Contents: International bonds: no thanks, Bogle on non-US investor allocation: 25% home country, 50% US and 25% other non-US, annuities have higher ‘returns’ than bonds? robo-advisers include trusts and tax-loss selling, U.S. homes: prices (Apr) up 10.8% YoY while sales (May) up 4.9% MoM, 2nd homes concentration ups prices, Social Security decision complicated, Nortel bankruptcy court to rule on $1.6B bond interest demand??? protecting gains and downside, “dead money” or “optionality”, smart-beta: worth the trouble? demographics drive down stock returns? early Alzheimer detection test.
Personal Finance and Investments
In ETF.com’s “Bernstein: Don’t bother with international bonds” Olly Ludwig interviews Bill Bernstein who is got a new free 16 page book “aimed at young adults to help them navigate the world of investments” entitled “If You Can”(It’s excellent and takes less than one hour to read. A must read by young adults of all ages.)In the interview Bernstein discusses his recommended portfolio for US investors in the book which is comprised of only 3 ETFs: VTI (Vanguard Total Stock Market), VXUS (Vanguard total International stock) and BND (Vanguard Total Bond Market). His message is to save 15% of salary per year and put one-third in each of these, then rebalance once a year to the same 1/3 each level. You’ll note that there is no international bond component, which he explains very succinctly as follows: “…there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets. They are what you are defeasing (securing) your retirement with; they are what enables you to sleep at night; they are your liquidity for when you lose your job or for when you want to buy cheap equities or the corner lot from your neighbor who got caught in a liquidity squeeze….(by the way) when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.” (Fantastically simple, you might want to peruse the book and send it to the young, and not so young, adults in your life. In the Canadian context it is a little more complicated, but same principles apply- the bond component should be CAD based or at least CAD-hedged. For the equity portion you might consider VCN (Canadian all-cap), VUN (US all-cap), VDU (Developed countries ex-NA) and VEE (emerging markets); for the fixed income look at VAB and GICs. My personal stock mix is 25% Canadian, 30% US, 25% Developed ex-US and (an over-weighted) 20% Emerging Market, implemented mostly with older ETFs before these became available. My current fixed income allocation is 42% and I rebalance to keep it between 40-45%, of which is over 80% CAD GICs and short-term bond ETFs.)
Coincidentally, John Bogle in his Globe and Mail interview with Darcy Keith’s “Q&A: How the man who created index funds would invest $100,000 today” recommends the following rule of thumb: “As to a portfolio for non-US investors, you might want to think about this crude rule of thumb: 25% in your home country, 25% in other non-US investments, and 50% in the US market. But the right allocation for you will depend upon your specific circumstances.” As to how he’d invest $100,000 he’d suddenly receive, he’d invest it in quarterly instalments in a U.S. based 60% stock and 40% bond portfolio.
In the Globe and Mail’s “Unhappy with bonds, retirees? Add an annuity to your fixed income mix” Rob Carrick correctly warns about the risk of overreaching with dividend stock in search for yield, but he suggests that you should replace some of the bonds in your retirement portfolio with annuities because they have “modestly higher returns and less risk”. (But annuities are not investments, they are insurance, and the annuity rate is not return but a combination of interest/return-of-capital/mortality-credits. People should not be buying annuities because they have higher ‘returns’ than bonds or high dividend stocks, but because they are worried about living much longer than same age population and are concerned about running out of money. Buying annuities is just trading-off longevity risk for inflation risk, i.e. you are condemning yourself to an eroding purchasing power throughout retirement. So it’s not for everyone, if you need this insurance, you should buy it, otherwise you might prefer to invest your money rather than spend it on insurance.)
In InvestmentNews’ “Betterment for advisers on its way as firm adds trust tax –loss harvesting products” Joyce Hanson reports that robo-adviser Betterment is adding trusts and tax-loss selling to its automated adviser features, to be introduced as an “institutional-level platform” for advisers. This way clients will be better served by automation coupled with what human advisers do best: “the personal relationship and the consultation about life’s goals, and they value estate planning and tax planning.” Wealthfront, another robo-adviser, (if I recall correctly) is also offering tax-loss harvesting features.
The April 2014S&P/Case-Shiller Home Price Indicesare up 10.8% YoY and 1% MoM during the month of April. ““Overall, prices are rising month-to-month but at a slower rate. Last year some Sunbelt cities were seeing year-over-year numbers close to 30%, now all are below 20%: Las Vegas (18.8%), Los Angeles (14.0%), Phoenix (9.8%), San Diego (15.3%) and San Francisco (18.2%). Other cities around the nation are also experiencing slower price increases… the monthly figures were seasonally strong.” All cities in the composites showed increases during the month with Atlanta, Boston San Diego and San Francisco being >2% each. Miami and Tampa were up 1.1% and 1.2% MoM, and 14.7% and 10.2% YoY, respectively.
In USAToday’s“New home sales surge 18.6% topping forecasts”Doug Carroll reports an 18.6% increase in US new home sales during May, the highest increase in May over 6 years; but sales are at about the same level as a year ago in May. Prices were up 0.8% in the month and 7% over the year. Sales of existing homes were up 4.9% during May, but are at a lower level than a year ago.
In the Financial Times’ “Second homes and the price of fish” John Mcdermott writes that “In areas where a third of properties are second homes, (house) prices are double”. The article asks whether “second homes in holiday spots are damaging local communities”. Should communities increase the taxes on second-home owners? (I guess you can pluck them until they vote with their feet.) How about the impact on jobs and the local economy which are enabled by the presence of second home owners? (No clear answers are delivered. The reality is that if 2nd home owners would be squeezed out and leave, many of the jobs would go with them, but local year-around residence might have a more idyllic life, so long as they didn’t have to make a living in the local community.)
Pensions and Retirement Income
In the WSJ’s “What you don’t know about Social Security- but should” Glenn Ruffenach does an excellent job at trying to explain the many complexities associated with when and how to claim social security benefits. If you are approaching the decision point, this is a must read article and he lists some of the issues: “the Social Security Administration is not your financial adviser” especially since they are uninformed about your personal circumstances like “your household budget, your health, your savings, life insurance, plans you might have to work in retirement”. The article also points to free calculators from the SSA, the AARP and T. Rowe Price , as well as services which charge fees like MaximizeMySocialSecurity.com, SocialSecurityChoices.com and Social Security Solutions . The article discusses many intricacies of the program, including tax consideration. (Well worth reading for those affected.)
In the WSJ’s “Nortel Canada says fast answer on interest rate could aid settlement”and “Dividing up the Nortel Networks pot: talks may be under way” Peg Brickley reports that Nortel Canada’s bankruptcy representatives have asked the judges to rule ASAP on the bondholders’ additional $1.6B interest demand since bankruptcy as a decision on it would accelerate the likelihood for an early settlement. The article notes that there are arguments suggesting that under U.S. law the bondholder might be entitled to on about $90M. Nortel Canada and Nortel US are arguing for and against such an ASAP ruling, the former suggesting that ruling is required ASAP to prevent “more litigation, appeals and delays”, while the latter argue that such a joint decision by the judges would open the door for “more litigation, appeals and delay”. (Thanks to Bert Hill for recommending. I am struggling to understand why the judges would have even accepted the bond interest as a valid claim, after all the company went bankrupt because it wouldn’t/couldn’t pay its creditors as of bankruptcy date. If bondholders are entitled to interest then so should all other creditors at the same interest rate, which would be like no interest, especially since the bondholders who have been the root cause of the last 4 years of delays, so all legal fees to date should be charged against them; sounds fair to me. You have to remember that according to my understanding, most of the current bondholders bought these bonds, which were originally issued as junk bonds paying as much as 10%, at about $0.20 per dollar! By the way, bankruptcy advisers (mostly lawyers) have been feasting on the Nortel carcass to the tune of $1.2B so far, see “Nortel creditors watch in dismay as ballooning legal fees whittle away assets” with some estimates suggesting that the number will be close to $2B before this will be resolved. (Total assets available for distribution were about $7.3B with claims as high as $30B, and lawyers get paid fully and first! The Canadian pensioners may end up with nada/nothing as opposed to my original guesstimate of about $0.15 per dollar. But the US and UK pensioners fortunately were almost fully compensated by their respective government insurance programs, but not so in Canada. Can you believe all that!?! )
Things to Ponder
In the Financial Post’s“How to maintain gains in a bull run while protecting the downside”Martin Pelletier suggests that you ignore pundits, and forget market timing; instead he suggests that: you should rebalance quarterly but at least annually, consider “implementing an out-of-the-money covered call option strategy” by selling a call option, or perhaps use a put option to protect downside below some point.
In the Globe and Mail’s “Forget ‘dead money’ cash is king” Tim Shufelt discusses whether cash is a “legitimate asset class” or just “dead money earning microscopic returns, waiting to be deployed”, Many argue that cash is not just scared money being sat on by investors scarred by the 2008-2009 crash, “The true value of cash lies in what’s called “optionality”. Cash gives investors the option of capitalizing on future weakness, while offering some insulation against that weakness in the meantime.”
In the Financial Times’ “Smart-beta sirens are calling to Odysseus” John Plender argues that the shrinking pension deficits not only are driving reduced equity allocations but “running a portfolio of active managers is turning into a less practical governance proposition”. So as (smaller and) passive equity approach is the sensible answer, the question “what kind of indexation makes sense?” Cap-weighted indices are a “form of momentum investing” where overvaluation of some stocks can be an issue, so arguments for “smart-beta” emerged and many of the indexes have delivered superior risk-adjusted performance. Counter arguments discussed include: higher costs (transactions), it is just value investing (with a new name), and can’t work as more people jump on the bandwagon. Plender concludes with “Before embracing alternative indexation, it will be vital to establish whether these important snags mean that the game is just not worth the candle.”
In the WSJ’s “Will demographic trends slash stock returns” Jonathan Clements discusses the impact on aging population on future stock returns by referring to Rob Arnott’s thesis that the last six decades of 3% US real growth rate could turn into 1% soon. All the arguments aside, Mr. Arnott suggests ratcheting down on equity return expectations to 5% nominal and 3% real. He argues that emerging markets with median age of 30 will “enjoy demographic tailwinds”. He also worries about inflation in developed countries which might try to use is to inflate away their large debts.
And finally in the NYT’s“A test for the early detection of Alzheimer’s disease”Ann Carrns includes a linkto SAGE or Self-Administered Gerocognitive examination . “It is intended to test different parts of the brain equally; it includes questions on language, reasoning, problem-solving and memory skills. Research found that about 80 percent of people with mild thinking and memory problems will be detected by the test, while 95 percent of people with no problems will have normal SAGE scores.” The article also includes a link to Legal and Financial Planning for People with Alzheimer’s Disease Fact sheet” (I took the test before I wrote this blog post 🙂 , and gave myself a pass.)