Rational Advisor

There’s more and more auto manufacturers planning to launch cars that use less Oil

and some of them even look great

visit the link and see for yourself - this is all stuff that is coming out.

If the mass transit system of automobiles was to change its use of Oil, what woudl happen to Oil?

see the link

http://inventorspot.com/articles/top_8_us_made_electric_vehicles_11107

Rational

Here’s a note I recently received from Charles Brandes

“Today’s investing environment reminds me of thirty years ago, which only serves to reinforce my belief that investors are best off when they ignore the noise and confusion of short-term factors. The price of oil, the volatility of currencies, the level of interest rates, the fallout from sub-prime mortgages - these things have little impact on the performance of value portfolios over the long term. In fact, at the foundation of what we do is a belief in regression to the mean - that extreme highs and lows inevitably give way to historic averages over the long term. That is why we continue to stay true to our value investing philosophy and do not engage in currency hedging.”
- Charles Brandes, January 28, 2008

Rational

In an earlier post, I had highlighted a conversation with David Dreman, about two different kinds of investors “the Wealthy” and “The Rest”

Unfortunately, there are too many in “The Rest” category - let’s call them “The Masses” and too few in “The Wealthy”

If “The Masses” made the right investment decisions greater than 50% of the time, they would be in “the Wealthy” group. Unfortunately they don’t.

David’s premise was, that what “The Wealthy” do is really the opposite of what “The Masses” do. They don’t read the same things, they don’t watch the same things, and really when “The Masses” are zigging, “the wealthy” are zagging.

Now to why, I am bringin this point up, again and again

Todays news article is from the cbc (I am giving you the highlights)

Mutual fund sales plunge to $460.5M in January; industry assets sag

Investors abandoned stock and bond mutual funds in droves during January, pulling a net $4.35 billion out of long-term funds during a stomach-churning month on financial markets.

This was offset by $4.81 billion in net sales of money market funds, leaving the industry with net sales for the month of $460.5 million - down from $2.9 billion in December and $4 billion in January of last year.

Investors pulled $3.1 billion out of equity funds in January.

Balanced funds, regarded as a steady combination of equity and fixed-income holdings, endured net redemptions of more than $1.1 billion in January, while redemptions from bond funds exceeded sales by $218 million.

http://www.cbc.ca/cp/Money/080215/J021502AU.html

So, “The Masses” have taken their money out of balanced funds, and equity funds.

Who would you rather follow “The Masses” or their counterparts. “The Wealthy”. If the “The Masses” are selling, there has to be a buyer, and typically that buyer is “The Wealthy”

Remain Rational - don’t let your emotions make you part of “The Masses”

Rational

I’ve never been a fan of using computer models to tell us to do something.

I’ve continuously argued that correlation and other statistical “risk” tools are not really useful. But in the lack of any clear tools, and also in the ability of the analysts to further confuse us with their BS, they spring up numbers as if these numbers have real relevancy

Amazingly most of these analysts, and note most of the recent problems have been due to these brainac analysts structuring these crappy mortgages at banks and brokerage houses. And all because they believed too much in these spreadsheets.

This situation is no different than others before. Whether it be LTCM over levering, dotcoms with no earnings, over weighting income trusts, or chasing yield and buying ABCP, the latest, greatest can’t miss scheme always ends badly and the last on board are the first to the dustbin.

I frankly have a very lowly opinion of analysts at banks and brokerages.

I just love that television commercial where it portrays bankers as rats scurrying around grabbing and clutching at our money…..Yup….You have BANKERS!! and their ANALYST buddies A friend told me years ago that banks are not your friend…no matter how nice they seem, and he was oh so right!!

The mafia uses guns. Wall Street analysts uses spreadsheets. They are both crooks. Wall Street was always run by greed, however when they let the bankers in the brokerage business, we got professional crooks. Screw with a spreadsheet long enough, and it will tell you, what you want to know. Most successful ceo’s of decent corporations ,are not brainaics with vast degrees behind their names for the most part, in the US, they graduated from no name colleges, with no name degrees. And of course, are very most successful, Gates and Dell, bailed out of University. However, a lot of the problems we’ve had in the markets were due to guys with degrees behind their names - Nobel Prize winning guys at LTCM, the PhDs that created the sophisticated computer models that lend to 1987 stock market crash, the technology analysts with their degrees that led to the 2000 technology crash, etc. etc.

I see it almost ever yweek, when some stock does 10% profit and is targeted as a sell by an analyst because it did not meet “analysts expectations” of 11% or something such ridiculous. I am currently reading a fascinating book called “Full of Bull”, written by one of Wall Streets top investment analysts, telling you exactly the BS games he played.

I tend to pay very little attention to the degrees behind a persons name, and woudl rather listen to their actions and history.

So, when I came across this article in G&M I thought great - finally someone else see’s it my way

here’s the link
http://www.reportonbusiness.com/servlet/story/RTGAM.20080222.wr-cover23/BNStory/Business/?page=rss&id=RTGAM.20080222.wr-cover23

I have included the main points below

Miscalculating the risks

Statistical geniuses of finance at the banks and hedge funds got it wrong. They were lulled into a false sense of security by their spreadsheets and risk models. Meanwhile, the old-fashioned wisdom of contrarians like Prem Watsa saw trouble. And profited.
BOYD ERMAN AND DEREK DECLOET

Globe and Mail Update
February 22, 2008 at 8:55 PM EST

Inside his boardroom, Prem Watsa keeps an unusual artifact: a bronze bust of Sir John Templeton, the 95-year-old legend of value investing.

The item was a 50th birthday gift for the chairman of Fairfax Financial Holdings Ltd., but also serves as a source of inspiration. The Templeton principles, after all, underpin much of Fairfax’s investment philosophy: Be flexible; search around the world for the best bargains; and above all else, go against the crowd – buy when others are pessimistic, and sell when optimism rules.

It’s the last of these that led Mr. Watsa – until recently one of the most beleaguered executives on Bay Street – to one of the most stunning investments of his career, and has given him a way to silence his many critics.

Fairfax this week disclosed an annual profit of $1.1-billion (U.S.) for 2007, nearly four times what the insurance and investment company had earned in its best year the year before. Much of that was the result of a single, contrarian bet the firm made that the world had got it wrong about risk.

They never worried about risk.”

Neither did a lot of other people, until the credit crunch exposed tens of billions in toxic consumer debt, high-risk business loans, and complex, structured investment products. Some have called the U.S. mortgage crisis the biggest risk-management failure in financial history. Soothed by triple-A credit ratings, a strong economy and intricate risk-management plans, financial institutions and investors took on far more risk, and paid a much higher price, than they realized at the time.

It also happened because too many banks, insurers, hedge funds and rating agencies were given a false sense of security by statistical models that told them the probability of a financial “accident” was low. Where they used spreadsheets and algebra, aging investors like Mr. Watsa, 57, relied on their instincts and decades of experience to tell them something was amiss. And the grey-hairs won.

Until last summer, as the economy and credit markets boomed, investors were clamouring for risk, taking on more and more for less in return. Optimism ruled.

The most tangible result was that market interest rates dove to record lows relative to government bonds, with even risky products such as junk bonds earning investors a scant premium to “risk-free” debt such as Treasury bills.

How could this happen?

Many of the answers lie in the uncertain science of risk management, which banks depend on to avoid pitfalls.

As markets flourished, financial institutions poured vast intellectual and electronic resources into creating fancy new products such as collateralized debt obligations (CDOs). At the same time, in a parallel universe also populated by PhDs and supercomputers, risk managers used statistical models in hopes of simulating what sudden market moves would do to the value of those securities and derivatives.

In all financial institutions, there is a daily battle between the risk takers and the risk managers. The takers push for bigger positions to make bigger profits, while the managers push for prudence and caution.

But as their warnings of potential loss were proved false each day by the soaring financial markets, many risk managers lost the ear of management teams focused on the vast profits generated by the people in the business of creating the structures. That led banks to take bigger and bigger bets.

“In a lot of these organizations that have had difficulties, the chief risk officer’s role wasn’t that meaningful or the business lines had more power and authority than the risk function did,” said Brian Porter, 50, chief risk officer at Bank of Nova Scotia, which has largely avoided the financial mess.

But some of the fault also lies with risk managers who relied too much on their tools, the statistical models, which were rapidly eclipsed by the rapid innovation in financial markets that begat complicated structures such as CDOs, so-called CDO squareds and structured investment vehicles (SIVs).

“Risk management tools are blunt instruments, which calls for prudence,” said Louis Gagnon, a former Royal Bank of Canada risk-management executive who now teaches business at Queen’s University. “If you know you are driving your car on a foggy evening, you are supposed to go easy on the gas, but it’s not necessarily what happens.”

Correlation’s domino effect

Banks reeling from the massive losses are coming to realize that two of their key tenets of risk management – diversification and dependence on the so-called “normal distribution of events” – have been weighed in the balance of the credit crisis and found wanting.

Diversification has proved illusory because of a greater degree of correlation between asset classes and world markets than almost anybody expected.

The concept of avoiding correlation through diversification stems from the world of insurance. If you’re going to insure homes, you have a greater chance of a big loss if all the houses you protect are on one street, or even in one town. There’s too much risk of correlation, because a single hurricane or big fire could wipe them all out. One answer is to seek wider geographic diversification to cut correlation. Another is to insure in different markets, perhaps adding life or auto coverage to reduce the chance that all your customers will make claims at once.

In investing, money managers and risk officers seek to spread their risks over different geographies and markets for precisely the same reason.

The problem is, what works in insurance doesn’t necessarily work in financial markets, because markets are prone to contagion.

A house fire in Saskatoon won’t spark a conflagration in Tokyo, or any reaction at all, for that matter. But faced with something that shocks the financial world, such as falling U.S. home prices, investors on all continents and in all markets tend to react in a similar manner. Stocks, bonds, fancy CDOs and credit default swaps – the knee-jerk reaction is to sell them all, whether they trade in Toronto or New York or Tokyo.

In statistical terms, markets that don’t show much correlation on good days can be very correlated in bad times, and there are no current models that reflect that fact.

“Historically, you see correlation between markets is not that high,” said John Hull, a risk-management specialist who teaches at the University of Toronto’s Rotman School of Management. “But it’s dangerous to base your risk management on those correlations because when things start to go wrong, the correlations start to go up.”

Tripping over the tail

Along with correlation, another term has come to haunt risk managers: “tail risk.”

It’s an odd name for the statistical chance that returns on any given investment will fall outside the normal probability of events. (When plotted on a graph, the statistically probable events are grouped in a bell curve, but there’s a long tail of improbable events that trails off to one side, hence the name.)

In other words, most of the times markets behave normally. But every so often they don’t. Those abnormal events fall in the “tail” of the risk curve.

Many risk managers, especially those at banks, use the normal probability concept to develop a yardstick called Value-at-Risk (VaR), which measures the amount a position taken by traders could lose on any statistically “normal” day. Normal is defined as a move of less than three standard deviations from the mean, and the assumption is that normalcy will reign for all but one day in a hundred, or even a thousand. That’s when the tail comes into play.

Most banks look back three or four years to determine the likelihood of loss – meaning that just before last summer’s blowup they were looking only at years of unnatural calm. Markets fooled the models.

“The tail events happen far more often than we would predict,” Mr. Gagnon said. “But what are the predictions based upon? The normal distribution of events.”

As a result, VaR failed investors. For example, CIBC had a daily VaR in the third quarter of 2007 that averaged $9.9-million, according to the bank’s quarterly investor presentations. Yet three times in that quarter, as the credit crunch picked up steam and the bank booked writedowns, it lost more than that in a single day, including one loss of $120-million.

“The tails are always fatter than you think and the correlations are always higher than you expected,” Mr. Hull said.

Terra incognito

Financial institutions augment VaR with stress tests, in which a range of possible outcomes are run through the models to see what happens. What if interest rates rose three percentage points in two months and the price of oil doubled?

Scotiabank, for example, can run 75 stress tests a day on its balance sheet. In fact, if Mr. Porter, the chief risk officer, thinks of a potential situation that worries him, he can have a test turned around by his team in as little as 24 hours.

But even stress testing fell short at many institutions during the credit crisis.

“VaR, stress tests and other risk measures significantly underestimated the magnitude of actual loss from the unprecedented credit market environment,” Merrill Lynch said in its third-quarter earnings filing, which revealed a writedown $8.4-billion of CDOs, mortgages and loans.

The problem, risk managers now say, is that there were no models that could accurately predict how the products would react because of the way that innovation had outpaced risk controls. In such a situation, there was no hope of coming up with an accurate estimate of the losses.

“When you’re dealing with an opaque structure, there’s no amount of stress scenarios that will reveal the true exposures you’re putting on the balance sheet,” Mr. Gagnon said. “It all becomes a theoretical exercise. There’s just no model.”

The problem, however, is not just with the models. It’s also with the human brain. Because of the way humans think, they are unlikely to dream up the kinds of havoc that markets can wreak. People are just too programmed to think within the box, Mr. Hull said.

“The unfortunate thing is that human beings have this tendency to latch on to the most likely scenario, and as soon as they start thinking about that scenario they convince themselves that’s what’s actually going to happen,” Mr. Hull said. “That’s the danger, that you become complacent, and you don’t think about the range of alternative outcomes.”

The experience premium

The answer, then, may be a renewed deference to grey hair. The same experience that helped Mr. Watsa make his winning bet may help keep financial institutions on the right side of the risk curve.

The result is a renaissance for the credit officers who came of age in an era when banks largely only needed to focus on the risk of a client skipping out on a loan, only to be eclipsed by youngsters versed in the markets and slicing, dicing and repackaging loans for trading.

Those experienced managers were around to see the crash of 1987, the Russian debt crisis and, in many cases, the sky-high interest rates of the early 1980s. In other words, they have been around long enough to have seen markets move irrationally. That makes them invaluable for their ability to dream up scenarios to test the balance sheet, because they are unlikely to say: “That could never happen.”

“We have about a dozen PhDs in mathematics,” says Scotiabank chief executive officer Rick Waugh, 60. “We probably need about another dozen PhDs in human behaviour.

The pendulum is swinging back from the risk takers to the risk managers.

Rational - How do we get over this. In our investments we should get an understanding of the worst case scenarios, and see if these are tolerable, and also an understanding of the timeframe of investment, and what was the worse case for that length of time.

Another thing to consider, no matter how much you think you can tolerate investments volatility, expect it to get to that point and beyond that - then invest with your eyes wide OPEN.

Rational - A computer lets you make more mistakes faster than any other invention in human history, with the possible exception of handguns and tequila.

Someone once said this to me, and I’ve never forgotten it

Common sense and intelligence in ANY undertaking

OUTWEIGHS:

Greed and stupidity

We just have to figure out what is the greed now, and are people being stupid about it - are they saying things like “this is going to keep on going up”, “these economies are the new economies - nothing could de-rail them”, “the price is at a high but the demand is greater still”, “the world is going to end”, “everythings in trouble”, “ohhh, look how well the returns of these did last year, I want some of that”,

Rational - Right now in Spain, it’s the annual Running of the Bulls.
Followed, of course, by the Soiling of the Pants and then the Burying of the Idiots.

Oh yea, it’s that time, and you thought I would forget, that I wouldn’t mention them.

Well, from my recent round of trips, I’ve realized that people STILL don’t understand RRSPs, even though advisors have done a great job in explaining them. I believe the public continuously need to be reminded about why they did these things with four letter in them

So, here’s my stab at it.

Firstly some rules and statistics

Changes for 2007 tax year:

- Maximum RRSP contribution is lesser of 18% of earned income or $19,000
- Pension splitting for seniors is allowed
- Deadline for RRSP conversion changed from age 69 to 71

QUICK FACTS
- Number of Canadians who contributed to an RRSP in 2006: 6.2 million
- Median contribution: $2,730
Source: Statistics Canada

The notes below are based on discussions with the public on RRSPs, they’ve been collected based on the most popular questions

Since their introduction in 1957, the RRSP has been the cornerstone of millions of Canadian retirement plans.

The concerns around the stock market investors in early 2008 have done nothing to create a calm investing climate as Canadians ponder where to put this year’s RRSP contribution. This can be seen by the huge amounts of money being put into GICs, Money Market Funds etc. As you’ve probably noted from previous writings, I believe in the Fear and Greed scenario - and that is as Buffet says “Be Greedy when people are Fearful, and Fearful when people are Greedy” and this panic rush to Money markets and GICs tells me that investors are Fearful - so guess what, I’m a Greedy.

Another thing pointed out by David Dreman was that there are two types of people a) The Wealthy and b) the Not Wealthy.

There’s more people that are not wealthy. And the reason they are that way is because of their decisions in investing etc. They made poor decisions and that’s why they are not wealthy So, if you want to not be in that class - don’t follow what they do. Since they are the masses - don’t follow the masses, don’t read what the masses read ( the papers), don’t listen to what the masses listen to, don’t watch what the masses watch (CNBC, ROBTV, BNN etc). Instead do what the wealthy, Which is virtually the opposite of the masses - So, while the “masses” are putting their RRSPs into money markets, and GICs, waiting till the market “will recover” - the smart investors are out their adding to their portfolios with good investments - Remember Warren Buffett, has recently added to his portfolio by buying into Swiss Re and Kraft, and he did it just as the markets were falling.

However, if this year is like most, only about a quarter of us will actually make any RRSP contribution at all. That’s a shame because the RRSP is, for most Canadians, a pretty amazing savings vehicle. People in other nations drool over the tax benefits and wonder why more of us don’t take advantage of it. An article in Forbes.com (headlined “Canadians eschew billions in free money”) pointed out that, despite the immediate tax break and the tax-free compounding in RRSPs, Canadians have only contributed seven per cent of what they could. “The government offers them billions of dollars of free money and they turn their back on it,” the author marveled.

Questions and Answers on RRSPs

Q - Why should I ‘RRSP’?

A- There was a time when financial institutions used to scare people into making RRSP contributions by showing how much they’d need to save to have a secure retirement. The problem was, the amounts were so large that some people threw up their hands and said, “Why bother?” Well, you should bother.

Financial advisers point out that anything saved is better than nothing. But for those without a company pension plan, a more-than-subsistence retirement (retirement benefits from the Canada Pension Plan and the Old Age Security program) will require some kind of saving. RRSPs are not the only way of saving for retirement, of course. But for most Canadians, they’re the best way.

The reason most people go to work, is to get cash flow. This cash then goes to pay bills etc. When you retire - you don’t have this ready source of cash flow each and every month from your work. Instead you have to rely on what ever other sources you have to get your monthly/weekly cash flow. Because get what, your bills etc don’t disappear once you retire. This is why you do an RRSP, to help with obtaining a ready source of assets to provide a cash flow.

Think of an RRSP as a glass. In a glass, you can put different things: Fluids like water and milk and I put loose change in mine! The glass is the RRSP. What you put in it are the investments.

The unique benefit of an RRSP plan is that when you put money into it, it reduces your taxable income in the current year. And then as you make money in the plan, you’re not subject to tax. You do get taxed on withdrawal, but not until then.

Smart financial advisors always advise people to automatically pay yourself first. In other words, it’s easier to put $200 a month into an RRSP than to come up with $2,400 once a year. Monthly saving also allows you to dollar-cost-average your purchases - the same $200 will buy more units of a mutual fund when unit prices are low, and fewer units when prices are high.

Oh yea, and as to how much should I have in an RRSP, it’s really an understanding of cash flow.

This is just a rough piece of math’s, for better understanding I would strongly recommending sitting down with your advisors.

- Determine at what age you want to retire
- Figure out how much you require to live on each month - subtract any OAS and CPP you will receive from this number
- multiply that number by 12, for the yearly sum you require from investments
- then multiply that number by 16

This is the amount you will need to have at retirement to provide you with an income per month for your needs.

Again, see a financial advisor for the exact maths.

——–

Q - What’s the deadline?

A – Well, that’s a bit of a trick question. It’s seems like that as Canadians we always need a deadline to motivate us to do anything, RRSPs, taxes, Sales at Canadian Tire, and changing our brakes. Well, when it comes to RRSPS in reality there is none. You can make a contribution at any time. The only RRSP deadline you face is if you want the tax break applied to your 2007 income. In that case, the deadline is midnight, Friday, Feb. 29, 2008. But you can always carry forward unused RRSP contribution room to next year, or the year after that, and so on.

The thing about an annual carry-forward, of course, is that they can quickly mushroom into a mountain of room that will stay unused unless you win a lottery or get an inheritance. If you can’t muster $2,000 this year, will you be able to find $4,000 next year, or $6,000 the year after that?

Again to get aroudn this deadline, make a habit of putting some money aside monthly for that time when you will not have any money to put aside.

——–

Q - How much can I contribute?

A - For the 2007 tax year, people can contribute up to 18% of their earned income from the previous year, up to a maximum of $19,000.

But the contribution calculation isn’t that simple. From that figure, you must subtract your pension adjustment (PA). If you’re a member of a pension plan at work, you’ll have a pension adjustment. This amount takes into account the money you and/or your company contributed to an employer-sponsored pension plan. Your T4 slip records the pension adjustment figure.

To this figure, you must then add the total carry-forward of unused RRSP contribution room since 1991. For some taxpayers who haven’t been stuffing their RRSPs, this can amount to more than $100,000.

There’s an easy way to find this figure without doing all the calculations. Just check the Notice of Assessment you got from the Canada Revenue Agency last year, or phone the tax department’s T.I.P.S. line at 1-800-267-6999. You will be asked to provide your social insurance number, your month and year of birth, and the total income you reported on line 150 of your 2006 return.

While there seems to be enormous pressure for everyone to contribute to RRSPs, there may well be a better way to use your money. For those with a lot of high-interest credit-card debt, it may be better to pay that off first.

——–

Q - Are RRSPs only for retirement?

While RRSP stands for Registered Retirement Savings Plan, the government has brought in two provisions that allow Canadians to access RRSP money for reasons other than their golden years.

The Home Buyers Plan (HBP) has been enormously popular in Canada, with almost 1.4 million people taking advantage of it as of 2004. Since 1992, more than $14 billion has been withdrawn. As long as the money is used to buy a qualifying home, no tax is paid on the withdrawal. The catch is that the money must be repaid to your RRSP over the next 15 years or the minimum annual payment will be added to your income and you will pay tax on that. And the repayment is not tax-deductible (you got the tax break the first time you put in the money). The full rules are complex, so check with the Canada Revenue Agency and your financial adviser.

The Lifelong Learning Plan (LLP) allows Canadians to pull up to $20,000 from their RRSPs to head back to school. The withdrawals can be a maximum of $10,000 in any one year and can be spread over four years. Repayment is on a 10-year schedule. Again, familiarize yourself with the rules and limitations and seek financial advice before doing anything. About 49,000 people have withdrawn $363 million since the LLP began in 1999.

Another thing, you can take the money out whenever you want, especially when you have a low taxation year. You just have to be aware of the tax consequences. Again a Financial Advisor is critical here.

——–

Q Is there a downside to contributing to RRSP’s?

A - There may be - in very limited circumstances.

If you are a low-income Canadian and you believe that your RRSP will NOT exceed, say, $30,000 (more or less) in your retirement years, then having an RRSP may mean that you will not enjoy all the government programs designed for low-income Canadians.

However, if you are planning to save for your retirement, the RRSP is the most tax-efficient vehicle there is given the alternatives out there.

——–

Q - If possible should we always contribute the maximum RRSP allowable?

A - The answer to this may very well be “no,” and here’s the reason why.

Believe it or not, some Canadians “over-save!” Most financial planners expect that, in retirement, our income needs are about two-thirds of what they were when we were actually setting the alarm, getting up in the morning, etc., etc., etc.

Therefore, based on reasonable assumptions about 1) what age you plan to retire at and 2) an estimate about life expectancy, I would strongly recommend that you sit down with a financial planner and work out how much money you require to have a comfortable retirement. And in this calculation, don’t forget about Canada Pension Plan benefits and Old Age Security! I find that an independent financial planner - not linked to a bank, or a financial institution, such as an insurance company are the best. Independence does have its merits.

——–

Q - How much should I contribute to my RRSP to avoid paying additional taxes this year? Is there a formula I can use?

A - This is particular to each individual.

If you know how much you are going to make this year (which you should) you can “work backwards.” Let’s say that your income is $50,000. The combined marginal tax rate in the Province of Ontario works out to about 35%. Therefore, if you put in $5,000, it would reduce your tax burden by about $1,750.

But I’d stress that this calculation is unique for EACH investor depending on a variety of factors, including income, exemptions and the nature of the income. What I can tell you for sure is that each dollar of RSP contributions DOES reduce your current tax burden - but make sure you respect the maximum limits imposed by the government!

——–

Q - Will the current market volatility benefit or negatively impact the average RRSP in the long term? I keep hearing investment advisors say that there are great deals to be had right now and I assume that RRSP managers are taking advantage of these “deals”, is this assumption correct.

A - If you are contributing regularly to an RRSP and have a long-term time horizon, ironically enough dips are good. Here’s the logic why.

Let’s say that right now an investment unit is $10. A $100 contribution buys 10 of them and I expect that if the market performs as expected, the units will be worth $26.50 in about 20 years. (I assumed a 5% growth, which is much less than the markets.) So my $100 contribution grows to $265. Now there’s a downdraft and instead of my $100 contribution buying 10 units at $10, it buys 11 units at $9. Now if they’re worth $26.50 per unit, I’ve got $291.50 instead of $265. It’s counter-intuitive - but the numbers bear it out. assuming that you are disciplined enough to buy the dips!

The current volatility only makes a difference to you if your retirement is in the next 10 years. If it is over that time period that it has no serious impact and can be taken advantage of.

If you are retiring within ten years, then perhaps you should be re-assessing your tolerance to volatility.

——–

Q - I’m currently on 2nd year of owning my first house with my wife. I have used almost all of my RRSPs to avail of the government’s HBP on purchasing the house. How do I repay the RRSPs that I’ve withdrawn? Do I have to buy RRSPs from the same financial institution I’ve bought my RRSPs originally?

A - Under the terms of the HBP, you are REQUIRED to “pay yourself back” in regular installments. You are free to put it into an RRSP anywhere, not just the one you took it out of

——–

Q - If I was a farmer why would I invest in RRSP’s when I can make more money investing in livestock (cows, sheep, etc…) How do you convince this farmer to invest in RRSP’s?

A - To anyone who is thinking that they can make more money outside an RRSP I would say the following: Will you make more on an after-tax basis? Because the growth in an RRSP occurs tax free? Will your return on livestock reduce your current tax burden, because RRSP contributions will do that? Are you diversified - that is - have you spread out your eggs among a number of baskets?

By the way, if you are sure that you can make more, lots and lots more, in livestock, then it could be the correct decision. Just accept that there may also be higher risk going down this road.

——–

Q - For those who put off contributing to RRSPs earlier in life, what advice could offer to get these people (and I fall under this category) on track for?

A - I’d just say that you shouldn’t lose sight of the benefits of RRSP investing: reducing taxes now and tax-sheltering the growth of income. You can’t turn back the clock, but it doesn’t mean that if you currently regret the decision, you’ll regret it any less by delaying further.

Procrastination is one of Canadians worst vices - along with believing politicians are telling the truth!

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Q - We have always maxed out our RSP contributions and are now afraid to contribute this year due to market viability. Is there any way to make contributions to that will not be as risky?

A - I understand your concern - but here’s something you may not realize. You can put money into an RRSP and NOT purchase mutual fund units, instead letting it sit in cash until things calm down a bit. You don’t have to invest your money in the stock market right away and in fact you don’t have to invest in the stock market at all if you don’t want to. If you have a Financial Planner, ask him to explain the investment options out there, because there are many when it comes to products allowable in an RRSP plan.

If you are concerned about the markets, then take the time to visit with your advisor. Another worst mistake you do, - is not talking to them.

Sometimes, it good to look at history and see similar conditions as today, and determine what was the outcome then. After that, ask yourself is today’s situation worse than it was then. As an example, in 1991 we had the S&L crisis that rocked the financial markets - it was over in a short time, and the markets went well after that. The smart investors were the one’s that took advantage and invested with an understanding of what they held.

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Q - I am already contributing to a pension fund as a government employee, is it still advisable to contribute to an RRSP in addition to this?

A - This is a tough call. It really depends on how much money you expect to have from your pension at retirement, and how you envision your lifestyle in retirement.

Here’s what I would do if I were you. Call your Pension Administrator and ask them what they estimate you’ll receive at retirement. Let’s say that they said in 20 years you can expect $50,000 per year. Remember to adjust that amount for inflation which should average about 3% or so over the next 20 years, which means your $50,000 will actually have about $28,000 of buying power. Then you can intelligently determine whether you would like to save more for the future, or enjoy the present more!

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Q - Is their a minimum age for contributing to RRSP’s? When is the best time to start thinking long term?

A - There is not a minimum age.

However for most Canadians, it is most appropriate to think about retirement after entering the workforce full-time. If you start early with a disciplined plan, you can enjoy the present and have lots of money saved for the future. I would encourage you to consult with your financial advisor (there’s usually no fee for a Consultation) and then you can explore your options further.

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Q - Do you think that Mutual Funds, with their management expenses running as high as 2.5 to 3% in some cases, represent a better investment in a flat or bear market, where professionals can really show their skills, than they do in a bull market where the rising tide tends to life all boats?

I think the mis-information about mutual funds is huge out there. Because of their sheer numbers there will be a majority that under perform some index. But that doesn’t; take into account those that do,

Also, it’s necessary to understand the positive and negative returns of an investment. Most funds will not under perform an index when the index goes down 60% like it did after the tech crash.

The objective is to find an investment that is within your risk tolerance and can meet your objectives. And yes, professional management does do better - just ask David Dreman, just as Tom Marsico, Charles Brandes, Gerald Cooper Key, Bob Tattersall, George Frazer, etc - all good managers that have demonstrated to manage with a risk tolerance and obtain a long term result that fulfills planning objectives.

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Q - I make a lump sum contribution to my RRSP in February each year. Due to the present market volatility, is it better to use money to make monthly contributions? If yes, over what length of time? I do realize that I will not be able to claim the tax savings this year but I can reduce tax paid at source for these monthly payments.

A - UNDER ALL CIRCUMSTANCES, I strongly recommend monthly contributions which are directed to purchase investment units at regular intervals. Timing the market is a very dangerous game!

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Q - What is the best strategy for using up your previous year’s (over 10 years) unused contributions? How do you find out how much is available?

You will learn how much is available by looking at the Tax Assessment from the Government. It’s clearly there in the summary. The “best” strategy would be to contribute to lower yourself to another, lower marginal tax bracket. If you’re making something just over $74,358, get under that benchmark. If you’re making something just over $37,179 get below there. I would not recommend taking out loans to accomplish this because the interest payments are NOT tax-deductible. Just do it gradually over time.

I am usually not a fan of non-deductible loans.

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Q – What are some of the major mistakes people make with their RRSPs

A – Here are some of the biggies I have seen, there’s probably a whole lot more

1. Often people rush to make a last-minute RRSP contribution and give little thought to the underlying investment.

Spend a few minutes to remember how long it took you to earn that money and slow the selection process down.

Solution: If you are in a rush we recommend you consider making contributions to your RRSP in cash and look at all your available investment options prior to making an investment decision.

2. Over-contributing to your RRSP may result in T1-OVP penalties and interest. This past year we noted a campaign by Canada Revenue Agency that resulted in several letters being sent to individuals who have made over-contributions. Solution: Before you contribute, be certain of your limit.

3 . People with an RRSP account should understand that all income generated in the account is tax deferred. This is by far the biggest advantage of an RRSP. Over time, this should save you much more in taxes than the initial deduction for the contribution. People who have non-registered investments understand that income generated in these accounts is taxable. Pulling funds out of an RRSP prior to age 72 is generally the wrong decision when non-registered funds are available. There are some exceptions, such as shortened life expectancy. Solution: Using the capital within your non-registered investments first will reduce your current annual income and defer taxes further.

4. Some people have multiple RRSP accounts held at different financial institutions. They may have $10,000 at Institution A from a 2004 RRSP contribution, $6,000 at RRSP Institution B from a 2005 RRSP contribution, and $8,000 at Institution C from a 2006 RRSP contribution. This may result in additional RRSP fees being charged to you and result in more fees than you need to pay. More importantly, your investments become more difficult to manage. Solution: Consolidate your RRSP accounts at one advisor for better management, to reduce fees and to open up more investment options. Make sure he is independent.

5. When you open an RRSP account you must make a beneficiary selection. If you are married or living common law then the natural choice is your spouse for the tax-free rollover provisions on the first passing. Often, widows will still have their deceased spouses named as beneficiary. We have seen cases where people have remarried and have their ex-spouse still listed as a beneficiary. In some cases naming your estate may be the best option. Solution: Speak with your adviser and ensure you have the correct beneficiary on your RRSP account.

6. People who do not have pension income (not including CPP and OAS) should ensure that they are taking all planning components into consideration before requesting early RRSP withdrawals. Withdrawals from an RRSP are not eligible for the pension income amount and they are not eligible for income splitting. Solution: If you require funds, we encourage you to wait until at least age 65 and then convert funds to a RRIF before withdrawal. RRIF income received at age 65 or older may be eligible to be split and qualify for the pension income tax credit ($2,000 each per year).

7. One of the biggest mistakes we see is failure to make an RRSP contribution. Individuals who are making large salaries without a pension need to take advantage of their RRSP contribution room. Not having the discipline to set aside funds for retirement will result in making sacrifices at retirement. Solution: Consider making an RRSP contribution.

Rational - If you don’t believe that the education system in this country has gone to hell, just take a look at all the people who can’t even count to ten in front of you in the express lane at the supermarket.

I found this story in WSJ fascinating for a number of reasons

- it shows the controls China has on its production and quality
- it shows how much the world depends on China and key ingredients that it provides
- it shows that blood thnners which people require if they have had heart attacks are made out of pig intestines
- Vegetarian or not, if you are taking certain medicines you are taking them from animals that are being killed for it

Here is the link

http://online.wsj.com/article/SB120354600035281041.html

Key points from the article

In a small, damp factory here, blood-smeared men wring pulp from pig intestines, then heat it in concrete vats.

The activity at Yuan Intestine & Casing Factory is the first step in the poorly regulated process of making raw heparin, the main ingredient in a type of blood-thinning medicine that in recent days has come under suspicion in the deaths of four Americans.

More than half the world’s heparin comes from China. The chemical is often extracted from pig entrails in small factories — many as rudimentary as this one, which also manufactures sausage casings from intestines. The heparin eventually ends up in drugs used world-wide by patients having surgery or who need dialysis.

The lack of a well-documented supply chain for medicines such as heparin is a problem that has come under the spotlight with last week’s announcement of four deaths and some 350 allergic reactions among patients who received heparin sold in the U.S. by Baxter International Inc.

The health of the animals from which heparin is extracted can be important to the safety of the drug. Drug makers in the U.S. and Europe stopped using cows — a once-common heparin source — after the discovery of bovine spongiform encephalopathy, or “mad cow” disease, amid concerns that the illness could be passed on.

In China, not all heparin makers answer to drug regulators. That’s partly because some are registered as chemical makers, not drug producers. It’s a legacy of a regulatory system that focuses on finished drugs, not their ingredients, says Shen Chen, a spokesman for the State Food and Drug Administration in Beijing

Heparin makers in China readily acknowledge the lack of oversight. Yuan Changkun, the owner of the small factory here, says health regulators don’t visit his plant. Mr. Yuan doesn’t keep records of where he acquires the intestines he uses. Nor is he sure who the end customers are.

“Basically, it goes overseas. It’s for foreigners,” he says.

Heparin is extracted from the guts of the animal, he notes, “and lymph nodes in the bowel may harbor contaminants from infections.”

China is the world’s largest heparin exporter, shipping more than $100 million of the substance a year. China’s lack of consistent oversight of its heparin industry highlights a regulatory gap that’s opening as drug makers increasingly go shopping globally for ingredients.

The raw heparin made by China’s myriad small producers ends up in the hands of about 50 export companies, which sell to customers overseas. In the first half of last year, more than 85% of these heparin exports went to the U.S., Austria, France, Italy and Germany, according to an industry trade group.

A spokesman for the Chinese government’s main product-safety watchdog, the General Administration of Quality Supervision, says his agency “is not responsible for anything related to drug issues.”

That leaves makers of raw heparin with no regular government supervision, many manufacturers say.

Wang Jiewen, who runs a sizable heparin and sausage-casing factory in China’s eastern province of Anhui, says inspectors routinely check his sausage-casing production lines, but not his heparin operations. “There’s not really much regulation for the heparin,” he says.

Consumers in the U.S. and Europe are protected in part by their own regulators. But even the FDA can offer only limited oversight.

The agency did, at most, 21 inspections of Chinese drug-making facilities annually in fiscal years 2002 through 2007, according to the U.S. Government Accountability Office. That represents a fraction of the 714 Chinese facilities that, as of the end of fiscal 2007,

Extracting medicines from animal entrails is by its nature a grisly business. But it’s commonplace. An experimental blood substitute is made from cow’s blood, for instance, and a clotting medicine, thrombin, also derives from cattle. Before heparin was made from pig intestines, it came from beef lung.

Since mid-2006, China’s pig herds have suffered serious outbreaks of porcine reproductive and respiratory syndrome, a viral illness commonly known as blue-ear disease. Sick animals are supposed to be rejected by slaughterhouses, but enforcement can be lax. Also, infected animals may be slaughtered before symptoms are recognized.

Mr. Yuan, the owner of the heparin and sausage-casing factory in the village of Yuanlou, is a gregarious man who takes pride in the business he has built. Now 57 years old, he has earned enough money from heparin to send his two sons to university. Mr. Yuan himself never graduated from high school because his family was too poor to pay for school.

He launched the original business in the mid-1980s making sausage casings from intestines. Later he added heparin production.

Mr. Yuan’s four-room factory, which has a roof made of tile and thatch, is part of the compound in which he also lives. In a central courtyard, raw heparin — a brown-and-white powder — air-dries on a table.

Every day, his company collects barrels of pig intestines from slaughterhouses in the region. “They give us a commodity. I give them money. We don’t keep records,” he says. The intestines of about 3,000 pigs are required to produce a kilogram of heparin.

In his factory, men in thick aprons untangle intestines at a bench, flush them with water and pass them through a wringer. The resulting slurry is dumped into concrete vats, where it gets heated. Because coal is expensive, the factory sometimes burns rubbish — old shoes and clothing — to heat the slurry.

The slurry is later mixed with a resin that adheres to heparin. That mix passes through several more steps. Toward the end of the process the raw heparin is stored in old-fashioned, Chinese-style ceramic pots on the floor.

Mr. Yuan produces about six kilograms of the stuff a month, which he sells to middlemen. Recently it has been selling for 6,500 yuan, or about $900, a kilogram

For more go to the link

Don’t you just love it, a thriving economy, and emerging markets, and us investors think they have the same quality controls as here

Why am I so concerned, becasue people are investing in areas where there is a vast lack of control, lack of records, and lack of accountability - This is a disaster waiting to happen

Recent other issues related to China
- SARS
- Bird Flu
- Pet Menu Foods contamination
and there’s abunch more that I have not been able to recollect

Be careful, nderstand what you are getting - don’t get excited just because an investment, or a region is doing well - they may be doing well, becasue they are hiding something

Rational - I just read that last year 4,153,237 people got married. I don’t want to start any trouble, but shouldn’t that be an even number?

There have only been two recessions in the past 20 years, according to the National Bureau of Economic Research. The first lasted three quarters from July of 1990 through March of 1991 and the second started in March of 2001 and ended November later that year - lasting about three quarters as well.

It wasn’t that long ago, was it? Do you remember how truly bad a recession was for your portfolio?

Chances are it wasn’t too bad at all. During the recession of the early 1990s, both the Dow and S&P 500 increased 1% and 3.5%, respectively. During the recession that kicked off the new millennium, the Dow fell 11.7% and the S&P 500 was off 12.6%.

And at all times the markets recovered to their pre-recession highs - at no time, did they go to zero, or did the recession last forever, and yet that’s exactly what the investors are thinking now!

All in all, nothing too extraordinary for a recession in the overall markets.

Rational

“Past experience has repeatedly demonstrated that a resumption of rising share prices or a new bull market often arrives quietly, without any prior notice and frequently in the midst of intense trepidation, frustration and disenchantment.” - Chen Zhao, managing editor at BCA (Bank Credit Analyst) Research.

Rational - you just have to figure out are we trepidated, frustrated and disenchanted?

It seems the media is being blitzed by a certain Insurance company selling a certain “Variable Annuity” which they call Income Plus

The Ad’s kind of interesting in that it uses a catchy lyric that goes “Keep looking out for Number One”

When you go through the numbers the 4% “real” MER, (3.5% MER plus a 0.55% Fee to withdraw your own money”) and you realize that they say they guarantee income (means that they are guaranteeing giving your own money back to you, and that the guarantee is of the principal minus all your withdrawals

You can work out, and it is not complex

that the “ONE” in the jingle is them selves

So when they say “Keep looking out for number ONE”

They really mean “WE, the insurance company, Keeps looking out for number One, which is US, and not after You”

So be careful when you hear ads - there are two meanings.

Also, to keep their investment approach above water they have to do cover

4% t(The “real” MER) + 5% (your withdrawal) = 9% per year just to stay afloat

I mean they have to do that each and every year using Balanced funds only!

using Globe and Mails numbers dated Jan 31 2008, Out of 399 Canadian Equity Balanced Funds (and I know many were not around for 20 years, but this is what the insurance company is choosing from)

Over the last 20 years, the average Balanced Canadian Fund has done about 7.63% with only two out of 399 doing better than 9%. And none of these funds that have outperformed were on the insurance companies lists

Over the last 15 years, the average Balanced Canadian Fund has done about 7.63% with only four out of 399 balanced funds doing greater than 9%. (99% of the time (most often) you did not hit your target of 9%)

Over the last 10 years, the average Balanced Canadian Fund has done about 5.60% with only four out of 399 balanced funds doing greater than 9%. (99% of the time (most often) you did not hit your target of 9%)

Over the last 5 years, the average Balanced Canadian Fund has done about 8.79%
with about 90 out of 399 balanced funds doing greater than 9% - that’s about a quarter (75% of the time (most often) you did not hit your target of 9%)

Over the last 3 years, the average Balanced Canadian Fund has done about 5.82%
with about 17 out of 399 balanced funds doing greater than 9% - that’s about a quarter (96% of the time (most often) you did not hit your target of 9%)

Over the last 1 year, the average Balanced Canadian Fund has done about -3.060%
with about 4 out of 399 balanced funds doing greater than 9% - that’s about a quarter (99% of the time (most often) you did not hit your target of 9%)

So, as you can see, the probability of the insurance company meeting the targets that you really need is next to nil! You are paying just to get your own money back.

Oh, and why is the media NOT talking about this issue, could it be because the insurance company is buying a lot of media space - buying print ads in the newspapers, buying radio time - all this is dollars that goes into the “neutral” journalists pockets - So, why would they do what’s right and tell the “objective” point of view.

This type of smoke and mirrors in the industry makes me sick

If you as an advisor are selling these kind of products realize that Portus was sold by well meaning advisors because it gave a “guarantee”. When advisors offer an investment product because of the ads and the features, without doing their homework to see if it best fits into the clients best interest and not their own - they are at risk, for litigation, at some time.

Don’t get fooled by the ads

Also the biggest company that was involved in one of Canada’s most famous financial fiasco’s was this same company! The issue all related to a particular investment company called Portus, which offered a “guaranteed” product - sounds familiar. For more info on the companies you can go to

http://www.canadianhedgewatch.com/content/news/general/?id=589

There is a reason Variable Annuities are not liked in the US, go search for it yourself.

also go to

http://www.smartmoney.com/retirement/investing/index.cfm?story=wrongannuities

The most important words we were taught as kids was to LOOK and THINK. And I urge you to do the same with your investments - LOOK at what you have, THINK about the Risks you are taking.

The reason, I am sending this note is so that my friends are not caught up in the BS. I do not want their names in the media, or their reputations ruined. Sometimes it’s better just to stick to the plain and simple stuff.

Rational - Oh, you hate your job? Why didn’t you say so? There’s a support group for that. It’s called EVERYBODY, and they meet at the bar.