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This week’s Barron’s feature articles are focused on retirement. In “Retirement: The new math” “volatility budgeting” (volatility is risk defined as standard deviation of return) is described as the new analytical tool replacing the old 60:40 stock: bond portfolio asset allocation. It starts with the investor’s risk tolerance from which the overall portfolio risk is determined. Then risk budgeting is used to select the appropriate asset classes and weights to maximize the return for the overall risk to be taken. The new instruments used include structured notes (limiting both downside and upside), commodities, hedge funds, REITs, venture capital, private equity (most of these are now available in ETF form). The objective is to find and blend “un- or less-correlated” assets into the portfolio to reduce/keep overall volatility for a(n) given/increased rate of return. (Still you must keep costs in mind, as these are the only things that ARE guaranteed). In Barron’s “Retirement: The 80% myth” the argument that many are able to live comfortably on 70% of pre-retirement income is supported by itemizing the categories where expenses may be lower/eliminated in retirement: taxes, mortgage, children’s education, work related(clothing, travel, eating out), savings for retirement, sell/move to smaller home or rent or lower cost area. The only probable increase in expenses is healthcare related. (You may also find interesting my take on this topic in the Transition blog of this website)
In WSJ’s “Why your home isn’t the investment you think it is” David Crook shows why a house is not the great investment that you think it is. Once you factor in mortgage payments, property taxes, maintenance and upgrades/improvements a $290,000 house bought today will cost $1,073,000 over 30 years. In addition, many couples end up having their house represent between 50-70% of their total assets, which is not a well diversified portfolio. You also can’t think of the house as asset for retirement as you have to sell it and likely buy something else to realize spendable cash; you also run the risk that property prices drop, just before your retirement. Even Americans are encouraged to pay off the mortgage ASAP; this is even truer for Canadians who can’t deduct interest payments. Therefore the house is a lifestyle, not an investment, and certainly don’t buy if you are planning to move in a few years.
In the WSJ’s “Fast-money crowd embraces ETFs, adding risk for individual investors” the apparent price discrepancies some ETFs and the value of the underlying shares are discussed. The examples given were ETFs replicating Asian indexes. The apparent discrepancies are easily explainable due to exchanges trading the underlying shares being closed during NYSE trading hours of the ETFs. In case of some specialized funds, like precious metals, where the underlying is traded less frequently than the ETF (which is traded continuously), and apparent discrepancies can occur even when time zone differences are not present. However the cause of the discrepancies is the same, i.e. the ETF is acting as a “price discovery vehicle” for the underlying, which happens not to be trading at the same time. So everything works as it is intended!
The Financial Times reports in “Longevity risk: breathing life into death rates” that a new public index will be available measuring death rates in the US and UK. This new index, over time, will likely allow pension plan sponsors the option to hedge longevity risk associated with the increasing lifespan of pensioners. (Notice that a pension plan sponsor’s longevity risk is different than the one we discussed elsewhere, under longevity insurance, at this website; that longevity risk, is the risk that you as an individual will outlive the average life expectancy, as half the population does by definition; whereas, the pension plan sponsors risk is related to the overall pensioned population’s increasing average longevity) You will be hearing more and more about both types of longevity risk in the coming years.