Contents: “Sure things”, single seniors lose, Ellis: “Winners’ game”, elder financial abuse, iShares vs. Vanguard mud fight, other ETF costs, long term care, Khaneman on risk tolerance, Canadian housing on precipice? US home inventories down, Canadiam MP’s and public service pensions tightened, Canada’s and US’s pension systems 6th and 10th out of 18- makes sense? Gold blowoff coming? governments converging on inflation as the answer? more golden views on gold.
Personal Finance and Investments
In the Globe and Mail’s “Investors, be skeptical of these current ‘sure things’” Tom Bradley warns that “sure things” are not necessarily so, and even if they come true it’s difficult to make money on what is in effect is the “consensus view”. For example, while western government will do almost anything to hold interest rates down but bond buyers might have a say on this at some point in time (though Japan, with 90% of the debt being in Yen and held domestically, has lived with much higher debt levels for much longer yet has been able to maintain low interest rates). If some of the rush to safety reverses, interest rates might surge. Other “sure things” mentioned that may not be as sure, include: China’s continuing 7-8% growth, dividend stocks being a slam dunk, and expectation of continued “low returns environment”.
In the Financial Post’s “Four ways single seniors lose out” Ted Rechtshaffen lists four ways that single seniors are disadvantaged compared to couples: no income-splitting, on death of one of a couple who were both qualified for full CPP the survivor’s pension is capped at maximum (individual) CPP, on death of one of a couple the RRSP/RRIFs are combined and required withdrawals are then taxed at higher rate for the survivor, on death of one the survivor loses the dead spouse’s OAS. Expenses also drop by 15-30%, but “the ultimate estate size of a couple who both pass away at age 90, as compared to one where one of them passes away at age 70 and the other lives to 90, the estate size was over $500,000 larger when both lived to age 90 – even with higher expenses.” His recommendations: write to your MP, consider life permanent life insurance to cover shortfall upon death, consider common law relationship to get the tax savings.
In the Financial Analyst Journal’s“The winners’ game”the well respectedCharles Ellis writes that investment professionals are being torn in “the struggle between the values of the profession (doing what is best for clients) and the economics of the business (doing what’s best for investment manager)”. To help with this struggle, Ellis argues that investment managers are making three errors: (1) incorrect definition of “mission” (it is not about “beating the market” but about helping client with understanding risk, objectives, asset classes/allocation, long-term perspective, etc), (2) incorrect prioritization of profession vs. business objectives, and (3) focus shifted away from investment counselling, i.e. away from helping clients with: realistic expectations of risk and long-term returns for different asset classes, realistic assessment of their circumstances and objective setting, assessment of investor’s “assets, income, spending obligations and expectations, investment time horizon, investment skills, risk and uncertainty tolerance, market experience, and financial responsibilities”, and identifying a path appropriate for the specific circumstances and temperament of the individual investor.
In the Globe and Mail’s “Elder financial abuse: Why seniors should practice tough love”Rob Carrick writes that “Asking a senior to co-sign or guarantee a loan is a form of elder abuse when he or she is not in a financial position to pay the entire amount being borrowed without suffering financial harm.” “Most people don’t realize that when you guarantee or co-sign a loan, you’re as good as taking out the loan yourself. You’re completely liable for that sum,” Ms. Tamblyn Watts said… If repaying the loan would in any way jeopardize your financial security, say no. Put another way, don’t guarantee or co-sign a loan unless you can afford to give the same amount of money as a gift… Seniors should be vigilant about financial abuse by investment advisers, contractors and caregivers as well as family members”
It took a long time, but ETF price competition is finally beginning to drive the market share. In IndexUniverse’s “Why iShares changed its pricing strategy” Matt Hougan writes that Vanguard has been winning market-share away from iShares, e.g. in the emerging markets space VWO (0.2% fee) vs. EEM (0.67% fee) as investors have finally figured out that fees are important. So to be more competitive with Vanguard for new investments without foregoing its current EEM fee gravy train, iShares introduced a new emerging market ETF.“The old fund (EEM) tracks the MSCI Emerging Markets Index, which only offers exposure to the top 85 percent of the market capitalization of emerging market stocks. The new fund (IEMG) tracks the MSCI Emerging Markets GIMI Series, which includes all companies in the top 99 percent of the market-cap spectrum. In other words, the new fund includes small-cap exposure, something the old fund lacks. The idea—one that we’ve suggested in the past—is to offer two flavors: A “trading-focused” product in EEM, with huge liquidity and a very liquid basket; and an “investing-focused” product in IEMG, offering broader exposure to the space.” A couple of other articles discussing the same subject are“BlackRock’s ‘Core’ ETFs bigger deal than fee cuts”and “When bigger isn’t better”. In WSJ’s“Blackrock wages reluctant fee fight”BlackRock CEO Larry Fink was reported to have “railed against competitors that sell investment products to certain clients “at cost,” or without profit” and “You can call that fee pressure,” Mr. Fink said. But he had another term for it: “stupidity.” (While not naming Vanguard explicitly (it could have Schwab which also introduced very competitive ETF fees), Mr. Fink calling companies offering low fees as stupid is somewhat pathetic. Perhaps those who buy overpriced funds are stupid. Mr. Fink fails to point out that cost isn’t Vanguard’s only advantage; Vanguard’s “mutual” corporate structure removes the tug of war between management’s fiduciary duty toward its shareholders vs. doing what is best for those who buy their investment products. Mr. Fink is focused in doing what’s right for BlackRock shareholders, while Vanguard is focused on doing what’s right for the owners of its funds. I know which funds I’ll buy next time I rebalance or add to my portfolio.)
A related story is IndexUniverse’s “ETF fee war blurs other costs” Paul Britt points out that while ETF fees are very important, one should also factor in other less visible costs of ETF ownership such as: trading cost, brokerage fees, index tracking differences, cost of advice (if included or added onto ETF), index exposure differences and overlaps, tax considerations when one switches from more expensive to cheaper ETFs.
In the Journal of Financial Planning, Christina Nelson interviews “Daniel Kahneman on the psychology of your clients…oh and your own mental hiccups”. Among 10 questions there are three in particular addressing aspects of risk: (Q4) risk tolerance (tolerance of volatility is not the answer, but answers to “What is the biggest loss that you would be willing to tolerate before you change your mind?” and “What would cause you to regret what you have chosen?”, i.e. what would make you change course and whether you can deal with regret will determine how much/little risk you can take), (Q8) the related reaction to perceived “new situation” (“seeing patterns where none exist” and interpreting them as a “new situation” which requires changes, and course changes usually result in financial loss) and (Q9) emotional reaction to loss (“the exaggerated sensitivity to the short term” first the” loss” and then the “regret”, followed by acts of “panic” which lead to financial loss)
In the Financial Post’s “Long term care takes planning” Jason Heath reports that cost of LTC in Canada depends heavily on where you live. In McMaster University study ““The Private Cost of Long-Term Care in Canada: Where You Live Matters,” annual care costs range from a low of $21,098 in Quebec to a high of $47,450 in Prince Edward Island for an average couple, if both spouses are long-term care facility residents. Ontario was below average, at $28,541 per year.” In Ontario the CCAC determines if “resident’s income is insufficient to pay for nursing home accommodation based on an individual’s tax return”. If income insufficient then resident’s cost is monthly income less $100. Also many opt for home care. Long term care insurance is mentioned by Heath as an option, but he does not discuss it in detail. (You might also be interested in reading my 2009 blogs on LTCI at “Long- term Care Insurance (LTCI- I)”and “Long-Term Care Insurance (LTCI) II- Musings on the Affordability, Need and Value: A (More) Quantitative View”)
In the Globe and Mail’s “Canadian housing market peers over the edge”Tara Perkins reports that, with the exception of Calgary, there is growing evidence which supports falling house sales volumes and at best prices holding flat; predictions are for a “healthy” drop of 10-15% in prices. “It’s just a matter of time” before falling sales lead to lower prices, CIBC economist Benjamin Tal said. “I think that in the next six months, we’ll see a very clear trend of softening prices.” “Sales in the Greater Toronto Area fell 21 per cent from a year ago, according to that region’s real estate board. But prices are higher than they were last September.”
In the Palm Beach Post’s “South Florida housing inventory down 34%” Kimberly Miller reports that “South Florida’s inventory of homes for sale was down 34 percent in September from the same time last year with the largest decrease happening in the higher price ranges… Nationally, the overall average inventory drop in homes for sale was 19 percent.” (Lower inventories are great news as long as bank don’t decide to release too much too soon of their shadow inventories kept out the market and as long that they don’t increase the rate of foreclosures on which they have been hold off on.)
In the Financial Post’s “Pension reforms make early exit from politics for many MPs” John Ivison reports that the omnibus bill changes to pensions include: “MPs leaving politics before the next election in order to qualify for a full pension at age 55… will increase MPs’ retirement age to 65 in 2015”, “Backbench MPs will see their contributions from their pre-tax salaries increase from $11,000 a year to $39,000 over a period of five years. Once fully implemented, MPs will match public contributions to their pension fund dollar for dollar”, “the annual return on the MP pension fund will be reduced to 4.7% from the current 10.4%”, “public service…pension plan members’ contributions are set to rise to 50% from 37%. In addition, the age of retirement for a full pension will rise to 65”
The 2012 “Melbourne Mercer Global Pension Index” was just released. Canada is in 6th place among 18 countries rated behind Denmark, Netherlands, Australia, Sweden and Switzerland, U.S is in the 9th position (with UK and Chile being number 7 and 8 respectively. Every year I peruse this report, I have serious cognitive dissonance when I see Canada’s rating given my personal (Nortel) experience with Canada’s pension system. Particularly strange is an “Adequacy rating” of 74% and an “Integrity” rating of 79%, especially since the latter is based on private sector system focus and therein the role of regulation, governance, participant protection (which I consider minimal at best); in addition coverage of private sector employees was never high and has been plummeting recently. (Also, subjectively, I perceive the US Social Security system and 401(k)/IRA system having potential for far superior outcomes for 2nd and higher quartile incomes compared to Canada’s CPP/RRSPs and generally higher cost based vehicles. Am I missing something critical in my superficial read?)
Things to Ponder
In the Financial Times’ “As money hides away, gold heads for a blowoff” John Dizard opines that while he usually thinks that people should seek shelter in cash, however “we are going in to a long period when holding currency and bonds will turn out to have been the wrong thing to do”. You’d think that observers of the current US election would question how the debates can go on without a single mention of the inflation risk associated with monetizing the unsustainable deficits and debts. He argues that after the recent pullback, commodity price rises are coming; and a “hyperbolic, 1979-1980 style blowoff in the gold market is becoming much more likely”, especially with the shift of central banks turning from net selling to net buying, and growing interest among professional investors. (As the old saying goes, “forecasting is difficult especially about the future”, but it is difficult to argue that sooner or later higher US inflation is not in our future given the combination current monetary and fiscal policies, and given that inflation is the least politically painful solution to the huge deficits/debts for legislators.)
The Economist’s Buttonwood column in “The next step”writes that we are heading toward a situation where “central banks are likely to be the biggest single holders of government bonds for a while. And to the layman this looks rather absurd. The government is paying interest to a body that is an arm of itself, rather like a husband paying interest to his wife. It would surely be simpler to write the whole lot off.” Buttonwood also argues “that developed world debt…cannot be repaid and thus there will have to be either defaults or inflation. Some people think that inflation is the least worst option and they may be right, although history teaches us that hyperinflation brings chaos in its wake.” He also writes that “the nagging feeling remains; if zero interest rates and unlimited deficits were the answer to our economic problems, you think we would have worked it out before now.” (In the meantime seniors continue living not just with near zero nominal interest rates but negative real interest rates as well on their retirement savings.)
And finally, numerous other articles indicate growing interest in gold suggesting even more ink is to be spilled on the subject of gold. Here are some other interesting examples. Diane Francis in the Financial Post’s “Gold the new asset class for the confused”writes that “in a tumultuous world of financial, stock market and sovereign meltdowns, gold has been a rising star. Investors have branched out from real estate, equities, bonds and art into gold. I call it the new asset class for the confused.” And she quotes ex- Newmont Mining CEO Pierre Lassonde that “The supply-demand situation is clearly pointing to ever-increasing prices but not necessarily for gold producers” who has a long list of reasons to support his argument: continued growth in jewelry driven demand, explosive growth in investment driven demand (central banks buying, investor demand for securitized gold, asset allocation to gold increased from 0.2% in 1980 to 2% in 2011 and will rise to 5-7% in next 5-10 years, etc. In IndexUniverse’s “Gold fits all market environments” Cinthia Murphy reports on gold bull Peter Schiff’s views: “Federal Reserve’s easy-money policies…are fueling an unstoppable gold rally and won’t do anything to spur U.S. growth”, “The Fed has said it will keep printing money until we have more jobs. That means we are going to be printing money until we have an economic crisis” and ““The closest thing I know to being a sure thing is that the U.S. dollar is going to depreciate”, inflation will come and that “gold and other precious metals are a perfect hedge against loss of purchasing power”. Schiff even argues that gold will outperform even in a deflationary environment because ““In deflation, the markets collapse, interest rates rise and the price of gold would fall, but not as much as everything else”. (There are no “sure things”, but he makes a persuasive argument that a small allocation might be appropriate for insurance purposes. I’ve been targeting about 3-5% allocation for close to a decade and have rebalanced back to 5% when prices have shifted allocation to close to 7%. )