The interesting thing about hiring new employees, such as my situation,  is that you have to re-emphasis what you are looking for in your new hires. As an employer, you tend to take for granted certain things about long-standing employees.  For younger workers, there is a dual challenge of figuring out how to make yourself valuable to your employer and acclimatizing yourself to an environment less structured than an educational institution.

In good times, being an average employee just made you a clog in the machine. In bad times, the difference between being a good employee and an average employee could be the difference between engaging in exciting work and a number in the unemployment rate.

By no means a complete list, here are 5 things that most employers look for in a good employee:

1. You think like an owner. A friend who owns his own business once remarked that his right-hand man was very valuable because he spent money like he owned the business. Thinking like an owner is difficult since what you are asking an employee to do is to contextualize their duties in the larger scheme of the business and most employees only want to concentrate on the task at hand. But a good employee is always asking the following questions: is what I am doing making money or saving money? If you are doing neither, it is hard to prove value to your employer.
2. You learn the art of prioritization. A workplace is a like a big game of dodge ball. Lots of bodies falling around in seemingly chaotic patterns. The ball of blame hitting the worthy and unworthy alike. Lots of screaming, lots of complaining and the boss/gym teacher who half the participants hate and half are indifferent. Out of this mess, the ones who get ahead are the ones who learn to prioritize. Again, it comes down to the essential question among the many tasks given to you which one makes/saves money quickest or the most. The smaller stuff you don’t sweat as top priorities.
3. Learn to accept that you get paid for the grief, not the work. Some young workers think the work place is like a television show. At your first day of work, you are thrown into a room and asked to participate in some exciting project. More often than not, this does not happen. The best testing ground to see whether you are ready for the exciting stuff is to see if you can handle the mundane assignments well with initiative and a positive attitude (as a side rant,  the worst thing you can do is pout and throw a fit when the work is not challenging. Your boss is not your parent or a teacher and they will not indulge a trouble-maker in the same way. Bad attitudes when faced with a challenge is more a comment on the employee than the workplace not conforming to expectations. Experience is an alternate word for failure. We learn more by failing than succeeding, something our “no one can fail” parenting has missed). Unconsciously and consciously, responsibility is given in small doses to an incoming employee as they prove their worth by doing the small stuff right first.
4. You don’t give up easily. My real pet peeve is that you ask an employee to do something they have never done before and, within a short period of time, they come back and said they could not do it. It shows the boss that you do not know how to think through problems and you are not good with responsibility. More to the point, if the boss has to do the work for you, why does she need you?
5. You are a problem solver. My partner complained to me one day about an employee. They approached him and said we ran out of ink on the “paid” stamp. Period. In other words, the employee was taking their issue (no ink) and transferring it to their boss (what are you going to do about the fact we have no ink boss?). The better approach would have been: “we have no ink. Can I order some? We have a $20 off couple at Staples.”  In other words, you came with a solution which an owner would like. The boss reads this statement as: “employee solved issue by themselves, asked me for permission and is saving me money” rather than “grumble, grumble…”

I’ll end with an observation by a friend of mine who wonders if young employees, growing up in an era of text-messaging and instant messaging, even know how to carry on a normal conversation anymore? He observed that younger employees had a more difficult time piecing together consecutive thoughts coherently or having an attention span of more than 5 minutes; my friend is in his 30′s-by no means old-  and I tend to agree with him. One wonders, in a world of 140 character knee-jerk pseudo thoughts/expressions, whether people are losing the ability to think deeply through issues and articulate answers intelligently in a face-to-face setting?  Please prove my pessimism wrong.

Best of luck.

Larry MacDonald recently joined the growing chorus of writers who wonder why anyone would want to use an investment or financial advisor.  Certainly, in some contexts, people do need professional financial advice and I have always believed even the most sophisticated and stubborn DIY investors require financial advice from time to time, paid on an hourly basis, to provide some detached opinion on whether their investing strategy is sound and is being executed properly.

Accordingly, the question should not be framed as whether you need a financial advisor but whether they bring value to a particular investor? For example, a financial advisor who provides a 2nd opinion for $250 to a DIY investor with a 20 year investing horizon could bring value if their opinion was sound and it held credence through most, if not all, of that investing time-line.

However, if we answer the value question in the form of an hourly rate (once a lawyer, always a lawyer…), the findings could shock you.

Nothing in life is free. Financial firms and their distribution network of advisors and planners are compensated through hidden (in the sense they are not upfront like a trading commission) fees known as management expense ratios (MER). MER is typically expressed as a percentage determined by a products’ operating expenses divided by the average dollar value of the product. All mutual funds and exchange traded funds charge MERs. The MER is deducted before calculation of the products’ return.

I am going to use Million Dollar Journey’s example of the erosion of investment return based on higher MER; in his post, MDJ compares the costs of a  DIY, low MER portfolio versus an active mutual fund portfolio with a 2% MER per annum. I am going to assume the mutual fund portfolio involves the use of a financial advisor.

Using his assumptions (which he freely admits are overly optimistic as to rates of return), an investor investing in an active mutual fund portfolio is losing  $12,016 in fees  after 20 years compared to their DIY counterpart.  In other words, the loss is $600.80 a year, or $600 to make the math simple.  If we recategorize this $600 not as a MER but as the cost of  professional advice, how much value are you getting?

Let’s assume you have a bad financial advisor who calls you in for an appointment once a year for an hour under the same old routine: exchange some small talk, update on your situation, review your portfolio, top up your retirement funds, highlight of what’s hot and cue the sale pitch. That’s $600 per hour for the advice you just received.

Let’s say you do an extended lunch meeting for 2 hours. That is a $300 per hour tab.  If you have a good advisor who spends 3 hours, you are down to relatively palatable $200 per hour. Four hours a year results in your financial advice costing $150 per hour.

To put this context, here are average billable rates per hour for lawyers and accountants:

• Average American lawyer (source: Incisive Legal Intelligence as of July 2009): $284
• Average Canadian lawyer (source: Canadian Lawyer Magazine, June 2009): $231
• Average American accountant (source IMOA, 2008) : $225 (no Canadian info found in limited time searching)

You have to remember that lawyers and accountants set their billable rate in an analogous manners as a MER  (the majority of which is advisor compensation). In essence, take your costs add in a desired profit margin, adjust for market conditions, and you have your billable rate/MER.

Setting aside performance, do you believe that approximately 2.5 hours of time with a financial advisor is worth 1 hour of your accountant’s time? It is, admittedly, an apples and oranges comparison.

But look at the value question both quantitatively and qualitatively. Time does not necessarily equal value but time spent is inverse to advisor indifference. Thus, is your advisor spending sufficient amounts of time with you to lower their “billable rate” to something reasonable?

More to the point, does their performance justify this billable rate? At least with accountants, you are minimizing taxes and with lawyers you minimize risk, facilitate the purchase of large assets, defend your civil liberties etc. For upwards of $600 per hour, does an adviors provide sufficient results which a DIY approach could not match or beat?

The question is contextual. Some great advisors are worth more than $600/hour but you never hear of them because they are so busy servicing their clients well.  But, is your advisor worth their hourly rate?

Imagine if you will that you have an opportunity to purchase a home for the first time but had to sell it in 2 years. Would you become a home buyer if your exit time-frame was that short?

My vote would be no. First and foremost is the fact there are several hidden costs to home ownership. The average sale price of a Canadian home is approximately $326,000. In Ontario, this means the land transfer tax is $3,365.00 less the $2,000 first time home buyer rebate, giving you a $1,65.00 bill. Add moving costs, cost of installing new phones/internet/cable, lawyers fees etc. and you most likely have another $500-$1,000 bill.

This is a relatively insignificant dollar amount compared to the fact that very rarely has anyone moved into house that is just perfect.  Most people I know engage in some touch-ups: painting, gardening or replacing some facets. Some people I know undertake some medium to  major renovations: install new flooring,  buy new kitchen cabinetry, build a new bedroom.  EVERYONE I know who ends up being a first-time home buyer becomes an accumulator of stuff. We can’t help it. See that empty space in the corner there? Fill it up with something. Anything. Basement is empty? Buy used exercise equipment to create a gym.

Economists obsesses over housing stats for a reason. They know it is a harbinger of consumption; it is a rare story of someone who buys a home and leaves it unfurnished for many months afterwards.  This is especially so in a first time home since first time home buyers have relatively little possessions. When I bought my condo I owned an Ikea love-seat from my university days that fit my cozy student apartment and looked so tiny in my new place that I “had” to get a new couch (not to mention it had survived 4 moves and looked and felt like it had survived 4 moves).  Then I needed side-tables to go with the couch and then I got lamps for the side-tables and then and then…

Add all this “stuff” to the price of the home and suddenly you have sunk more than $326,000 in your home. This does not include on-going maintenance costs in any home, which can be steep for anyone who lives in the snow belt with raising energy costs. Some estimate property tax, condo fees, maintenance costs of up to 5% of your acquisition costs a year depending on the state of your home and how heavily you are taxed.

…now, you have to exit 24 months later so would you get your money back on exit? According to the National Association of Realtors, the average gain in real estate in the U.S. has been 6.4% per annum over the last 40 years,  or 1-2% over real inflation.  Add  commissions from the sale to costs and, given this really rough calculation, you may not be getting much back in return ASSUMING the housing market does not go sideways in the short-term (any prediction about the future is fanciful these days).

This also ignores the more practical consideration of actually why you buy a home. To enjoy it as your castle. Two years flies by quickly. You don’t get to enjoy something you worked hard to acquire.

At the end of the day, I tend to agree with a host of a HGTV show I once watched. Everyone should look to own their home for at least 5 years, short of life-changing circumstances, to both enjoy their place and for enough time to elapse to earn back what you invested in the home.

Other opinions are certainly appreciated.

Insurance is often described as banking without money given it engages in a risk management business model using other people’s money. In normal times, insurance companies are stodgy widow and orphan stocks returning a modest return but with a level of safety. For example, using the period of 1993-2003 (i.e. pre-bubble), the S & P Life and Health Insurance Index returned only 3.6% on an annual basis.

But, with the cheap lure of money and every CEO suddenly thinking they were high-flying traders, insurance companies got sucked into the vortex of unreasonable risk taking in the recent past. The most notable example was Manulife Financial who invested insurance premiums heavily into equities, and failed to hedge against such trading, found itself in financial trouble.

Assuming that the world gets back to normal and risk management companies actually begin to manage risk responsibly again, what should one look for when investing in insurance companies?

Insurance companies- what is its business model?

Insurance is the transfer of risk from one party to another in exchange for the payment of a premium. The premium, in turn, is invested and used to pay out future claims and to operate the insurance company.

In essence, insurance companies are engaged in two primary revenue streams: the assumption of other people’s risk in exchange for money/premiums and the management of such premiums (asset management). An insurance company makes money by making more in revenue (insurance premium sales + investment income) than expenses (premiums paid out + general operating expenses).

Here’s where things get a bit bizarre. Insurance companies are guessing (albeit with some sophisticated financial modeling) whether it will make money on each policy sold. The insurance premium could be too low (i.e. the insured is riskier than they thought), the return on the premiums invested could be under its assumptions on ROI or the insured could cancel their policies too early (which, with a return of premium rider, is bad news for the insurer).  Insurance, on some preserve level,  is like taking a stab into future events.

Thus, a critical piece of an insurance company’s operations is to ensure that it always has enough capital to manage all the risk it has assumed. Mismanage the risk and you end up with AIG.

Insurance companies- what are some key factors to look at?

Beside the traditional metrics of investing stocks, what are some things that all investors should look at?

1. Premium growth. In plain English, how many premiums is it selling? This is the life-blood of any insurer’s growth. Stop selling premiums and the company will shrink since it has expenses (premiums to pay out) without corresponding revenue other than investing income. Premium growth is so important that commissions paid are generally the largest expense after premiums paid.  Also look for sources of premium growth- ideally, an insurance company should be growth among many product lines. Most companies highlight premium growth in their discussion to the financial statements
2. Combined ratio. This tells you if the premiums are making money. This is calculated by expenses and losses/revenue from premiums. If the ratio is more than 100, the company is paying out more than it is taking in. If the ratio is less than 100, the company is making money. I noticed that most insurance companies do not disclose this ratio. It has to be calculated manually or an analysts will calculate it in a research report.
3. Investment income. In some insurance sectors, insurance premiums are close to, or are, loss leaders. Money is made mostly through investment income. There’s two factors to look at: (i) what is the total of investment income over all revenue; if it is really high, the insurance company either is not selling a lot of premiums or has become purely an asset management company addicted to trading revenue to be profitable; neither are positive developments for an investor; (ii) what is the company invested in? Hopefully, their trading strategy is prudent. Most insurance companies will disclose what they are investing in and whether they are engaging in hedging strategies.
4. Capital adequacy. Similar to a bank, an insurance company has to put aside enough money in reserves (which does not show up in earnings until the transfer of risk has expired) to pay for future claims. This is referred to as the minimum continuing capital and surplus requirements (MCCSR) by Canadian regulators. In Canada, all insurance companies should have a target ratio of 150%. This is disclosed by all insurance companies. The higher the ratio the safer the company is but too high of a ratio means either: (i) risk payout is anticipated to be quite high in the future; or (ii) the company is not expanding since it is putting so much money in reserves and not to expansion.
5. Credit rating. As a payer of policies, all insurance companies have a credit rating which reflects a third parties assessment of their ability to pay policies as they become due. The higher the credit rating the better (i.e. AAA is ideal). This is always stated by insurers.

Insurance companies- common sense factors?

Insurance companies are like banks. Who is aggressively on the street selling product? As a business dependent on attracting other people’s money, whomever has the best distribution network typically has an edge over competitors (remember how large an expense commission is in an insurance company). As a practical example, think about how many people sell Blue Cross product over Manulife/John Hancock? The latter has a much larger distribution network and a correspondingly larger market share than the former.

The price of gold and its perception as an investment by bloggers seems to have an inverse relationship. As the price of gold rises, bloggers seem less enthusiastic about gold as an investment. Why such a negative attitude about something going up in price?

Gold, unlike silver or copper, has no industrial usage. In fact, other than for purely cosmetic purposes,  it has no utility which could at least justify an inherent floor price of the commodity. Having said that, gold is the closet thing to a universal currency. If you were in the Republic of Benin, you would most likely get room and board with physical gold; I am not as sure if you tried to pay with USD you would have the same success (especially lately). Obviously, there is also a huge market for gold in the jewellery industry and it is a highly desired luxury for most cultures.

However, it is the concept that gold is a universal currency that makes it, in some respects, better than a money market fund as an investment. When paper currencies that the developing world recognize as the standard falters (i.e. the USD), the markets rush to gold since its underlying value is not dependent on policy decisions of governments or their relative solvency.  As confidence wanes in paper currencies, governments typically resort to printing more of it which only accerlerates gold’s demand since you now have inflationary pressures on paper currency as well and gold is a good hedge against inflation (see below).

The end result is that, in bad times, gold serves as an able substitute for cash. As Jeremy Siegel found, a $1 invested in gold in 1802 would yield $32. 84 in 2006. It serves to protect the value of the $1 invested which, if kept in cash would be worth considerably less than $1.00 due to inflation. But as Siegel also points out that is all gold is: a good protection against inflation.  But, the opportunity costs of investing in gold long-term in lieu of other investment classes is enormous.

Like everything else in investing, gold has its time and place. I would not dismiss the fact it has no utility as a reason not to invest in it. Whether most of us like it or not, I call gold the irrationality hedge. The more irrational the markets get, the better gold is a hedge against such irrationality. The extreme example being times of war. What are governments doing in war? Most are stock-piling or stealing gold from where-ever they can get it.

Does this defy some well-reasoned argument why anyone would want to invest in a commodity that really does nothing other than look pretty? Of course it does but is the market that rational? I suspect the last 9-12 months is a walking argument that the market is not rational.

However, when such irrationality ends (and it always does), one should move out of gold. It is, and should be used, as nothing more than a short-term cash substitute and a hedge against inflation.

The argument that anyone should have substantial portions of their portfolio in gold defies any type of long-term prudent portfolio management. If the world is so bad that gold prices are astronomical, does the size of your portfolio really matter compared to, say, imminent threat of physical harm to one’s self and their family? Investing vast percentages of your net worth in gold long-term due to impending economic armageddon misses the practical point that a net worth calculation probably doesn’t matter anymore when your primary need is survival and self-preservation.

At the end of the day, substitute cash for gold. You would only hold cash/gold in your portfolio in the short-term and during times of uncertainity. Holding a large portion of it or holding it in the medium and long term will generally not serve a prudent long-term investor well.

Japan’s lost decade of 1991-2000 is often cited as a situation that American policy-makers hope to avoid. In an eerily  similar repeat of history, the Japanese real estate bubble burst followed shortly thereafter by a banking collapse. Governments tried to stimulate the economy by lowering interest rates to near zero or zero percent (although they never flooded the system with so much capital). A nation of savers became even greater savers and, with a general lack of demand for anything, the economy went into a general tail-spin.

But how accurate is the Japanese analogy to our situation?

What often gets glossed over in looking at Japan was that, regardless of real estate pricing or the stability of the financial markets, the country was going to slow down structurally due to its demographics. Simply put, Japan got old in the 1990′s and old people don’t buy as much as younger people.

In 1990, 20% of the Japanese workforce was made up of workers over 55. In 2005, the Bureau of Labor estimated 16% of the American workforce was over 55. By 2000, this figure in Japan was approximately 24%; a figure which the U.S. will not reach until 2030.  With an average immigration of approximately 15,000 people a year for a nation of approximately 127 million people, Japan could not replace itself and the nation and economy literally got old and died out beginning in the 1990′s; sadly, this is now reaching a critical point (CIA Fact Book projects Japan will lose 1.9% of its population this year).

In comparison, the U.S. is eking out small population gains every year (estimated at 0.975% this year by the CIA) mostly by barely replacing deaths with births and immigration equal a growth of 1/3 of 1% (legal immigration stats only). The population base is not growing but it is not shrinking either. It is, at least, keeping its head above water.

More importantly though, Americans born between 1979 and 2004 constitute 60 million people vs. 72 million baby boomers.  As a generation  born with advertising everywhere, this generation of consumers will soon replace the baby boomers as drivers of the economy. While less numerically than the baby boomers, they constitute a large enough consumer base to avoid the type of generational chasm that is occurring in Japan as one generation got old not to be replaced in sufficient numbers by the next.

While America 2009 looks similar to Japan circa 1991, a strict comparison between the two economies is an inaccurate one since it fails to factor an important structural issue, demographics, that would have rendered Japan’s fall from economic might regardless of its management of its banking system. Having said that, the comparison may only be off 10-15 years when American faces the same issue unless there is a drastic change in its immigration policy or a substained uptick in its birth rate.

Undoubtedly, some of you are spending your summer in a lake-side cottage, a golf-course resort or somewhere exotic. You may wonder to yourself, while you are lounging in the sun, what it would be like to purchase a 2nd home or vacation property if you don’t own already (I am going to use the terms interchangeably in this post to refer to anything that is not a principal residence or strictly purchased as a 365 day a year investment property). Whether it be a cottage, a Mexican beach-house or a little farm-house with no plumbing, what are some factors to consider when purchasing a 2nd home or vacation property?

Careful you don’t over-reach

According to the National Realtors Association, the average America vacation home buyer in 2008 was 46 years old, had a median household income of $97, 200 (USD) and the medium vacation home was 316 miles/508 km (!) from their primary residence. 89% of vacation home purchasers were purchasing for a family retreat.

The bottom line is that most “average” vacation home buyers are older and making almost double the average American household (the median American household income was approximately $50,000 in 2007) and had the money to travel long distances to their vacation home. One needs to be in this category to afford what is ultimately a luxury. If you considering purchasing a cottage, just remember what type of demographic plays in this field and careful you are not over-reaching to keep up with the Jones.

Vacation properties tends to be one of the first real estate niches to collapse in a downturn

A real estate agent once said to me that you can tell when the real estate market is beginning to dip since vacation property prices begin to dip. Given it is a luxury for most, vacation properties purchased with an eye to future appreciation in addition to enjoyment tend to have much larger downsides than other real estate uses. After all, an investment property can be rented out at a loss in a worst-case scenario.

It is difficult to sell or refinance a vacation property outside large urban areas when there is no demand for this type of real estate. Just remember that it is a buyer’s market for vacation homes for a reason.

Vacation properties can be break even propositions- assuming you are willing to work on it

A MSN Money article estimated that it would take 15-17 weeks of rental income to break-even on a vacation home. As the article also indicates, the best way to break-even or make money on a vacation home is to cut out the management companies and become a DIY landlord.

For those of us who are looking at vacation properties north of the Mason-Dixon line, you know that the enjoyable cottaging season (as we like to refer to vacation homes) is quite short (May long weekend to maybe the first weekend of October). Thus, if you are renting out your vacation home, you may have to give up a lot of time during peak season for rental uses, which undercuts the primary reason to own a vacation home.

Additionally, there’s just the sheer maintenance of the place- for others to enjoy. One may end up toiling away for other people’s enjoyment and is that what you really want out of the property?

Taxes do not tend to favor vacation homes

If you are a non-resident owning a vacation home (for example, a Canadian buying Florida property), some jurisdictions charge multiples of property tax to non-resident owners and waive any cap on property taxes (some jurisdictions have a freeze on property tax).

If you rent out vacation homes and you are a non-resident, you may be subject to withholding tax as well (30% if you are Canadian renting out U.S. rental properties). If you are a U.S. resident deriving rental income from a vacation property located in the U.S., if you live in the home for an enumerated period of time (the greater of 14 days or 10% of the days you rented out the property), you may be denied certain deductions as well (specifically, the interest deduction).

The point is always consult an accountant when purchasing or renting a vacation homes. Tax codes tend not to be friendly towards vacation properties given governments also consider these properties luxury items and have not bent over backwards to accommodate vacation home owners like owners of the principal residence.

Why do you want a vacation home?

In spite of the above, it really comes down to answering the “why” question first. Why do you want to buy a vacation home? For some who grew up in the country, it is a way to get back to nature. For others, vacation homes may be located close to extended family. Others still buy vacation homes for recreational purposes (boating and golfing come to mind).

If it is something that fits into your life and it is who you are and not what you do, and assuming you can afford it, all the commuting and maintenance are worth it.

Best wishes for an enjoyable summer.

Weakonomics recently took to task a  television personality for disparaging personal finance blogs and bloggers. His post highlights one of the tensions of our web 2.0 world: the divide between bloggers and the mainstream media. Earlier in the spring, a sports blogger made some wild accusations about a baseball player using performance enhancing drugs; many members of the sports media used this opportunity to throw the entire sports blogging world under the bus. A recent spat between a Globe and Mail political blogger and a columnist from the Montreal Gazette resulted in the latter calling the former’s opinion not worthy, in part, since he was a blogger (she did this on her own blog undercutting her own argument).

Are the opinions and information provided by blogs better or worse than mainstream media? Who can you trust for helping you make your decisions?

The answer cannot be framed as an either or question. Sports and political blogs have a different dynamic than personal finance blogs; they are generally rooted in access to the source which can breed an old boys network. The beat reporters for the New York Yankees baseball club are notorious for covering up for the excesses of its stars from Babe Ruth forward; after all, the team can simply deny you access to the club-house or to players if you report on the well-known debauchery of spoiled young athletes with lots of money. So, the beat reporter becomes part of the team rather than a true insider-outsider and can view anyone not in the circle, like bloggers, with suspicion.

Personal finance blogs exist within a regulatory framework of equal access to all. A CEO cannot give an exclusive interview to a reporter on some secret of their company that is material to the company’s fortunes without making that information publicly available to all, lest they break securities laws (the founders of Google found this out early when they went public). Thus, the asymmetry of information (not opinion) is not as great in the personal finance context.

This lack of relative asymmetry of information is probably why mainstream media are beginning to use good bloggers as references (see below for a possible reason why). Jonathan Chevreau and Larry MacDonald, writers for mainstream media, do cite bloggers as sources on occasion. It is hard to process so much information by yourself.

Where the asymmetry does occur is the mainstream media’s access to resources. Mainstream media have research staff, editors and reach of hundreds of thousands, which makes getting expert opinions easier. Whether the opinions provided are worth anything is really in the eye of the beholder. Fact-checkers and researchers can also weed out most wrong information which is an often cited, and correct, issue with some blogs.  With access to editors as well, the presentation tends to be a lot more polished as well.

However, bloggers do have a certain advantage over reporters. Many bloggers tend not to suffer from glass tower syndrome, whether literally or the editorial leanings of large congolermates who own media outlets, and, with a keen eye of observation on their daily lives, can report on many things that mainstream media cannot. For example, I have been told that the banks have begun to do well by resorting to the Wal-Mart model of having their suppliers de facto finance their business. Many service providers for banks are now being paid on 60-100 day terms and being grounded down on their fees. The law of intended consequences is that by doing this small and medium sized business have less than ideal cash flow statements which makes lending to small businesses harder, caused, in part, by the banks themselves.

What are we to make of all of this? Attacking the medium, in and of itself, is lazy analysis. I would suggest instead that people fused information from both sources to make an informed PERSONAL finance decision. For example, Rob Carrick and I both recently wrote about investing in ETFs against the back-drop of the sheer amount of  EFTs being sold. Rob’s excellent article tackles subjects mine does not and vice versa. I would suggest reading both and then deciding accordingly on how to proceed if you are assembling an ETF portfolio.

Having said that, I have enjoyed Rob’s articles because he is primarily a provider of information and not a peddler of opinion (I have never spoken to Rob before). Blogs and mainstream media alike which are nothing more than soapboxes for opinions should be viewed with a critical contextual eye. After all, the opinions and recommendations being provided are based upon the particular context of the opinion-maker and not the reader. Thus, just because some television personality believes you should buy Australian 10 year government bonds, does not necessarily mean it is right for you.

As one blogger once wrote, personal finance is 90% personal and 10% finance. At the end of the day, all media and blogs should be doing is conveying information. It is still up to you to (i) verify the information; (ii) process it and act in accordance to your life.

While the medium of blogging has changed the dynamic of personal finance somewhat, with due respect to people falling all over themselves about Web 2.0, the basics of creating a household budget has existed since the advent of money. Thus, apply the same critical analytical eye to personal finance decision-making regardless of where you get the information. While blogging has certain increased the amount of information available, you still have one context to apply that information to- your own life.

Best of luck.

Insurance is the transfer of risk from one party to another. In consideration of  monetary payment by the insured, the insurer promises to pay compensation based on some future risk/loss, such as disability or death, to a designated party. In and of itself, the concept of insurance is great. Who does not want a risk management tool that shifts your risk to someone else?

However, the devil is in the details and there are two larger and worrying trends in the insurance industry. The first is that insurance companies don’t want to be boring old insurers anymore but asset managers. The second is a general consolidation of the industry. In Canada, three insurers- Manulife, Great-West Life and Sun Life- now control approximately 65% of the market. In the United States, companies dominant insurance niches. While the public opposes big banks, the insurers quietly reached a scale the banks would die for.

The result is that most insurance companies need to pay out as little as possible to maintain or grow their assets under management (in fact, many insurers sell policies as loss leaders while making money on asset management) and a consolidated industry means pricing power. Neither is particularly  good for the consumer.

On a more specific level, what are 5 warning signs that you may have an improper insurance policy?

1. No medical required before obtaining an insurance policy

Four Pillars and I  have written before about post-claim underwriting. While illegal in many jurisdictions, there are many ways to re-characterize a policy to be potentially within the scope of the legislation (and require expensive litigation to resolve).

A “no medical required” insurance underwriting process may not indicate per se that you are subject to post-claim underwriting but it could be a warning sign you could be sold a policy subject to post-claim underwriting. It may make the process of obtaining insurance easier but the potential future-risk is greater.

2. The purpose of insurance is not being used for risk management

As reported by Riscario Insider, the 10/8 program, which involves using insurance policies as collateral towards a loan to the policy-holder to be used for business or investing purpose (thus making the interest tax deductible), is being reviewed by CRA.

Depending on the specifics, some insurance policies were designed more as tax shelters than insurance. In such cases, the insured could run audit risk for what is supposed to be a risk management tool.

While no one knows what will happen to the 10/8 program (and you know there is too much money at stake not to have the insurance company fight this out), the larger point to consider is why you are entering into an insurance contract. If you are being sold something who’s primary purpose is not risk management then think twice since you have opened yourself to other risk factors.

3. Watch the exclusions

Insurance policies are drafted to set out what it does not cover rather than what it does. Just because it is called critical illness insurance, does not mean all type of critical illness are covered and if you have a family history of certain critical illness, the insurer could deny you on the grounds you failed to disclose a pre-existing condition.

The point is to ask your insurance broker what the policy does NOT cover as well as covers so you understand the limitations of your policy. If you may possibly fall under an exclusion, then the policy is not right for you.

4. Unnecessary insurance

Life insurance for minor children. Mortgage insurance. Credit balance insurance. Flood insurance for someone living in North Dakota. There are a lot of insurance products that are ideal for a small subset of the population but sold to everyone. The fundamental question to be asked is always: (i) am I actually at risk (chances of a minor child dying are slim; and (ii) does the risk of occurrence actually require transfer of such risk (a minor child has no dependents so who really needs the money on death?)?

5. Too much insurance

This one is always tricky but insurance brokers tend to start high on their coverage (for their commission). The question to be asked is always: how much money do I really need in case something happens to me? This requires some cash flow projections based on your own life-style rather than what the insurance company tells you.

Goldman Sachs announced the best quarter of its 140 year existence yesterday. Normally, this type of news would be viewed quite positively as a sign that the financial industry is turning around and the recovery is fast approaching. But how it made this money has a lot of observers worried that the street truly has not learned its lessons.

The obvious political furor is over the $11.4 billion set aside as employee bonuses (as a clarification from my original post this amount is for the whole year not just this quarter). From a populist perspective, Goldman Sachs has thrown an oil tanker on the fire. From an economic perspective,  many worry that bonus envy may lead to imprudent risk taking from less skilled (or less lucky) peers, re-setting the cycle of chasing the highest-risk for highest reward on someone else’s money.

More worrisome is how Goldman Sachs achieved this result. It basically traded its way to massive profit. Net revenue from trading was up 93% year over year to $10.78  billion; having made $13.8 billion in total revenue in the last quarter, this is a huge dependency on a revenue source that is not exactly stable right now.

More specifically, financial analysts use a concept called value at risk (VaR). In plain English and on a very simple basis, VaR measure how much risk of loss a particular portfolio has. Goldman Sachs VaR increased 22% last quarter and its average daily VaR is estimated at approximately $245 million. In other words, this figure is its exposure to loss every day but if recent history teaches us anything it is that losses are not one-day events.

In and of itself, this is pretty risky but as Reuters reported Goldman Sachs is now the second largest derivatives trader in the U.S., adding a staggering $10 trillion in contracts in one quarter. Derivatives contracts carry with them counterparty risk which can be mitigated but the law of averages dictates that in massive quantities your risk management analysis in derivatives moves from “what if we loss” to “how much are we losing?”

Combine massive trading with Goldman Sachs becoming the new AIG and has the street learned anything? Probably not. Goldman Sachs employs some of the smartest people on the earth. No one can deny their talent and drive. But their willness to believe that the future means resorting to the very recent past, with the context having changed around them, is  a worrisome trend which one hopes is an exception rather than the new/old rule.