Contents: Outperformance unpredictable, Clements: “rules of the road”, smart-beta an expensive way to implement factor strategies, financial plan necessary but outcome not guaranteed- flexibility is key, older love but not marriage, tax-aware asset location, intermediate bond funds strike interest rate risk-return balance, robo-adviser shortfalls, Shiller: home ownership tarnished, considering current mortgage refinance options, Florida tangible property values up 5.4%- non-homesteaders’ property taxes to rise more, Ontario ORPP starts the pension reform ball rolling, Fraser Institute: no retirement crisis in Canada- just sell your houses?!? UK annuities no longer mandatory- sales off significantly, Nortel pensioners: pushed further out into the cold, war on retirement, SEC to cave on broker fiduciary standard? financial crises are cost of progress, China to take lead from US in 2014 as #1 world economic power!
Personal Finance and Investments
Larry Swedroe’s ETF.com article “Hard to know who’ll outperform” is a great reminder to those who are still invested in actively managed mutual funds that “while some active managers appear to have stock-picking skills, because it’s difficult to separate skill from luck, it’s hard to identify them in advance. In addition, even if you were able to identify them in advance, it’s the manager who’s likely to be the beneficiary of the excess returns, not the investor.” (Active management: another example of investors’ triumph of hope over reality; right after the expectation that brokers’ “suitability standard” will protect them the same as an adviser’s “fiduciary standard”.)
In WSJ’s“Jonathan Clements rejoins Sunday Journal” Jonathan Clements issues his “rules of the road” for the restart of his WSJ column after a 6-year hiatus (his rules are equally applicable to other personal finance journalists and bloggers): “no forecasts”, “no news”, “no jargon”, “no politics”…” In this column, expect to read a fair amount about perennially important topics such as how much you ought to save, how to generate retirement income and how to design a portfolio. Yes, the answers vary a little as the markets bounce up and down. But they don’t change that much.” (You can expect nothing less than unbiased time-independent financial know-how from Clements’s column…I am looking forward to read it regularly.)
In InvestmentNews’ “Smart beta slow to gain traction among asset managers” Carl O’Donnell writes that according to a new Russell survey “while the popularity of smart beta products is growing, these investments don’t yet play a major role in most asset managers’ portfolios…most asset managers are still trying to figure out where these products fit…They are taking smaller, tactical allocations rather than big, strategic allocations.” Furthermore, “There is often good reason for this sentiment…Many smart beta strategies could easily be mimicked by simpler, less expensive approaches.” (Certainly there are much cheaper ways to passively implement (factor) strategies: small, value and profitability.)
In the Financial Post’s“How much money is enough to retire? Only you can figure it out” Jason Heath reports that according to an ING Direct survey 1/3 of 55+ year olds “had to return to full-time work after retiring due to insufficient savings” and discusses “the” question of “how much do you need to retire?”. The factors are many: time in retirement, CPP/OAS (or Social Security) levels, other pensions, return assumptions, risk tolerance and asset allocation, home downsizing or not, but you must remember that while “crunching the numbers” is important, “retirement planning does need to be taken with a (large) grain of salt as it’s based on a point in time only and assumes holding countless factors constant…so it doesn’t mean that the future will work out exactly the way you plan it”. On the same topic in the NYT’s “With planning out of the way, time to enjoy the moment” Carl Richards discusses the importance of financial planning but notes that it’s all based on projection, assumptions, guesses about future scenarios/outcomes. Sometimes “salespeople disguised as financial planner” manipulate the process until the only workable solution is the product they sell or “well intentioned advisers use this process with a false sense of precision”. Alternately, we could “give up on the whole process of planning. Just forget your goals and projections and focus on the process of living today!” Perhaps the best approach is o consider goals as potential destinations, give “ourselves permission to let go of certainty” and considering the plan “flexible”, “we’re that much closer to happily living in the moment instead of stressing about a future we can’t predict.” (So while planning and periodically re-planning is a must, flexibility/adaptability in response to changing environment is the key to a financially successful retirement.)
In the NYT’s“Welcoming love at an older age, but not necessarily marriage”Stanley Luxenberg discusses how the financial disincentives for older couples of marrying such as: legal problems for heirs, occasional tax penalties, loss of alimony, loss of Social Security, loss of survivor’s pension, responsibility for each other’s medical bills, impact on children’s college education grants, loss of dead spouses military pension; there are also risks of legal problems should the couple split up. Potential “solutions” are offered but many worry that these are not fool proof, so they choose to just live together.
In the Financial Post’s “1% in your pocket is better than 1% in the taxman’s pocket” Ted Rechshaffen discusses after tax returns for Canadians and reminds them that “because of the high rate of tax on interest income, bonds and GICs should usually be avoided in taxable investment accounts. Here is where preferred shares can be used for lower volatility, and common stock (especially Canadian) has significant tax advantages… For those with taxable investments, get your extra 1% every year, and in the long run, it will add up.”
In ETF.com’s“Why interest rates fooled us” Allan Roth discusses what to do given the uncertainty/unpredictability of where/when intermediate and long-term interest rates are heading. He argues that there is little reward for buying long-term rather than intermediate term bonds, especially compared to the risk one assumes. He looks at a scenario involving at sudden 3% interest rate jump for a bond fund with duration of 5.6 and yielding 2.3%. The 13% (+) estimated bond fund loss in that year, is gradually recovered as a result of the higher reinvestment rates for maturing bonds. This is the same conclusion as reached by Mark Hulbert in his WSJ article “When bonds trump gold” discussed in my April 14 blog a few weeks ago.
And by the way, in the Globe and Mail’s “Investors line up for half-century of low returns” Jacqueline Nelson reports that the Government of Canada has just sold $1.5B worth of first 50 year bonds, double what it planned to sell, at a nominal interest rate of 2.96%, i.e. slightly lower than the going rate for 30-year bonds. Insurance companies and pension plans gobbled them up for their need to do assets-liability matching.
In ETF.com’s “How robo-advisors are impacting investing” Cintia Murphy interviews Grant Easterbrook on strengths and weaknesses of robo-advisers. The advantages have been discussed before: low cost, attractive to younger generation, better transparency, and good aggregation of holdings with specific buy/sell advice. Where they tend to fall short is on: personal handholding during a crash (to prevent people moving to sidelines), a generic questionnaire may not be best way to determine risk tolerance, no help in more complex matters like estate planning and financial planning (and likely insurance needs).
In an ETF.com interview with Robert Shiller entitled “Allure of home ownership fading” he argues that home ownership is tarnished, and a combination of higher prices and mortgage rates coupled with changing societal value system in the internet age has reduced the allure of home ownership.
In the WSJ’s“Refinancing a mortgage? Do it soon” Jonathan Clements discusses the mortgage refinancing decision and its old rule of thumb that “To make refinancing worthwhile, you typically need to shave your mortgage rate by at least a full percentage point.” Now that 30-year mortgage rates have risen 1% to about 4.4% from 2012 lows, he suggests that it’s time to explore 15-year 3.5% refinancing opportunities, while those planning to move in the next five years might consider a 5/1 hybrid which currently offers a rate of 3.1% for the first 5 years. Furthermore he recommends that “When you refinance, tailor your mortgage’s length to no later than your expected retirement date.” (The article is fully in line with Clements’ “rules of the road” discussed above: simple and sensible advice, explained clearly.)
In the Palm Beach Post’s “Early numbers show tax base increasing in all 38 cities in Palm Beach County: average up 5.4%” Joe Capozzi reports that according to the County’s Property Appraiser Gary Nikolits the rising property prices will drive a tangible property value increase of 5.4% for tax purposes. Nikolits added that “It’ll be interesting to see how local taxing authorities react to these higher numbers…What we are hearing from most of them is they are staying with same millage rate.” (This would suggest that most non-homesteaded property owners should be preparing for an even larger than average property tax increase, as homesteaders’ taxable property value increases are capped at inflation or 3% max.)
Pensions and Retirement Income
The Ontario budget has announced a mandatory Ontario Retirement Pension Plan (ORPP) to be operational in 2017 and will be supplemented by a new voluntary PRPP. Janet McFarland in the Globe and Mail’s“Ontario’s proposed pension plan excludes half of workers”adds that some of the specifics of the plan mentioned are that: plan only covers about half of the workers as it excludes the self-employed and those already covered by “workplace plans or are in federally regulated industries such as banking”, “Workers would contribute 1.9 per cent of their incomes, which will be matched by employers, up to a $90,000 income maximum. It aims to pay out about 15 per cent of income before retirement.”, the pension income will defined benefit and indexed built on the CPP model. (Good to finally see a firm pension reform proposal after almost a decade of talking about it. Ontario proposal tackles the sweet-spot of most exposed middle income employees who don’t have a workplace pension. It tries to strike a balance in addressing some concerns of those opposing a CPP-like plan by only covering about half of Ontario’s workers, by supplementing it with federally proposed PRPP and by only mandating a 1.9% contribution from each of employers and employees. It’s still a poke (though a mild one) in the eyes of the federal government, still does nothing for those near or in retirement (in fact, given benefit phase-in over 40 years it will benefit primarily younger workers), it even placates the financial industry by introducing a PRPP as well, but of course the Ontario minority Liberal government has to get the collaboration of the NDP or call and win an election to proceed with plan. I would have liked to see “more and different” approach but credit to Ontario Liberals for finally starting the pension reform ball rolling.)
In BenefitsCanada’s“What retirement crisis?” the staff reviews a Fraser Institute study “The reality of retirement income in Canada” which apparently argues that there is no crisis and expanded CPP-like pension reform is not required because people are accumulating “large sums of assets” and are retiring later, increased mandatory savings tend to reduce voluntary savings, and the alarmists studies overlook “trillions of dollars in assets held by Canadians in home equity and other savings as well as undocumented support from family and friends” (While an expanded CPP-like approach is not my preferred pension reform vehicle for a number of reasons which I have discussed previously, arguing that working longer and tapping home equity are the answers is disingenuous, especially given Canada’s current high real estate (bubble-like) prices and considering what would happen to those prices should boomers start selling en masse.)
In the Financial Times’ “Sales of Standard Life annuities slump” Alistair Gray reports that Standard Life annuity sales dropped by 50% since the UK decision to now “allow pensioners to convert retirement pot into income” instead of forcing mandatory annuitization. The insurance company expects to “deal with the changes” by selling “its alternative “income drawdown” offering”. (If the alternative is some GMWB/GLIB-insurance product targeting the financially ignorant and vulnerable to fall for promises of hope over reality, the retirees’ outcome will be unchanged…the more complex/opaque the product the faster the investor will be separated from his assets.)
And in the “how far have they fallen (or more like crushed)” in expectations, Benefit Canada’s “Nortel pensioners pitted against bondholders” reports that Nortel’s Canadian pensioners “are looking to reclaim their share in the allocation of the company’s global estate, but only on a fair and equitable basis”. (How quickly we have forgotten, that we were initially trying to get the Courts to provide some level of priority for trust funded pension benefits over unsecured creditors, or did we give that away in exchange of insignificant gains in the 2010 “settlement agreement”?) “The group claims that bondholders are trying to make the U.S. estate solvent, which would force the company to pay interest on the bonds since filing for creditor protection as well as leave less money to go to Canadian creditors.” (So Canadian pensioners would now be happy to settle for “fair” share of available funds, given now the prospect that they’ll get less than even “fair” share. Thank you federal government for protecting pensioners-NOT; the justice system doesn’t seem to be able to dispense justice for pensioners in Canada. I always said plan for the worst (zero recovery from the bankruptcy) but hope for the best, which about 5 years ago was a recovery of the order of 15¢ per dollar; not much has changed except the lawyers have sucked away over $1B+ from the Nortel estate, but at least the bondholders’ lawyers might actually end up earning their fees. )
Things to ponder
In the DailyReckoning’s“The war on retirement”Nick Hubble enumerates the long list of demographically driven assault on retirement in the world: “retiree benefits are on the chopping block”, increase in age of government pension eligibility, “85% of (US) public pension funds will go bankrupt in the next three decades”, Greek retirees are already living the new reality. He recommends that “the best course of action is to focus on generating wealth, savings and investments outside of the government controlled systems like Super and the pension. Who knows what those nincompoops will come up with next when it comes to Super and the pension? Who knows what financial markets will do to their grand plans?” And then, tongue-in-cheek suggests children’s advice to parent, the same advice as we’ve been giving to our children: get a job, “move out of the family home and downsize…house prices will fall”, eat healthy and exercise to stay mentally fit for a job, “save money for a rainy day”…and be nice to your children. (Is expanded-CPP inside or outside government controlled systems?)
In Financial-Planning.com’s “How independent advisors can beat Wall street” Bob Veres’s scathing article attacks SEC (and its employees) for the “threat of a compromised fiduciary standard that will allow brokerage firms to conduct business as usual. We have seen the SEC issue reports that openly talk about accommodating the brokerage industry’s business model.” He adds that this is “completely consistent with the possibility that if the SEC staffers play ball, they will be rewarded with seven-figure salaries in the industry at some point down the road. Indeed, a former senior SEC staffer recently made the jaw-dropping comment that the brokerage industry has too much influence to ever be held to a true fiduciary standard.” The solution, he argues, is to take the fiduciary professional adviser battle to other groups and organizations which are fighting other consumer issues to help spread the word and learn from their successful experience in other consumer protection areas. (Sounds like a long-shot but can’t dismiss as an approach given the lack of success achieved so far on the fiduciary front.)
In the Financial Times’“Human nature means financial crises are the cost of progress” John Authers reviews Bob Swarup’s new book “Money Mania: Booms, Panics and Busts from Ancient Greece to the Great Meltdown”in which he argues that “…we must accept crises as a cost of progress, and take some steps to limit the damage that can be done by the central problem, which is human nature.” Authers calls the book “entertaining, even if it covers ground that is already well covered”, he notes that “it is unusually well told” and shows how “similarities between different episodes are breathtaking”. While other books focus on greed overcoming fear and easy credit, Swarup looks at game theory, behavioral finance, complexity, and suggests solutions like simplicity, reduce size of institutions which are too big to fail, but we must accept crises are the cost of innovation. (Sounds like it might be worth adding to reading list.)
And finally, in the Financial Times’“China poised to pass US as world’s leading economic power this year”Chris Gilles reports according to the World Bank’s new PPP (purchasing power parity or estimated real cost of living) based methodology China will pass the US in 2014 and become the largest economy in the world. The US has been the largest economy in the world since 1872 when it surpassed the UK. India is projected to be 3rd and Russia, Brazil, Indonesia and Mexico will be in the top dozen. “When looking at the actual consumption per head, the report found the new methodology as well as faster growth in poor countries have “greatly reduced” the gap between rich and poor, “suggesting that the world has become more equal”. (Investors might want to consider the asset allocation implications of looking at the world economy on PPP rather than prevailing exchange rate basis.)