Contents: Ready for retirement or not?brokers fight fiduciary care, international diversification free, market timing hard, end-of-life care covered by estate allocation, lower U.S. house sales in 2014? the new American dream? UK house prices accelerate, first time buyers squeezed in UK/Canada, CPP investment risk rising, Ontario pension reform on the way, 401(k) to IRA conversion rip-off, bond fund exit fees to prevent run?!? index fund problems? investor distrust leads to high cash levels, surviving market stress, central banks also buying equities, higher EM allocations in portfolios.

Personal Finance and Investments

In the Globe and Mail’s “How short-term market fluctuations could gut retirees’ savings” Ian McGugan has a great article explaining simply and clearly how a couple approaching retirement could assess their readiness for retirement and the implications of market volatility and sequence of returns covering expenses to age 95 during decumulation phase of the life-cycle, The important pieces identified: expenses separated into musts and wants, retirement savings (assets), identification of ‘guaranteed’ lifetime income sources, mechanisms to bridging the gap (annuities and/or systematic withdrawal) between lifetime income and (musts and want) expenses, and staying flexible with withdrawals and reserves. (I am actually working on another ‘annuity vs. lump-sum’ blog addressing some of the same issues and other related matters.)

In the NYT’s“Brokers fight rule to favor best interest of customers”Tara Siegel Bernard discusses how brokers are fighting tooth-and-nail requirement’’ best interest standards”. Millions of dollars are pouring in from the industry trying to influence outcome. In conclusion the article notes “fiduciary duty won’t necessarily stop “bad people from doing bad things. But it may provide something of a deterrent and it may increase the likelihood that investors will be able to recover damages.”” (No wonder the industry is trying to protect its high profitability and unfair share of available market returns at the expense of the rest of society. Without an explicit fiduciary standard of care your only protection is being financially educated.)

In ETF.com’s “Swedroe: International diversification is free” Larry Swedroe makes the case for international equity investing: it’s better value (now), at 40-50% level reduces volatility (diversification), investor might have non-dollar expenses. He recommends not hedging currency. “The bottom line is that since diversification is the only free lunch, you might as well eat a lot of it.”

In ETF.com’s “Ferri: The problem with market timing” Rick Ferri argues the reason that market timing is so difficult is because you have to make”two correct decisions: when to get out and when to get in”. He says that there are two types of market timing: intentional (based on relative attractiveness of asset classes) and unintentional (behavioral reaction to fear and greed). For individual investors, much of the market timing activity is of the unintentional/behavioral type and can generally be fixed by having the right asset allocation to start with, as investor is less likely to bail out in a crisis.

In the Globe and Mail’s “Seniors: Put late life healthcare costs before kids’ inheritance” Rob Carrick suggests that seniors should not neglect consideration of “late-in-life health care costs like in an acute care facility, home care or the retrofitting of a house to address mobility issues”. He suggests creating a reserve fund to cover these expenses; in fact he suggests that “Such a fund might be found in the money seniors are hoping to pass along to their children.” That is a lot better than ending up having to rely on the children to cover these late-in-life expenses, otherwise one might jeopardize the children’s retirement as well.

Real Estate

In Bloomberg’s “Housing falters as forecasters see U.S. sales dropping” Kathleen Howley reports that U.S. housing forecasters are now predicting a small drop in home sales, the “first annual drop in four years”, and the reasons for their pessimism.

In the WSJ’s “Housing numbers reflect shift in American dream” Spencer Jakab writes that the view of a “colonial with a lawn, white picket fence and two cars in the driveway” was not only crushed for many during the housing crisis but may in fact be outmoded. Housing starts just bounced over one million are still low by historical standards when it often peaked over two million. However the world has also changed: proportion of married adults dropped from ¾ during the 60s to about ½ today, fertility was also 80% higher in the 60s, and there is also less need for “self-standing suburban homes today and more for smaller, cheaper apartments”.

In the Financial Times’“UK house prices surge 9.9% in year to April” Chris Gilles reports that UK house prices were up 9.9% for the year, while London prices were up 2% in the month of April and 18.7% for year ending in April. Action expected on interest rate front and loan-to-income ratios. And speaking of loan-to-income ratios, in the Economist’s “The big stretch”  Buttonwood shows a chart indicating that for first time buyers, house price to earnings ratio is approaching 5 Britain-wide and has reached a level of 8 in London!

In the Globe and Mail’s “Soaring home prices slamming the door for the young”Ian McGugan calls the rapidly rising Canadian real estate prices of the past decade “a highly efficient machine for transferring wealth from the young to the old”. Yet some will argues that the current low interest rates make carrying the mortgage easier but the low interest rates “actually increase the fragility of the current market…”

Pensions and Retirement Income

In the Globe and Mail’s“Risk rising: The CPP investment arm’s big, bold bets”Tim Kiladze discusses CPPIB’s investment strategy: active rather than passive, increasingly private rather than public markets, growing portfolio risk without correspondingly higher returns, and operational issues of running such a large fund, such as attracting and retaining top talent, compensation structure, etc. (And there wasn’t even a mention of the fact that with the massive move to private markets, valuation of the portfolio becomes much more challenging.)

BenefitCanada’s “Wynne-win for Ontario pension plan supporters” writes that Ontario Premier Wynne will shortly be introducing the budget that was defeated before the election, which includes enhanced CPP-like pension coverage for more than three million Ontarians. The plan which pools longevity and investment risk will cost 3.8% (equally split between employer and employee) up to a maximum of $90,000 income, and is intended to deliver an inflation indexed replacement rate of about 15% up to $90K. (Note: we are currently paying 9.9% for CPP for about 6.5% worth of benefits equal to maximum of about $12,500 benefits. (This is a wonderful initiative by Ontario after years of federal and provincial paralysis on pension reform. I would have been happier with a “pure longevity insurance option” with  a cash buy-in option coupled with a systematic withdrawal plan, as this would have also helped baby boomers access a low cost annuity option to protect them against outliving their savings.)

In Bloomberg’s “Retirees suffer as 401(k) rollover boom enrich brokers” John Hechinger reports that imminent retirees are being ripped-off by brokers pushing them to roll over low-cost 401(k)s into individual IRAs with “risky high-commission investments that Wall Street’s self-regulatory agency warns against on its website”. “The U.S. Labor Department has said it will propose rules in January that brokers and other advisers act in clients’ best interests during rollovers, a so-called fiduciary standard. The agency had announced a similar plan in 2010.”

Things to Ponder

In the Financial Times’ “Fed looks at exit fees on bond funds”Braithwaite, Alloway and Mackenzie report that the Fed is exploring whether regulators need to “impose exit fees on bond funds to avert a potential run by investors…”The corporate bond funds look like “shadow banks” allowing on demand withdrawals even though there is no liquidity in the underlying market. In fact the article notes that some investors are building a warchest to take advantage of a potential bond market correction. “Mutual funds aren’t leveraged like banks are, so they probably don’t create the same degree of systemic risk. But they do offer daily redemptions, and so they engage in a maturity transformation similar to banks, which could result in significant market stress in heavy outflow scenarios. See also” Also see Ben Eisen’s “Mile wide, inch deep- Bond market liquidity dries up”discussing the illiquidity of the corporate bond market. (Some scary stuff!)

In ETF.com’s “Swedroe: The problems with index funds” Larry Swedroe, while re-articulating the overwhelming benefits of index investing, he raises a number of (small) disadvantages which are overcome by “structured portfolios”. The negatives mentioned are: (1) since indexes reconstitute only annually vs. monthly for structured portfolios there is more factor drift before it is corrected, (2) hard boundary conditions in indexes are relaxed by ranges thus reducing the need for forced transactions upon index reconstitution, and (3) “index funds risk exploitation through front-running”. He gives the example of the Russell 2000 small cap index outperformed by small-cap CRSP index. And follow-on article discussing other index fund problems can be viewed at “More problems with index funds”. (These are future opportunities for further enhancing the already very high value delivered by index funds.)

In the Financial Times’ “Investor distrust drives high cash holdings” John Authers also examines the behaviour of retail investors and the ways in which they harm themselves. Many of these investors are still holding very high levels of cash and are staying away from the stock markets because: they don’t trust their advisors, and they don’t trust the market. Authers writes that there are two implications to this: (1) nobody trusts the financial services industry and argues for government/regulators to punish the guilty and thus clean the slate, and (2) with investors still sitting on so much cash the bull market is not yet over.

In the WSJ’s “Can you handle the market’s stress test?” Jason Zweig writes that the various environmental and market stresses requires that investors prepare by relying “on rules and procedures, rather than willpower alone, to regulate behavior… (otherwise) at the very moment when falling prices make assets more attractive to own, most investors are likely to focus on how much they are losing in the short term—rather than on how much they stand to gain if they hang on for the long term”. He suggests rebalancing now, and in the middle of a stressful episode focusing on the total portfolio rather than poor performing portions of it,

In the Financial Times’ “Carney tells UK to prepare for rate rises” Giles and Parker report that Bank of England governor Carney issued a warning to prepare for higher interest rates sooner than currently anticipated.

In the Financial Times’  “Central banks shift into shares as low rates hit revenues” Ralph Atkins reports that Central banks “have shifted decisively into investing in equities as low interest rates have hit their revenues”. The article notes that China’s central bank is the largest global equity investor but Swiss and Danish central banks are also involved. Experts are calling for increased transparency of central bank holdings/activities to prevent “changes, real or rumored, in asset or currency composition of foreign reserves” to potentially destabilize markets.

And finally, in the Financial Times’ “Too much of a goo EM thing is just right” James Mackintosh discusses James Booth’s new book “Emerging markets in an upside down world” arguing for a higher emerging market allocation in portfolios because “All countries are risky. The emerging market countries are those where this risk is widely perceived and priced in.”