Contents: Spending smart, Madoff L-T lessons=Nada, advisers’ value-add: taxes/fear-greed-control/focus-on-long-term, simple ETF strategies win, Vanguard advantage: coop model with matching reputation and low cost index funds, RRSP or mortgage prepayment? PBC/Florida property assessments: homesteaders=+1.5% while non-homesteaders=+10%? legal and fraudulent homesteaders’ taxes in Florida paid by non-homesteaders? Air Canada pension plan eliminates deficit while Nortel pensioners stuck with 40% cuts, Ontario pension reform brewing, create your own pension plan? expanded CPP not free (and other options may be superior), bubble or no-bubble and what to do next? small caps outperform, money: when do you have enough? hedge funds: more a statement of status and hope rather than rational thinking, long-term-care: ship mom off to Thailand???
Personal Finance and Investments
In the Chicago Tribune’s “10 years of columns and thousands of tips” Gregory Karp packages the essence of 10 years of personal finance columns’ wisdom into this one article in which he notes that “money and wealth goes far beyond material comforts and desires… Regardless of how much money you earn, spending money well is the key to wealth. Having money gives you options. Not having it attracts stress and haunts relationships.” So Karp discusses what he calls “Spending Smart fundamentals” including considerations such as: “you can’t out-earn dumb spending”, the value of money is in spending it so saving is “just a disciplined decision to spend later”, have goals to motivate deferred spending, understand where you spend money today, compare prices, buy experiences not things, pay particular attention to food/insurance/telecom and recurring costs, etc. The end of his column even includes a list of thing that he would and would not buy as a result of his research for his column. (Tons of common sense packaged in this short article; well worth reading!)
In the Financial Times’ “Madoff: Just another wolf on Wall Street” Chris Newlands reports that “after every scandal…investors learnt a lot in the short term, something in the medium term and nothing in the long term. No amount of regulation, he suggests, can override “greed and fear on the part of investors”.
In InvestmentNews’ “How to outperform using boring old index funds” Jason Kephart argues that, while investors may be in search for an adviser who can deliver alpha (i.e. above average returns), “adding alpha is as simple as making savvy tax moves and as stopping clients from making classic investing mistakes like buying high, selling low and thinking short-term instead of long-term. These are all basic things that mom-and-pop investors probably aren’t thinking about on their own. And these are things that an adviser can actually control, unlike, say, the market’s returns.”
In IndexUniverse’s “Simple ETF strategies work” Allan Roth writes again that “a simple three-fund portfolio will beat the vast majority of investors”. His three ETFs are: VTI, VXUS and BND. This portfolio designed by his 8-year old with a little help comes in three flavours: aggressive (90% equity), moderate (60% equity) and conservative (30% equity). Roth explains that the reasons for the great performance are: low-cost, broad diversification, rebalancing and the reality that the future is unpredictable.
In the Globe and Mail “Vanguard CEO’s recipe for growth” Jacqueline Nelson reports on Vanguard’s doing things “just a bit differently: co-op like (a mutual company owned by investors in its funds), low-cost index funds, sticking to its knitting rather than trying to be all things to all people, growth is organic with minimal advertising based on customer goodwill built on reputation. Now they are focusing on move toward “fee-based investment advice” (as opposed to commissions/trailers paid via mutual fund sales model) which represents 60% in the US but only 20-30% in Canada.
In the Globe and Mail’s “Should you contribute to an RRSP or pay off the mortgage? Kira Vermond explores the trade-off between paying off your mortgage faster and putting extra cash into your RRSPs. Considerations looked include: where you get better returns, tax bracket, risk tolerance and others.
In the Palm Beach Post’s “Florida homestead assessment increase will be 1.5 percent 2014” the expected increase in assessed value of homestead properties will be 1.5%, limited by the lower of 3% or state’s inflation in 2013; 2012 it was 1.7% while the PBC’s tax base increase 4.2%, but according to Florida realtors median prices increase in 2012 by 9.8%. PBC property appraiser “Nikolits said market values in 2013 appear to have risen by 2 to 3 percent over the previous year ”but earlier in the article he is quoted as indicating that “Preliminary estimates from 2013 show that property values appreciated at a more significant rate then they did in 2012”. The market increase will drive the non-homesteaded property owners’ tax increases limited only by a 10% annual cap on assessed taxable values. (I got a full brunt of the 10% increase in assessed value last year, and by the sound of it we might be hit by another significant increase of similar size again this year, to be likely accompanied by same order of magnitude tax hikes.)
And by the way, who really knows how many “legal“ homestead exemptions are actually frauds, where owners don’t meet criteria because they are not residents and/or even rent out their property as explored in “Palm Beach County property appraiser will audit ex-commissioner’s eligibility for homestead exemption”. For a more humorous take on the story you can read Frank Cerabino’s Palm Beach Post article “Where was ex-Commissioner Maude Ford Lee when home was rented to violent street gang?” (Floridians don’t have to worry; non-homesteaded property owners will cover the expenses of legal and illegal homesteaders.)
Pensions and Retirement Income
In the Globe and Mail’s “Air Canada wipes out its $3.7B pension deficit, swings to small surplus” Greg Keenan reports that a combination of “strong equity markets, rising interest rates and changes in pension benefits for employees” have transformed a $3.7B solvency deficiency into a small surplus. Air Canada pension plan still has 30% % equity allocation but is considering further equity reductions as the plan becomes fully funded (presumably not just on a solvency but also a going concern basis as well) (As usual timing is everything; the Nortel pension plans, as mentioned last week, appear to have been fully immunized against interest rate changes somewhere near the stock market lows, locking in the 40% pension reductions of retirees for good.)
In the Financial Post’s “Former PM Paul Martin advising Ontario on controversial standalone pension plan” Barbara Shecter reports that Ontario Premier Wynn is being advised by Paul Martin who, the article notes, was “instrumental in a reform of Canada Pension Plan undertaken in the late 1990s”. (Glad to see that Ontario is pushing ahead with some form of pension reform. Such a move would be consistent with Ontario being a leader in protecting its residents’ retirement; Ontario is the only Canadian province which offers some (though minimal) protection in case an employer declares bankruptcy with an underfunded pension plan. Hopefully Ontario will be exploring pension reform options without restricting itself an expanded CPP-like model. There are likely superior pension reform solutions which meet the requirements of: (1) increased savings, (2) low-cost accumulation/decumulation strategies, (3) low-cost longevity insurance and (4) increase the protection of trust funded pensions in case of employer bankruptcy with an underfunded pension plan as recommended by Ontario Expert Commission on Pensions.)
In the Financial Post’s “How to make your own pension plan” Ted Rechtshaffen’s five steps to your personal pension plan includes: 12% of gross income saved per year, invested 100% in equities during your 30s/30s/40s, increase savings to 15% of gross and reduce equity allocation to 65-80%, 5-8 years before retirement take stock of expenses and create financial plan, aim at a draw of 65% of final income while timing retirement to when you can/want to retire. Rechtshaffen’s assumption include work start age and income, income growth rate, investment return rate and a start retirement draw of 65% of income adjusted at 2.5% per year. Given assumptions (which some might perceive as slightly aggressive on the return side and light on the savings side) he concludes that a superior retirement outcome is likely when compared to CPP and corporate pension plans.
Rechtshaffen had another article “CPP is not ‘money for nothing’: “Why you shouldn’t rely on big government for your retirement” in which he argues that CPP expansion is certainly a bad deal for employers, but even questions CPP in general based on its costs, returns, annuitization (no estate), CPP survivor benefits flaw, and lack of control (and from the perspective of the adviser community, each additional dollar invested in the CPP is one less available for asset gathering advisors. Personally, I partly resonate with less than enthusiastic view on an expanded CPP, as I’d rather see the government provide at least a national “longevity insurance” whereby a relatively small premium Canadians would have a guaranteed lifetime income starting at age 85. In many ways it’s the perfect product: it would allow people to plan for a known retirement duration (i.e. to age 85), age 85+ mortality credits are significant source of incremental ‘return’, it would reduce government GIS costs, government is in unique position to deal with cohort level longevity risk as one way or another it must do so anyways. I really struggle to understand why this ‘no-brainer’ approach hasn’t been embraced already. Perhaps it’s just too difficult to understand, though it’s nothing more than an expanded CPP which kicks in at 85.)
Things to Ponder
In the WSJ’s “New warnings from an investing pioneer” Jason Zweig writes that investors feel like there is “Nowhere to run, nowhere to hide — and no one to get unbiased advice from.” Zweig interviews “investing pioneer Dean LeBaron” whose motto has long been: “Look for the question that are not being asked.” He recommends that individual investors follow China (investing in Africa, Canada Mexico), focus on longer than 1-3 year horizon and be careful with things that have done well recently as things are about to change.
Mark Hulbert’s WSJ article “The bull market: Long in the tooth”, Gavyn Davies’s “How to detect a market bubble” and the Economist’s Buttonwood column “Overvaluation: The evidence” all discuss current market bubbles and/or overvaluation by different measures, but all opine that this doesn’t necessarily mean that the market will fall immediately. And some observers lament this as one indicates that “the higher they go, the more they are likely to fall”. The various measures of valuation discussed tend to be more valuable as long-term indicators: Shiller’s CAPE and Smithers’s Q-ratio really tell the same story are most reliable predictors, with dividend yield being the only credible traditional value measure. As to bubble or no bubble, Davies suggests that the “equity market would have needed to have risen 100% in the past two years” to a CAPE of 33 rather than 24, but even if that had happened it would not have been an “automatic sell”, however a hedge might have been appropriate. (Of course if you have an asset allocation consistent with your risk tolerance then market changes mostly require only rebalancing.)
In IndexUniverse’s “Indexing no average experience” Larry Swedroe explains why indexing in general and passive investing in particular are not average return experiences. “They provide investors with market returns of the asset classes they invest in and, by doing so, they produce above-average returns for their investors.”
In the Financial Times’ “Debate rages on the big returns from small caps” John Authers writes that “smaller companies reliably outperform over longer term’. He provides assorted explanations/reasons for this outperformance, one of which is that it’s accompanied by higher volatility, and refers to data indicating that this also applies to international markets. Authers opines that while the 2013 outperformance in the U.S. market may not be repeated this year, in the long term he argues for a “decent allocation” to small caps.
In the NYT’s “For the love of money” Sam Polk explains his personal experience of greed/selfishness/envy/addiction-to-more on Wall Street and the inability to understand the meaning of “enough”. (Thanks to MF for recommending article which in turn reminded me of the story told by Kurt Vonnegut about a conversation on this subject with Catch-22 author Joe Heller retold toward the bottom of the page in “Do you have enough? Or do you keep lusting for more more more for me me me” )
In IndexUniverse’s “The sad truth about hedge funds” Larry Swedroe takes a gloves off look at hedge funds, mentioning: “lack of liquidity; lack of transparency; loss of control over the asset allocation and thus risk of the portfolio; non-normal distribution of returns…high risk of dying…many invest in highly risky assets…(with) returns not commensurate with the risks…highly tax inefficient…and there are well known biases in the data (reporting performance)”. “The poor performance of the industry raises the question: Why is so much capital invested in hedge funds? One explanation is that it’s the triumph of hope, hype and marketing over wisdom and experience.” He also notes that hedge fund ownership also offers “expressive benefits of status and sophistication…”(He really savages hedge funds and his criticism is well worth considering given that “alternatives have now become readily available in mutual fund form to the average investors.)
And finally, in Forbes’ “Swiss daughter sends 91-year old mom to Thailand for care” and the BBC article quoted in it discuss a ‘solution’ to the growing number of families with members requiring dementia related care; the solution (?) described here involves shipping mom from Switzerland to Thailand where “she can get a lot more care for the money”.