Contents: Required retirement withdrawals, tax planning strategies, free Stanford finance classes, Canadian home prices flat MoM, extra savings required even with company pensions, UK pensions unfit due to annuities, annuities the worst option? will that be cash or pension? Ontario pension reform threat, Fama and Shiller Nobel democratizers, Fama: EMH/MPT good – hedge funds bad, Taleb: system fragile due to no skin-in-the-game by decision-makers and socialization of errors, VaR risk measure for mutual funds a time bomb, portfolio prep for deferred doomsday to January 16?

Personal Finance and Investments

In the WSJ’s “How to make the most of required retirement withdrawals” Carolyn Geer discusses what to do with required withdrawals from retirement finds around age 70: rebalance to maintain target asset allocation, asset allocation in the 70s and 80s (T. Rowe Price recommends “20% of their portfolio in short-term investments (money markets, certificates of deposit, bank accounts, short-term bonds), 40% in fixed income (70% investment-grade bonds, 20% high-yield bonds, 10% international bonds), and 40% in equities (55% large-cap stocks, 30% international stocks, 15% smaller-cap stocks), plus maintain 3-6 months of emergency funds in cash and re-invest excess withdrawals in a taxable brokerage account (you don’t have to spend everything you are required to withdraw).

In the Globe and Mail’s “Five smart ways to reduce your tax burden as year-end looms” Tim Cestnick suggests some year-end tax planning strategies for Canadians: restructure your portfolio to make it tax-efficient (interest in registered/tax-sheltered accounts, lower taxed dividends and cap gains in taxable accounts), use of TFSA is a no-brainer, arrange affairs to get tax relief for interest expenses, donate appreciated securities to charities and “any capital gain triggered when you directly donate securities is eliminated..and you’ll receive donation tax credit to boot”.

In the NYT’s “Finance Class on the Web, for Students of All Ages” Tara Siegel Bernard refers readers on some available free online courses on retirement planning. In particular one started Monday October 14, offered by Stanford University’s Joshua Rauh entitled “Finance of retirement & pensions” . “My goal is to try to empower people to make better decisions about their finances with an eye toward retirement and for retirees who are thinking about managing their money…whether it is buying an annuity or having a spending rule.” (Thanks also to VP for recommending.)

Real Estate

Canada’s September 2013 Teranet-National Bank House Price Index indicates that MoM prices are imperceptibly down -0.01% but YoY are up +2.65%. MoM Toronto and Ottawa were flat, Vancouver was up +0.5% while Montreal and Calgary were down -0.5% and -0.4% respectively. YoY price changes were Toronto +3.7%, Calgary +5.6%, Ottawa +1.0%, Montreal +0.8% and Vancouver +1.7%. The past 15 year average +0.2% MoM increase in prices compared to flat this September” suggests a market cooler than usual”.

In the Globe and Mail’s “September home sales soar” Tara Perkins reports that and 18% YoY increase in existing home sales compared to the month of September 2012, though MoM sales were only up 0.8% over August. Explanations (range from September 2012 being a very low (unrepresentative) month as it followed tightening of mortgage rules last summer, to people running out to buy now as they fear further rise in mortgage rates which increased from 2.64% to 3.39% since may 2013. However, interest rate pundits don’t expect yield to spike over the next year.

Pensions and Retirement Income

In the Financial Post’s “Got a company pension? You should still save a little on the side” Dan Ovsey uses the Nortel pensioners’ disaster as a springboard to discuss the need for additional savings even for those with DB pension plans. Many of Canada’s private sector pension plans continue to be significantly underfunded and in case of bankruptcy pensioners are unprotected. Private sector pension plans were always intended to be just one of the legs of a three legged stool, CPP/OAS and private savings being the other two. Even among companies which still have a DB plan, gradually fewer and fewer of the workers are eligible for it.

In the Financial Times’ “UK pensions are ‘not fit for purpose’” Chris Flood writes that “Millions of British workers face poverty in old age, with the charge that the UK pension saving system is “not fit for purpose”.”  While the recently introduced auto-enrollment is a step in the right direction it won’t guarantee the expected retirement. Specific concerns include the purchase of annuities upon retirement which one pension expert calls “highest risk product that you ever buy”, especially for people “if they retired at 65 and did not live beyond 82”. By the way the Telegraph’s “Proof: why annuities are often the worst option” explains why (UK) annuities are such a bad deal (thanks to DT for recommending). In the example shown in the article, for a 65 year old who buys an annuity it takes 18 years (which is approximately the life expectancy at 65) to recover your capital, 26 years to earn the 3.5% UK government risk free rate. (And this doesn’t even consider the impact of inflation over 20 or more years.)

In the Financial Post’s “Five reasons to take cash instead of a company pension” Andrew Allentuck’s list includes: you have other pensions (CPP, OAS, other) to create a “floor for future income” so cash allows additional growth, “you want to quit…(and )early retirement penalty is high”, “company is in trouble” and pension plan is underfunded, “planning to leave Canada for a lower tax jurisdiction”.

In the Globe and Mail’s “Ontario’s pension proposal turns up the heat on feds” David Parkinson calls the Ontario proposal to go alone on pensions unless the federal government takes steps to expand CPP, a shot across the bow. This proposal, coming shortly after the PEI one, increases the heat on the federal government, but the article notes that Ontario has no choice but act; unless pensions are increased it’s going to get stuck with many of the bills as the boomers’ retirement crisis builds. Also there is already precedent for province going alone- Quebec’s QPP (Saskatchewan also has one, though participation is not mandatory.)

Things to Ponder

In IndexUniverse’s “Fama & Shiller: The great demcratizers” Elizabeth Kashner explores the democratizing impact of the work of Fama whose “findings not only had a profound impact on subsequent research but also changed market practice. The emergence of so-called index funds in stock markets all over the world is a prominent example” and  Shiller who “found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low.” Fama argues that one “can’t gain advantage by stock selection or by market timing, because the market has incorporated all available information into current prices” while Shiller asserts that “asset prices, while efficient in the short term, are subject to mean-reverting, long-term collective influences”.

In Financial Advisor’s “Fama unrepentant on MPT, Alternative Investments and Value of advisors” Evan Simonoff reports on an interview Fama did a week before his Nobel Prize was announced. It is a well worth reading article in which he: stands by EMH (efficient market hypothesis) and MPT (modern portfolio theory- “diversification is your buddy”), continues his scornful view about hedge funds but is more positive on private equity where he believes that “human capital at the management level” can add value. He also had some kind words   about financial advisors but warned about cost vs. value of advice: “Most successful advisors, he claimed, moved out of investments and into wealth management where they addressed a host of client issues ranging from retirement, taxes to estate planning and other disciplines. The investment part of their value proposition is dubious in his view, since Fama noted it can be replicated for just a few basis points.” (Those who still own actively managed mutual funds, especially the high cost Canadian ones, should take note.)

In the Financial Times’ “Commonsense ideas behind Taleb’s rhetorical flourishes” John Authers reports on a chat with Nassim Taleb. Some of his thoughts on the state of our financial system include: “natural systems work by allowing things that do not work to break”, “properties of a healthy system, which would allow for errors to occur without “socializing” them”, requirement for “skin in the game” for market participants is that decision makers “suffer the consequences of any mistakes” (e.g. hedge funds), banking concentration has been increasingly making the system more fragile, US debt is the most fragile part of the national system and “The western economy is over-centralized, and that creates extra risk.”

In the Financial Times’ “VaR calculation a ‘time bomb’” Steve Johnson reports the use of Value-at-Risk by many European mutual fund managers as a measure of risk is a “time bomb” that may lead to a “severe market crash”. In 2008 VaR was blamed for providing false security to large financial institutions about their level of risk which it underestimated at the time, now people are worried that the widespread use of VaR “could lead to a repeat of the 1987 stock market crash, when the S&P 500 fell by 33 per cent”… (because) if volatility rises as markets fall, fund managers would be forced to sell equities, exacerbating the initial sell-off”. In 1987 the crash was at least in part due to “portfolio insurance” whereas now the concern is VaR, as both effectively force you to sell as markets drop, thus accelerating the fall.

And finally, (just before the short-term deal to avoid US default was reached but well in advance of the January 16 next deadline J, for your entertainment you can peruse) Reuters’ “The doomsday portfolio: How to invest for default” Lauren Young reports that she interviewed 20 money managers and the consensus was no default, though the probability is non-zero. Their recommendations included: betting against bonds (e.g. the very risky move, if convinced that default will occur consider ProShares UltraShort 20+ Year Treasury and/or ProShares UltraShort 7-10 Treasury ETFs), “focus on short-term debt”, “buy gold” (easiest GLD ETF but even better would be gold coins).