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moneysense.ca, 21/06/12
This and That: Tightening mortgage rules, risk taking and more…
A 2×4 to the Housing Market?
Finance Minister Jim Flaherty announced steps to cool the housing market by (1) reducing the maximum amortization to 25 years from 30 years (2) lowering the maximum refinancing amount to 80 percent and (3) reducing the ratios used to calculate mortgage affordability and (4) limiting mortgage insurance to homes priced under $1 million. You can read the news release and links to more information here.
Concurrently, the OSFI announced that the maximum Loan-To-Value of Home Equity Lines of Credit (HELOCs) will be lowered to 65 percent (from the current 80 percent). HELOCs will continue to remain revolving lines of credit and will not require amortization. If you currently have a HELOC and are close to the 80 percent limit, do not worry (though you may want to think about paying it down to a comfortable level): the HELOC rules will not apply retroactively.
The Biology of Risk Taking
Recent research is providing some interesting insights into the role that testosterone might be behind exuberant market conditions and the stress hormone cortisol behind market pessimism.
John Coates, the researcher behind these findings also shared his views in an interview with the CBC’s Anna Maria Tremonti.
Buy-and-hold dies again
Gordon Pape says that “to a degree, it’s true” that buying-and-holding index funds is a dead idea. So, what should investors do? Mr. Pape suggests looking at stock charts, companies with “industry leadership”, strong balance sheets, good dividend record and relative strength in bad markets. One wishes picking winning stocks were so easy.
The Importance of Rebalancing
It’s often painful but Rob Arnott explains why it is important to rebalance out of highfliers and into beaten up and unloved securities.
moneysense.ca, 21/06/12
I was under the impression that the ratios used to calculate mortgage affordability have *increased*, not decreased. GDSR has gone for 34% to 39% as far as I can tell.
The big change that you didn’t mention is the government no longer backing jumbo loans (purchase prices >$1 million). This is probably the most overdue change. But you’re right, it’ll take a 2×4 to the single detached market in Vancouver.
@Viscount: I don’t know if the current GDS ratio is lower than 39%. Here’s what the backgrounder says:
“Lenders must review a borrower’s debt service ratios before granting a mortgage loan. In 2008, the Government announced a 45 per cent TDS limit as part of the adjustments to the rules for government-backed insured mortgages. The measure announced today will limit the GDS ratio to 39 per cent and lower the maximum TDS ratio to 44 per cent. Setting a GDS limit and lowering the TDS limit will help prevent Canadian households from overextending themselves and reduce the number of financially vulnerable households.”
http://www.fin.gc.ca/n12/data/12-070_1-eng.asp
Good point on mortgage insurance for $1 million+ homes. I think it will have a big impact on homes priced above that.
Mr. Pape seems to be a pompous A. He forgets to mention that 90% of active money managers can’t beat the benchmark index over a long period of time. The TSX is down 17% over the last 5 years but the Couch Potato e-series is at 0.66%.
Will reducing the HELOC amount to 60% significantly impact those planning to use the Smith Maneuver?
Fun read on re-balancing. Explanation of possible advantage through the lens of sustainable spending and yield differentials was a change in approach from the more common (purchase the lagging fund method). I guess they are one and the same in theory but how would one do this through indexes? It seems that it could over complicate a couch potato type portfolio by adding value? growth? fundamentally weighted? ect funds within internationally diversified allocation setting. Not to mention the issues of re balancing.
But! the concept of sustainable spending does explain Papes denigration of the couch potato strategy as he is now 76 years old and likely trying to spend in the “trough”. hehe
I always enjoy these article compilations you put together Canadian Capitalist. Thanks.
Mr. Pape’s article can be summed up as follows:
1. If you buy a portfolio of equity index funds nine months before the greatest market crash since the Great Depression, you will be disappointed with the results. Therefore indexing does not work.
2. Investors tend to panic when markets go down. Rather than encouraging them to understand that equity markets have always been volatile, and that proper diversification can lower that volatility, it is better to encourage them to abandon their strategy because, “At some point, you have to move on.”
3. Warren Buffett has been a very successful investor. Warren Buffett picked stocks. Therefore, you should pick stocks.
4. The best way to pick stocks is to buy only the good ones, not the ones that will go down. Start by collecting as much obvious information as you can, such as the health of the company and whether it pays a dividend. Assume that the market has ignored all of this when setting the price of the stock. Then buy those stocks and hold them until it doesn’t make sense to hold them anymore.
5. If this stock-picking stratgey doesn’t work after three or four years, abandon it and “move on” on to something else. A good place to start is what would have worked in hindsight.
6. Repeat until broke.
Thanks for your response CP. I had a good laugh. Very accurate statements. I can see how Papes assertions can draw in and lead those who are unsure of their investment choices. His presentation is saintly and carries intentions of bringing the sick to health. It seems passive indexing has it’s weakness in investor behavior and there are many limited time active strategies waiting to real in the slack.
@CP: It’s tempting to take pot shots at Gordon Pape, but your first point isn’t fair. The date he started his Couch Potato model portfolio doesn’t really matter. Even if you go back 10 years, any equity-heavy indexed portfolio that wasn’t seriously overweighting Canadian stocks has had a bad time. The TD e-Series Index is running -0.6% annualized over the last 10 years, and TD e-Series International Index is running -1.2% annualized over the last 10 years. Those are nominal, not inflation-adjusted, numbers too. Add in inflation and a lot of indexed equity investors have seen a quarter of their principal evaporate over the last 10 years.
Does it mean indexing is dead? Probably not, but it’s a real issue investors have to confront. Dial up the bonds? It worked last decade, but who knows whether it will work this decade.
@Viscount: Actually, starting dates is everything. Measure the performance of the Couch Potato portfolios over three years or 15 years and they look great. Over five years and 10 years the look poor. If Mr. Pape is looking for a strategy that offers a guarantee of positive returns over a periods of less than five years, then he is correct that equity index funds are not an appropriate investment. However, he is assuming that stock picking gives investors a greater likelihood of these reliable returns, and there is zero evidence to back up that claim.
Believe me, no one is more aware of the poor performance of equity index funds in absolute terms during most periods since 2000. The point is that active strategies, in aggregate, have performed worse. Most index funds were in the first quartile compared with their peers, despite the low absolute returns. Of course there are strategies that would have worked better over the last 10 years. But it is of no use to investors to identify them in hindsight, although much of Mr. Pape’s articles spend time doing exactly that.
I have a very large portfolio,mainly Index Funds, but I do own some MMM,JNJ,PFE,MO, and ABT, for their dividends.
I asset allocate,the portfolio ,I never intend to sell it, I just clip the coupons.
I treat my Portfolio like an apartment building, the NAVPS is non relevant as long as the tenants keep paying the rent.
Pape needs to cheer lead Mutual Funds, that’s how he makes his living.
the only major change I have made is a life style change, to sell my current residance and to move into a smaller home in a less costly town and release a large amount of equity which will sit in cash as i watch Europe and the U.S Debt fiasco evolve.
Bottom line, 2.5% MERS means over 20 years you have lost 50%.