Contents: Clements: my index fund portfolio, Capital Market Expectations and its impact on portfolios, IRS offers amnesty to Canadians required to file U.S. returns, retirement planning, Toronto real estate continues firing on all cylinders, longevity insurance in 401(k)s, New Brunswick public employees sue province for pension changes, states looking to up employees pre-tax retirement plan contributions, “Trust me, I am a financial adviser”. Fed to end bond buying in October, don’t worry about a stock market correction, whistle-blowers can prevent Madoff-scale scams, used-car-like bargaining-it’s insane!

Personal Finance and Investments

Jonathan Clements in the WSJ’s “A portfolio entirely of index funds” addresses the proliferation of index mutual funds and ETFs by sharing how he approaches his personal portfolio. He focuses on what he calls a “strong core” with half his portfolio invested in three index funds tracking “total U.S. stock market, international developed-market stocks and short-term corporate bonds”, noting that Peter Bernstein argued that 75% stock and 25% cash mix is no riskier than a 60% stock and 40% bond portfolio. For the other half of his portfolio he uses “international small-cap stocks, emerging-market stocks, emerging-market bonds, and U.S. and foreign real-estate investment trusts”. He explains the only 36% foreign content of his stockholdings rather than a more representative 50% based on market weighting, in terms of “liability matching” since he’ll be spending his retirement in the US. Of course he also rebalances periodically to manage risk and boost returns. (Not a bad plan for American investors with similar risk tolerance to him.)

For Canadian investors, in a PWL Capital report entitled “Great Expectations- How to estimate future stock and bond returns when creating a financial plan” Kerzerho and Bortolotti look at Capital Market Expectations, including a view of the Canadian markets. (You might be interested in reading this together with “Vanguard’s economic and investment outlook” at year-end 2013 which doesn’t explicitly address the Canadian market but covers the global markets). Both reports look at returns and standard deviations associated with various asset allocations. What I find interesting is that this report uses as its stock allocation model a reasonable 1/3 of each Canadian, U.S. and International stocks and the bond allocation is Canadian (rather than U.S.) bonds, but the standard deviation for a 60%/40% portfolio of stocks/bonds is only 7.8% compared to Vanguard’s cap-weighted (about 5% Canadian content of stock component) global portfolio with a standard deviation of 11.2%.; the return differences are relatively small 5.8% for the Canadian vs. about 6.25% for the American investor portfolio. The much lower standard deviation, could lead to much superior outcomes for those exercising systematic withdrawal plans. The PWL report also includes “maximum annual loss” and largest drawdown” figures for the 60/40 portfolio of 14.8% and -23%. The authors correctly note that the future is unpredictable. (Thanks to Ken Kivenko for referring the paper.)

KPMG’s“U.S. offering tax relief for offshore accounts” reports that Canadians who are “required to file a U.S. tax return and have offshore assets that you have not yet disclosed…may be able to take advantage…expanded streamlined filing compliance procedures” released by the IRS, whereby they are waiving penalties and provide amnesty. (Thanks to SR for recommending.)

In the Globe and Mail’s “Will your retirement cash last the rest of your life” Ian McGugan discusses some of the controllables and uncontrollables in planning your retirement: portfolio losses early in retirement, withdrawal rates, risk tolerance, want to leave a bequest, pension plans, and annuities.

Real Estate

In the Globe and Mail’s “Toronto home sales, prices surge in June” Michael Babad writes that Toronto housing had a “stellar” month in June: Sales were up 15.4% YoY while prices were up 7.4% YoY. Some of the first quarter slow sales and starts are blamed on the very cold winter and industry experts now see 2014 finishing off at no worse performance than last year given expected increases for the rest of the year.

Pensions and Retirement Income

For those who missed last week’s news reported here, I missed Tara Siegel Bernard’s NYT article entitled  “Longevity insurance joins menu of retirement plan options”which provides more details explaining  the suspension  of the required minimum distributions from 401(k) if a longevity insurance is purchased (certain caps apply)…….” Treasury Department announced that workers can now satisfy those rules if they use a portion of their retirement money to buy the annuities and begin collecting the income by age 85…. To avoid the distribution rules, however, retirement plan participants can use no more than 25 percent of their total account balances, or $125,000, to buy the annuity, whichever is less.” (Thanks to EF for recommending. You should consider writing a letter to Federal Minister of Finance Joe Oliver, as well as Ontario Ministers of Finance Sousa and of Pensions Hunter.)

Benefit Canada’s “Retirees sue New Brunswick over changes to pensions” reports that Pension Coalition NB representing 13,00 public sector employees are suing New Brunswick because “the province made changes to the public sector pension plan” when it “introduced a shared-risk plan and no longer automatically indexed pensions to the cost of living”.

In the NYT’s“Some states look to fill a retirement savings gap” Elizabeth Olson reports that many boomers, even those who saved diligently, are finding themselves unprepared for retirement due to circumstances often beyond their control like major medical expenses, underwater homes resulting from housing crash, divorce and other unexpected situations. “With more and more retirees at risk, 17 states are examining simple, low-cost plans that would allow workers to direct pretax money from their paychecks to a retirement account….(while this won’t be of much help to those) retired or near retirement, they would help the next generation of savers bolster their nest eggs”. “…officials…worry that financially unprepared seniors could become a big drain on state and federal coffers…Retirement savings was once seen as a personal choice…but the reality is that they have become a matter of broader social interest.”

Things to Ponder

In the Financial Times’“’Trust me, I am a financial adviser’ is not good enough” John Kay discusses the “fiduciary duty in financial services” and refers to a Law Commission report suggesting “The obligations a financial intermediary owes to its clients are, as the commission explained, a complex mixture of common law, regulation, contract, and custom and practice” (just mumbo jumbo), whereas  a century ago a judge ruled unambiguously that  “The prohibition of the law is absolute. It will not allow an agent to place himself in a situation which, under ordinary circumstances, would tempt a man to do what is not the best for his principal.” The judge’s statement left no doubt that “you could be an agent or a trader; but you could not be both at the same time, and you had to make entirely clear to the customer which role you were playing.” (If interested in the subject of “fiduciary” you might find my Fiduciary – Response to “CSA Consultation Paper 33-403 – The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients” blog post of interest.)

In the WSJ’s “Fed sets October end for bond buying” Hilsenrath and DaCosta report that the Fed announced the end of bond-buying in October of this year; it had accumulated a total of $4.4T assets, up from $900B when the QE program was announced late in 2008. The question now is the rate and the timing of interest rate increases.

In the Financial Post’s “5 reasons not to watch for a stock market correction” Peter Hodson argues that there is little point to worry about a correction as it is impossible to time the sell and buy and you’d have “to make up 23% just to cover the taxes lost”, it may not come at all, and you lose the dividend income while you are waiting in cash. He suggests “keep a diversified portfolio…the market will go up and down, but, over time, it goes up far more than it goes down”.

In the Financial Times’ “Whistleblowers key to outing future Madoffs” Newlands and Marriage report that while fund management experts suggest that Madoff scale frauds could happen in the future because of “investors’ desire to believe in the impossible” as “unscrupulous managers will always be tempted to fleece the unsuspecting public”, but others believe that new and improved US and European whistle-blowing laws which offer significant compensation and protection can prevent them from becoming Madoff scale events.

And finally, Rob Carrick in the Globe and Mail’s  “Why I have renegotiating my telecom package” describes the used-car/oriental-bazaar market-like bargaining skills that you need to make sure that you get your telecom package at a fair and equitable price. Carrick concludes that “…I’m also thinking about an exit strategy using online alternatives like Netflix and an HD-TV antenna that brings in local TV signals for free. Netflix already accounts for almost all our TV watching, and it costs us just $7.99 per month.” (I have to agree that paying $1,000 or more for cable TV channels that you can get off-the air and probably hardly ever watch is absolute non-sense.)