Entries from July 2018 ↓

The guardian

Should somebody be allowed to commit financial suicide? If it’s your mother? Or your aging husband?

This is a difficult topic for some people. Especially those who just don’t understand it, and think nobody ever, under any circumstance, should be allowed to act on their behalf. Jacob was one of those guys. He died three weeks ago, so I can talk about him now. He was a soldier in Korea, a bush pilot, surveyor, off-grid cabin builder and a man’s man who ended up in suburbia. He routinely ripped me a new one in this blog’s comment section with acerbic wit and gleeful malice. I hated that. But respected him. We actually met and had the kind of affectionately snarly relationship two chained junkyard dogs might enjoy.

Then Jacob’s comments got weird. I allowed a few. Deleted some. Months later I was deleting them all. Scattered jibberish.

Wendy called. “My father has been diagnosed with Alzheimer’s,” she said. Yes, I replied. I know. And thus began a two-year battle by his family to access funds J had squirreled away over the decades in order to pay the $6,000 a month he required in 24-hour care at a retirement home. In the end, they needed a court order. Costly. He suffered in the meantime. All because he’d refused to sign one piece of paper. A POA.

Late last week this blog published a letter from a troubled son watching his financially illiterate mom blow through a windfall, creating a tax liability and future woes. One of my suggestions was for sonny to secure a power of attorney so, if needed, he could move in and rescue her.

Interesting responses n the steerage section, including this:

Really? What happens if Mom tells sonny-boy to go dunk his head in the toilet? I’m 60 and I’d use the money pretty much the same as Mom. Does that mean my 35 year old daughter should get power of attorney over me and take over my finances?

And this one…

And after the lawyer goes through the mandatory explanation that this POA is essentially a document whereby she signs her life away by putting all of her financial decisions into the hands of another, do you think she’s just gonna say: “Great! Where do I sign?” Give it up. Let her spend her way into oblivion.

Let’s try to make a few things clear since ignorance is washing over the gunnels. First, everyone who owns anything should have a POA – covering not just your money and possessions but your care. Not just the wrinklies. Everyone. You have no idea what may befall you in the future – sickness, accidents or being forced to sit trough a whiny Adele concert – so why not be prepared?

Granting a POA – most typically to your spouse – does not mean it’s in force. The person declared your ‘attorney’ does not have the right to touch any of your stuff or send you off to the psychiatric ward. First, a POA must be invoked, either voluntarily (you are sick and want someone to look after things for you) or involuntary (you’re an irascible, demented old goat like Jacob). Second, your appointee has a legal, fiduciary responsibility to act in your best interests. Period. Any activity not 100% for your benefit is a crime.

What’s a POA?

It’s a legal document granting – under defined conditions – your appointee the power to look after you, your money, your stuff, or your care. You set the terms and conditions, but it’s common for a spouse to want the other spouse to do anything they could do. Write cheques. Cash in a RRSP. Sell the house. Invest. Arrange healthcare. So, yeah, you need a lawyer to help select the powers and the circumstances.

To be effective, a POA must be invoked. Just signing one doesn’t mean it takes effect. Typically for a power of attorney to come into force a person would have to be declared medically incompetent. But if you were badly injured, laid up, and needed your spouse to take over all financial and household affairs, you could grant that.

A POA can be one person, a few of them, or an institution like the trust arm of a bank. Obviously choosing your cannabis-crazy nephew is probably not the greatest decision. There is always a risk that someone may decide to flaunt their responsibilities and take advantage of you. But balance against this the risk of troubled times befalling you, without anyone properly equipped to care.

So, everyone should have a power of attorney. You also need a will. And never make your unqualified kid your executor.

Well, that’s out of the way. Let’s roll.


DOUG By Guest Blogger Doug Rowat

Are you financially literate?

According to FINRA, a US investment-industry regulator and educator, almost two-thirds of Americans can’t pass a six-question financial literacy test. These questions are general, “covering aspects of economics and finance encountered in everyday life, such as compound interest, inflation, principles relating to risk and diversification, the relationship between bond prices and interest rates, and the impact that a shorter term can have on total interest payments over the life of a mortgage”. The toughest question for most is the bond question as just 28% of respondents know what happens to bond prices when interest rates fall. (I won’t spoil it for you—take the quiz at the end.)

Now, in fairness, if you asked me six general questions about, say, medicine, I would probably struggle, but that’s why I see a doctor. What’s more stunning about the results is that investors have become LESS financially literate since the financial crisis as the percentage of respondents correctly answering three or fewer questions has steadily risen. So, it’s not only that the average person doesn’t perform well on the test; it’s that they’re also performing worse over time.

Level of US consumer financial knowledge and decision-making

Source: FINRA

So, you can imagine that with such widespread financial illiteracy, truly understanding market risk and controlling emotion during market downturns would be highly problematic for most investors. If you don’t understand the basic mechanics of bond pricing, you’re probably not going to understand equity market volatility either and are unlikely to keep your cool when equity markets plunge.

Your own lack of market knowledge is certainly one reason to consider a financial advisor, but avoiding emotional overload during weak markets is definitely another. An advisor, if he or she is to be of any use, has lived through a bear market or two, understands that bear markets don’t last and can minimize the chances that you’ll sell when stocks fall. Once the decision has been made to sell, which in and of itself is probably the incorrect decision, the odds of an inexperienced investor re-entering the market at the appropriate time are basically zero. It’s much more probable that an investor’s fear will persist until markets have rallied substantially. Simply put, fear = missing the boat.

A simple way to illustrate this is to compare the Cboe Volatility Index (VIX) to the S&P 500. The VIX is often referred to as the ‘fear index’ and it should come as no surprise that when elevated VIX levels finally subside, much of the recovery rally in the S&P 500 has already taken place (see chart below). In other words, substantial upside is wasted while inexperienced investors wait to ‘feel’ better about markets. A good financial advisor can help you face your fear and hopefully make you some dough in the process.

The VIX (white line) and S&P 500 (orange) tend to move in opposition – waiting for volatility (read:fear) to subside before investing is a losing strategy

Source: Bloomberg

But an advisor can only do so much. It’s also important to maintain a balanced and globally diversified portfolio to help control volatility and, by extension, your emotion. Legendary investor and market historian Peter Bernstein summed it up best in his short, but highly influential, 2002 article “The 60/40 Solution”:

When [equity markets] are cascading downward, keeping one’s cool is almost impossible…. Even if we could imagine a person blessed with sufficient longevity to have been active in the market ever since 1925, how likely would it be that even the most experienced and sophisticated investor would have the self-control to stay 100 percent in stocks, without trading in and out as the market rode up and down its roller coaster? I know I could not have been so calm through depressions, inflations, banking and currency crises, wars and political disruptions.

Mr. Bernstein died in 2009, but consider how apt his observations are when we look at more recent market events. Could you have maintained a volatile, equity-only portfolio in the face of the Bear Stearns and Lehman Brothers collapse during the 2008–09 global financial crisis with equity markets sometimes plunging 9% in a single day? Held on to your Canadian bank stocks throughout the same period when analysts were regularly debating whether Canadian banks would have to cut their dividends for the first time in modern history? Or maintained your cool in the face of a CNBC report that asked during the European sovereign debt crisis “Is the Stock Market Dead?” when it seemed certain that Greece was going to pull out of the European Union and send the world into another devastating recession?

When invested in an equity-only portfolio, we can’t be trusted to make carefully considered investment decisions. We need multiple asset classes in our portfolios in addition to equities, such as bonds, cash, or preferred shares, to control risk, which, in turn, will prevent us from becoming consumed with fear and making poor investment decisions.

So, if you don’t currently have a balanced portfolio, and you also take that FINRA test and it turns out that you know as much about investing as Trump does about distinguishing between ‘would’ and ‘wouldn’t’, get help. You need it.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.