonuses over fake accounts“, Financial Times, 12 September 2016 (metered paywall).

Breaking news on the subject:

US bank Wells Fargo is to scrap sales targets for staff in its branches, in an attempt to restore the faith of customers and investors in the wake of a “phantom account” scandal. ….

John Shrewsberry, the bank’s chief financial officer, pledged to “take a big, wide fresh look at who knew what and when” about the accounts and said a postmortem would take in employees at “all levels of the organisation”.

A tenth of the 5,300 workers that Wells had fired since the start of 2011 over the malpractice were “managers”, Mr Shrewsberry said. But, as he set out plans to change Wells’ business practices, he appeared to suggest the blame lay mainly with low-ranking, underperforming sales staff.

Alistair Gray, “Wells Fargo to scrap sales targets“,, 13 September 2016.

According to Fortune, Carrie Tolstedt, the Wells Fargo executive in charge of the unit where employees opened more than 2 million largely unauthorized customer accounts, retired over the summer with an exit package worth $124.6 million. [Emphasis added.]

Matthew J. Belvedere, “If ever there’s a case for clawbacks, Wells Fargo is it: Ex-FDIC chair“, CNBC News, 13 September 2016.

under-consumption in retirement

Friday, September 9th, 2016

FT columnist Merryn Somerset Webb worries that “too many people ruin their retirement by deferring their consumption for too long”.

At a meeting of fund managers and wealth managers a few weeks ago, I said that I thought the priority of wealth managers looking after pension savings — the ones who really care about their clients, anyway — should be to make sure that most of their clients die close to broke. It didn’t go down that well. There were sharp intakes of breath all around. ….

That’s because most [fund] managers — and their clients — see capital and income as two entirely different things. Capital is not for spending — even in retirement. Income (in the form of dividends, and so on) is the thing for spending. ….

This is silly. ….

[D]ying broke is easy; stretching your money out so it is used evenly over your retirement and then dying broke is really hard. Who can get that timing right? This problem used to be solved by annuities — which before pension freedom pretty much everyone had to buy. These made no distinction between capital and income: the whole lot was handed to an insurance company in exchange for an income for life. If that was all you had, you automatically died broke. ….

I’ve said this here before but it bears repeating. The financial services industry has not yet got to grips with helping people figure out how to de-cumulate. It is time it did — think annuity-style products, funds that distribute percentages of total returns, or a new kind of return-smoothing product, perhaps.

I’ll leave that with them — and even chuck in a little incentive. The first company to come up with a product that helps retirement savers run down their capital effectively and that comes with the strapline “Let US help YOU to die broke” will get an honourable mention in this column.

Merryn Somerset Webb, “Why we should all aim to die broke“, Financial Times, 9 September 2016 (metered paywall).

I agree, with one reservation. Often, retirees have dependents who rely on them for financial assistance. If such a retiree dies penniless, dependents might be left destitute. If the only dependent is a spouse, the solution is simple: a joint annuity. This is a pension that continues until BOTH beneficiaries die, though with a smaller amount (typically 50%) for the widow or widower of the primary pensioner.

The same logic applies to other dependents. There is no reason more beneficiaries cannot be added to an annuity, with any desired sum awarded monthly for life upon death of the primary holder of the annuity.

All this comes with a cost. The pension will be smaller the larger the number of beneficiaries, the longer their expected lifetimes, and the younger the expected age that the annuity begins.

Other types of annuities are possible. If a dependent is a child, the pension could cease when the beneficiary reaches a specified age (say, 18 or 21 years).

These annuities are useful, but complex. The financial services industry could make itself useful by devising affordable products to meet the varied needs of retirees AND their dependents.

bad banks

Thursday, September 8th, 2016

Some things never change. Banks are still in business, and continue to behave badly. Wells Fargo was just caught in flagrante delicto, and fined 185 million dollars. The unanswered question: who is going to pay the fine? I predict it will be the stockholders, not management. Top managers are routinely allowed to run businesses into the ground and keep huge bonuses awarded for “a job well-done”.

Wells Fargo has been hit by the US consumer finance watchdog’s largest fine to date after regulators found staff racing to meet sales targets secretly opened millions of [credit card, debit, insurance, pension and other] accounts without customers’ knowledge. ….  Wells will pay $185m in fines as well as restitution. ….

Staff funded the new, unauthorised accounts by moving money that belonged to customers without their consent.

As a result, … many consumers were hit with annual fees, overdraft-protection charges and other costs. ….

The presidential election put banks back in the spotlight earlier this year as Bernie Sanders, the left-winger who unsuccessfully challenged Hillary Clinton for the Democratic nomination, railed against their perceived bad behaviour.

However, with the general election campaign now in full swing Wall Street reform has taken a back seat, as neither Mrs Clinton nor Donald Trump, who both have ties to the finance world, appear eager to talk about banks. ….

The penalty is an important setback for Wells Fargo. Marty Mosby, analyst at Vining Sparks, said the bank’s success at cross selling has been “a core part of what makes Wells different.”

Alistair Gray , “Wells Fargo hit with record fine over secret accounts“, Financial Times, 9 February 2016 (metered paywall).

As Mr Gray hints, it doesn’t matter to bankers who wins the US presidential election. Both candidates are in bed with Wall Street.

personal investment for the long run

Friday, September 2nd, 2016

John Authers offers a brief summary of advice on the tenth anniversary of his FT Long View investment column.

•Always worry about costs. You do not know about future returns, but present costs are known, and likely to be extended into the future. ….

•Be humble. The market is … efficient enough to make it close to impossible to beat. [This means] … that passive index funds should be the bulk of a portfolio.

•Rebalancing is the gift that keeps on giving. Set an asset allocation, and rebalance regularly, and you regularly buy more of assets that have just fallen, and take profits in assets that have risen. It works.

•It is as much risk to be out of the market as in it. …. Hindsight Capital gets timing right; you almost certainly won’t.

•For those who want to beat the market: look at the price you pay. All else equal, the greater the price you pay, the lower your potential return, and vice versa.

•… [O]nly attempt to beat the market when you have good reason to believe you know something that others don’t.

•And if you’re serious about giving this all the time you’ve got — look away from the public markets. The public markets are ever more efficient, making it ever harder to beat them, but beyond it, there may still be bargains.

•And most importantly, there are far more important things in life than finance. … [W]e should deliver ourselves from the agonies of investment choice to the greatest extent possible — and get on with the things in life that really matter.

John Authers, “Taking the Long View in investing: eight lessons“, Financial Times, 3 September 2016 (metered paywall).

I especially like his last recommendation, as I dislike stress.

financial markets work!

Monday, July 4th, 2016

Active traders with high fees continue to lose clients to low-cost, passively managed funds that are based on market indices such as the Standard and Poor 500. Goldman Sachs nonetheless believes, optimistically, that in the future their traders will manage to generate returns that justify high fees. Note, however, that GS does not guarantee results. There is no return of fees, even if a fund performs dismally.

Goldman Sachs has told staff at its asset management division GSAM to tighten their belts, amid outflows and poor performance from some of its largest funds.

Executives have issued an edict that GSAM’s 2,000 employees must curtail spending, including a ban on all travel that is not associated with meeting clients and winning new business. ….

The malaise reflects wider pressures on the industry, where actively managed funds are losing market share to low-cost index trackers. ….

A Goldman spokesman said: “Prudent cost management is important but we remain committed to serving our clients through active management and we believe we can grow the business over time by focusing on long-term performance, just as we have done in other areas.”

Stephen Foley, “Goldman Sachs tells its asset managers to tighten belts“, Financial Times, 4 July 2016 (metered paywall).

More and more consumers now realise that actively managed funds, on average, perform no better than index funds. After fees, index funds in the long run inevitably provide a better return than actively traded funds. See, for example, this recent clip from Last Week Tonight with comedian John Oliver. Mr Oliver provides good advice for savers. This segment of the show, though fun to watch, is serious. It is not comedy!


overpriced hedge funds

Wednesday, May 25th, 2016

It was the shot heard around the hedge fund world. After the New York City Employees’ Retirement System decided to cash all its investments in hedge funds, Letitia James, the city’s public advocate, delivered a message to the industry straight out of Occupy Wall Street: “Let them sell their summer homes and jets and return those fees to their investors.”

Hedge funds, she said last month, “believe they can do no wrong, even as they are losing money”. If they truly cared about New York’s pensioners, “they would never charge large fees for failing to deliver on their promises”. ….

Flows of money from big institutions have transformed hedge funds, which were once primarily a vehicle for rich families. Today, large pension funds account for about a quarter of the money managed by hedge funds. Since the market hit its post-crisis bottom in March 2009, passive, low-cost equity fund investors have thrived while hedge fund returns have underperformed the S&P 500 by 51 percentage points.

John Authers and Mary Childs, “Hedge funds: Overpriced, underperforming“, Financial Times, 25 May 2016 (metered paywall).

This is an update on the high cost -with no visible benefit- of actively managed funds (also known as ‘hedge funds’). TdJ has covered the topic numerous times in the past, for example here, here and here.

hedge funds

pensions are really, really simple

Wednesday, May 25th, 2016

FT columnist Merryn Somerset Webb, tongue-in-cheek, explains that retirement pensions are easy to understand. (more…)