Contents: Personal finance lessons from the financial crisis, up/down/up “glide-path”? US home frenzy easing, Alberta public pension changes? longevity decreases for >65 age group? investor lessons from war strategies, rising rates and stock price relationships? Zero interest rate impact on jobs? The Great Recession: causes and lessons.
Personal Finance and Investments
In WSJ’s “What we learned from the financial crisis?” Greene, Pleven, Saunders, Wotapka and Zweig have a list of what we learned from the financial crisis: “retirement timing is critical due to “sequence risk” (lesson: have 1-yr worth of cash reserve of expenses not covered from other sources, be flexible to adjust withdrawal rate), “don’t panic” and exit stocks at the bottom (use rebalancing to your target allocation- very hard to do after the market crashed but this discipline forces you to sell expensive and buy cheap assets, review changes to your risk tolerance annually with your advisor to insure that asset allocation is still consistent with it) and get a second opinion from a fee-only advisor if your advisor recommends “drastic action”), “home price don’t always go up” (still 11% of the mortgage holders are under water but down from 33% in 2011) and “don’t invest in what you don’t understand”.
In the NYT’s “An adage adjustment for investors at retirement” Tara Siegel Bernard reports that in a new study Kitces and Pfau indicate that near retirement individuals can keep as little as 20% as equities as long as they then ramp up on equities as little as 1% per year; this will extend how long their assets will last in retirement and minimize the chance that a near retirement stock swoon with 50-60% invested in equities will lead to bailing out of them. Siegel Bernard notes that this seems to be opposite to what is the accepted current practice (e.g. target date funds which continue to reduce equity allocation past retirement). “Portfolios that started with about 20 to 40 percent in stocks at retirement, and then gradually increased to about 50 or 60 percent, lasted longer than those with static mixes or those that shed stocks over time, according to the study.”(I haven’t as yet had a chance to read the study referred to in the article. The idea that retirees should reduce their risk as they approach retirement to protect against portfolio ravages should we be hit by a period of bad sequence of returns, but then increase risk later on (with fewer years left) in retirement has been suggested before, and can make sense depending on the individual’s personal circumstances which in turn determine his risk tolerance. So age is not the only determinant of “glide path”. As you might have noticed before I am not that enthusiastic about the chances of success or the wisdom of any “set it and forget it strategy” over a 25-35 year retirement independent of what happens in the world around us, including the initial 4% draw followed by annual inflation adjustments independent on the returns earned by the portfolio. The only practical “set and forget” withdrawal strategy that will consistently work for everyone over a 25-35 year retirement without penalizing retiree with very low withdrawal rates is one that adaptable to changing circumstances such as one’s needs and portfolio returns. Thanks to VP for recommending.)
In the WSJ’s “Home-sales frenzy eases” Timiraos and Dougherty report that industry experts opine that while the U.S. housing recovery is unlikely to stall the “exuberance that prompted bidding wars and led to double-digit price gains is easing”. The article quotes various metrics which support this view. “The consensus of economists surveyed last week by Dow Jones Newswires estimates that the pace of sales fell to a 5.24 million seasonally adjusted annual rate in August, down about 3% from July but ahead of last year’s 4.84 million.”
Pensions and Retirement Income
In a sign of the times, Benefit Canada’s “Alberta proposes public pension reforms” reports that “The Government of Alberta has proposed a number of changes to public sector pensions such as no benefit improvements until 2021 and a reduction in cost-of-living adjustment (COLA)… COLA on benefits earned after 2015 will be targeted at 50% of Alberta’s inflation rate, but it will no longer be guaranteed; those already receiving pensions by the end of 2015 will continue to receive their pensions, including COLA, covering 60% of Alberta inflation.”
In the Economist’s “Age shall whither them” the Buttonwood column discusses recent stats showing that while fewer British workers (i.e. 18 to 64 year olds) die than before thus reducing their mortality, the 65+ age group had mortality increases for both men (+0.4%) and women (+2.6%); furthermore mortality of those >90 increased even more (+2.9%). The article notes that “This reduces pension liabilities by about 1%”! While some say that this may be just a one year aberration, Buttonwood notes the 2011 census found fewer nonagenarians than projected from the 2001 census. (So the longevity/mortality statistics are not exclusively unidirectional.)
Things to Ponder
In CFA Institute Financial Analysts Journal’s “Lessons on grand strategy” Charles Ellis looks at how lesson of historical grand (war) strategies of Clausewitz, Sun Tzu and Mahan could be applied to investment management. Much like generals in war, investors are faced with “multiple uncertainties” and outcome is heavily influenced by chance. Sun Tzu for example wrote that “The skillful commander takes up a position so he cannot be defeated” which is analogous to best investment strategists’ portfolios constructed to generate” superior longterm results and withstand the severe interim tests of disruptive markets without the need to depend on clever portfolio tactics”. He also find analogies between investment strategy using concentrated portfolios and Mahan’s naval strategy in which he argues that there is no place to hide on the sea so you better have an attack strategy. (It’s an interesting article with investment management strategy lessons explained by Ellis the author of one of the best all time investment books “Winning the losers’ game”)
Mark Hulbert in WSJ’s “Will rising rates hurt stocks?” explores the effect of rising interest rates and suggests that they don’t necessarily lead to lower stock prices. The assumption always is the rate increases are inflation driven and they are both bad for stocks, however he notes that there is “no consistent historical relationship between interest rates and the stock market”.
In the WSJ’s “Zero interest, zero jobs” Al Lewis, on the heels of Verizon’s $49B bond sale, writes that this won’t generate a single job. He further argues that today’s ultra-low interest rates just drive companies to do stock buy-backs and increase dividends which in turn drive the market higher. He gives an example of a paper company with underfunded pension plan and declining demand for its product which announced a stock buy-back, dividend rise followed next day by firing 1,100 employees. He writes that this is not a surprising approach for CEOs who want to “keep investors happy” and keep their jobs and bonuses. Lewis notes that “For five years, artificially low interest rates have punished savers, rewarded borrowers, and perverted economic incentives. Big companies don’t have to produce much when there’s always another refinancing option on the horizon.”
And finally, in the Economist’s “Crash course” discusses the lessons and causes of what could have turned into another Depression if not for the “massive monetary and fiscal stimulus”. Some of the causes mentioned included: “folly of the financiers”, subprime mortgages and their securitization, banks reaching for riskier assets in a ultra low interest environment, collapse of the housing bubble exposed a series of weaknesses in the financial system, evaporation of trust, “complex chain of debt between counterparties” (e.g. Credit Default Swaps)), “regulators asleep at the wheel” including central bankers (e.g. allowing Lehman bankruptcy, the housing bubble, massive global current account imbalances, the Euro enabled expansion of financial sector leading to Euro crisis, allowing banks to take on more and more risk. (Good introspection on the 5 year anniversary of Lehman bankruptcy. Thanks to SR for recommending.)