Contents: Risk tolerance questionnaires, flexibility/adaptability the only “set-and-forget” retirement strategy, Canada’s housing bubble to burst or gradually deflate, Peter Munk places his bets on Toronto condo market, Fink: retirement savings must be mandatory, small business IRAs and 401(k)s, OTPP: Pension Plan Evolution, debt-to-income ratio, hand-to-mouth living by 50M Americans, Bitcoin vs. central banks, Madoff not just about fraud but money laundering and tax evasion as well, Farber: Canada at risk.

Personal Finance and Investments

In WSJ’s “Risky business: The quiz that could steer you wrong” Jason Zweig discusses the value of risk tolerance questionnaires and suggests that “Many of these questionnaires are unhelpful at best and harmful at worst…” because your risk tolerance, unlike “your IQ or shoe size” is not “determined solely by who you are; it’s also a function of the situations you are in… your tolerance for risk depends on countless changes of context, many of which you might not even be conscious of at the time.. Advisers tend to focus on how large a loss the clients can afford, while the clients think mainly about how painful a loss would feel. So, if your financial adviser asks you to fill out a risk-tolerance questionnaire, use the occasion as the springboard for a deeper discussion.”

In Wade Pfau’s “Dynamic retirement strategies” blog he has a great list of “what should be incorporated in a modeling approach (or what can go wrong with the traditional 4% rule- i.e. taking 4% of assets in year one of retirement and adjusting the amount for inflation in successive years) to determine optimal dynamic retirement income strategy”. His list includes annual consideration of: assets, capital market expectations, spending requirement/desire/can-make-do-with, health status, risk tolerance, asset allocation, life expectancy, need for annuitization, etc. (Yes, an annual or bi-annual reassessment of one’s retirement income needs, ability to sustainably fund those needs and the flexibility to readjust those requirements to reflect what is realistically possible reflect the real world retirement planning and adjustment that retirees must deal with. This is well put in couple of old sayings that I like to quote: “computing (modeling) is for insight not numbers” and “forecasting is difficult, especially about the future”. The only “set and forget plan” that you can count on is to stay flexible/adaptable!)

Real Estate

In the Financial Post’s “Canadian housing: Bursting bubble or gentle landing” Andrea Hopkins reports that Toronto saw a 40% drop in sales in Q1’13 compared to previous year. But many believe that we won’t have a US-like crash because of some of the differences in Canada such as: government’s tighter mortgage lending rules, “Canadians have more equity in their homes than Americans did, the default rate is lower, the sub-prime market is tiny, and mortgage interest is not tax-deductible, so there’s no incentive to build up debt. Finally, mortgages are structured as recourse loans in which assets other than the house are held as collateral. That makes Canadian homeowners less likely to walk away than their American cousins.” But others are concerned, like Robert Shiller “one of the few to predict the U.S. housing crash, sees the same thing happening in Canada — just in slow motion.”

And  in the Globe and Mail’s “Peter Munk’s contrarian bet on the Toronto condo market” Tara Perkins reports that billionaire Peter Munk is making a contrarian bet by investing in Toronto condo market because he believes that he is betting on the people behind the new development and argues that ““Look at Beijing, look at all the money. I’ve got friends who have got kids there, tremendous job opportunities, and the kids will come back because they can’t breathe the air,” he said. “You go to London – one of my daughters lives there, and it’s so overpriced that it’s sick-making. New York has got tremendous attractions, but it’s also got a hell of a lot of problems. Look at the traffic – I have an office there and you can’t go across.“Toronto is absolutely unique. It’s not flawless, but it’s so much better than the possible alternatives … “

Pensions and Retirement Income

In Bloomberg’s “Fink says U.S. workers need mandatory retirement savings” Leondis and Collins report that BlackRock CEO said that “The current system is not working and we need a comprehensive approach that includes some form of mandatory savings in addition to Social Security…The longer we wait to fix it, the tougher the task becomes.” He likes the approach taken by Australia where employers are required to contribute 9% of employees’ income. (Not such a bad idea, though I am not generally inclined toward “mandatory” schemes, the current “voluntary” approach to retirement savings is falling far short of what is needed to maintain living standards in retirement; perhaps auto-enrollment default will work better. The Australian system goes a long way to solve the “retirement savings problem”, however where it failed is that it did not offer a low cost investment/decumulation option built into the scheme.)

Lots of talk continues in Canada about the expanded-CPP and the PRPP, but we see little or no action on the pension reform front. In Canada the PRPP is supposed to help implement a retirement saving mechanism for small businesses. But Canadians are still talking, the U.S. as usual is more action oriented. For example in benefitspro’s “The Online 401(k) launches small business IRA option” Paula Aven Gladych reports on what appears to be a simple and cheap (for both employers and employees) implementation of 401(k)s and IRAs in small business environment (which is the stated objective of the PRPP). Online 401(k) addresses the need for cost effective implementation when employers are required to implement “auto-retirement savings through employee paycheck deductions”. The cost to small employer to implement the IRA is $25/mo while the employee pays $4/mo. The available investments are 10 target date model portfolios made up of exchange traded funds for a fee of only 0.25%- inclusive of investment expenses (ETFs), fiduciary advice and trading costs. (Now this sounds pretty simple; why can’t this be done in Canada?)

And speaking of pension reform the Ontario Teachers Pension Plan created a 23 minute documentary explaining Canada’s (U.S.’s and developed world’s) pension crisis entitled  Pension Plan Evolution which addresses the root causes of the (public and private) pension crisis, such as: shorter work-life due to earlier retirement, longer retirement life due to increasing longevity, unrealistic actuarial assumptions (e.g. plan return rates of 8%), we didn’t address the problems when they started to become apparent almost two decades ago. A solution must be found because that pension system that was built is now collapsing. The solution must be intergenerationally fair so it must be made up of a combination of working longer, contributing more and receiving less in retirement. The pensions must be more flexible (the context is DB, but not explicitly mentioned, target benefits are implied) to be able to respond to a changing world over 20-50-100 years, so flexibility is required to deal with changes in market returns and increasing longevity, for example. (A great documentary that we can only hope, that those working on pension reform will watch. After all, what can’t be done- won’t be done. The timing of the required changes in the public system will be a function of what is politically palatable. In the private sector DB plans are already becoming a historical oddity.)

Things to Ponder

Gillian Tett in the Financial Times’ “Europe and US lines cross on household debt ratio” quotes a recent IMF report which indicates that US household debt-to-income ratio declined from 130%  (2007) to 105% (YE 2012). “In the same period, eurozone household debt has risen from 100 per cent to almost 110 per cent.” (If I recall correctly, the corresponding Canadian number is about 165% and growing and so is public debt in developing world.)

In the Financial Times’ “The cost of hand-to-mouth living” Gillian Tett has an interesting (and sad) article discussing what is revealed by the “big data” that companies monitor about customers. What the data reveals is that the buying patterns, not just what but when, of Americans and how that is influenced by the paycheck and food stamps cycle. “…since 2007, spending patterns have become extremely volatile. More and more consumers appear to be living hand-to-mouth, buying goods only when their pay checks, food stamps or benefit money arrive. And this change has not simply occurred in the poorest areas: even middle-class districts are prone to these swings… the financial fragility of the poorer section of US society has risen sharply in recent years, as unemployment remains high and real incomes and household wealth fall.” She extends her concerns, about the hand-to-mouth life of about 50M Americans on food stamps, to the regression from the progress over the past century, when one of the key measures of societal economic progress was the growing planning horizon. Clearly, hand-to-mouth reduced ‘planning’ horizon to days from years.

In the WSJ’s “Bitcoin vs. Ben Bernanke” James Freeman gets an insider’s view of Bitcoin from Gavin Andresen, chief scientist at Bitcoin Foundation, who says that “I’m hoping to learn…whether a nongovernmental global currency” is possible. “Can you get from where we are to the vision of billions of people all over the world using Bitcoin just like they use any other currency? That’s the grand experiment.” The article discusses strengths (privacy, simplicity of crossborder transaction, etc) and weaknesses (hacker attacks, speculation, fraud and not legal tender) in Bitcoin. “But perhaps the most intriguing aspect of Bitcoin—at a time when the world’s central banks are creating lots of new money—is the promise that the number of Bitcoins will be capped at 21 million.” He suggests that Bitcoin might first take off in a big way in places like Zimbabwe. The article comments on the laughable criticism about Bitcoin being that nobody is responsible for accelerating the money creation process, as central banks are doing, so in a Bitcoin world there is a serious risk of deflation. (What about the inflation risk resulting from central banks’ money printing?)

Diane Francis in the Financial Post’s “Bernie Madoff’s secretary’s crusade to put things right” discusses a new documentary “In God We Trust” in which Madoff’s secretary describes her view of what happened and the personal consequences of the “biggest financial scam in U.S. history (which) was perpetrated right under her very nose, embarking on a private crusade to aid the FBI investigation”. Francis some years ago and this documentary now, argue that the Madoff story was not just a scam/fraud, but involved money laundering and tax evasion.

And finally, in the Globe and Mail’s “Master of doom Marc Faber is gloomy about Canada” Darcy Keith reports some of Faber’s opinions/forecasts on Canada (“huge leverage in the private sector”, “strong currency”, “slowing economy”, “price levels relatively high”, “housing market may well be in bubble territory”, “Canadian banks more risky investments”), gold (“I buy gold every month…with maximum allocation of 25%”), market crash ( one is coming this summer).