Contents: Taxes on failed investments? dying performance investing, 35-to45 year old most indebted, cost of delayed home purchase, Nortel pensioners condemn bondholder ‘deal’, pension reform discussion shifts to target benefit (TB), CARP on 2015 budget: abolish mandatory RRIF withdrawals and expand CPP, US middle class: no savings and no safety-net, UK pension reform: 50p government match for each £1 in retirement savings, high fee retirement plans a fiduciary duty breach by employer, red herring: S&P 500 actively managed, 2020 a return of QE? Russian sanctions to undermine dollar dominance?

Personal Finance and Investments

In the Financial Post’s “Do you have to pay taxes on a failed investment? One Albertan investor found out the hard way” Jamie Golombek writes that after an Albertan invested in what ultimately turned out to be a Ponzi scheme promising to pay 18-22% interest per year, resulted in a “drawn out battle with the tax man who may try to collect tax on your investment “returns” regardless of the fact that you may have lost some or even all of your money”. The judge fortunately agreed with the Albertan that the “interest” he received was actually just a return OF (not ON) his own money, so he didn’t end up having to pay tax on the ‘interest’ received.

In the CFA Institute Financial Analysts Journal’s “The rise and fall of performance investing” Charles Ellis (author of “Winning the Loser’s Game” one of the best books on investing) writes that “Performance investing has enjoyed a remarkably long life cycle, but the costs of active investment are so high…that investors…are shifting toward indexing.. and the incremental returns so low that  clients and managers have an opportunity to stop focusing on price discovery (which has made our markets so efficient) and refocus on values discovery, whereby investment professionals can help investors achieve good performance by structuring an appropriate, long-term investment program and staying with it.” He also notes that “truly professional practitioners want both a great business and an admired profession” and that can be achieved by focusing on values rather than price discovery. (I.e. rather than waste the effort of high powered people on active management (price discovery) instead focus on Investment Policy Statement (values discovery) and corresponding strategy.)

Real Estate

In the Globe and Mail’s “Home prices send 35-to-44 age cohort to top spot for debt” Tara Perkins writes that according to an RBC report on rising leverage “Canadians who were aged 35 to 44 in 2012 have racked up more debt, relative to their net worth, than their peers did in the past… this group more vulnerable to any economic shocks, especially in the housing market.” Quoting from the report: “Real house prices increased by an average of 4.6 per cent per year from 1999 to 2012, which was well above the average 0.3-per-cent increase over the prior two decades… This has resulted in higher leverage ratios for first-time home buyers.”

In Bloomberg’s “House punting: The cost of waiting to buy in hot markets” Suzanne Wooley reports that according to a Zillow calculation which defines the cost of waiting one year before buying  a home to be a 1% rise in 30-year fixed mortgage rate (4.1% to 5.1%) and 20% down payment on the median price of homes in 35 cities, the cost  of waiting ranges from $710/mo in San Diego to $65/mo in St. Louis; other cities mentioned include San Francisco $556/mo, Seattle $299/mo New York $201/mo and Miami $129/mo.

Pensions and Retirement Income

Benefits Canada’s “Nortel pensioners denounce bondholder agreement” reports that “Nortel Retirees and Former Employees Protection Canada (NRPC) strongly objects to the proposed settlement between the American division of Nortel Networks and some of its bondholders…If approved by the U.S. bankruptcy court, the NRPC says the agreement may dramatically impact the claims and eventual recovery for Nortel retirees in Canada”. ( As I indicated a couple of weeks ago in Hot Off the Web- Jul 28, 2014 when the story of the “deal” broke, If this “agreement” stands, and the court permits it to affect Canadian pensioners’ take from the remaining assets, it will be the final nail in coffin of Canadian pensioners. It would be an outrage, but then Canadian pensioners have been at the losing end of just about every court decision, so far (in fact I can’t think of one favorable decision of the top of my head.)

In the CFA Institute Financial Analysts Journal’s “Why we need to change the conversation about pension reform” Keith Ambachtsheer wants to shift the pension reform conversation away from “DB or DC” toward realities of good pension design which focus on: target income replacement rate, target contribution rate, feedback  for course correction, no intergenerational wealth shifting, long-horizon wealth creation capability and longevity insurance capability. (Consistent with my advocacy thrust on pension reform: ensure adequate saving, provide access to low-cost accumulation/decumulation vehicles, and access to low-cost longevity insurance capability.)

Among the CARP recommendations to the federal Department of Finance for the 2015 Budget included are: elimination of mandatory RRIF withdrawals, investor protection against bad financial advice and increase to CPP or the creation of a new universal pension plan.

In Bloomberg’s “For U.S. middle class, neither savings nor safety net” Mark Gimein writes that “…when you talk about wealth and debt in countries like Denmark, you need to remember that residents of most Western countries need a lot less in savings than Americans. Other countries …have a much tighter social safety net. That means lower savings needed for emergencies, less for education, and much less for retirement… any calculation that leaves that (safety-net) out is misleading. Make no mistake: The U.S. does not do well in median wealth calculations compared to most countries… The U.S. ranks third-to-last in median wealth in a list of 19 wealthy countries. .. The median Australian has a healthy retirement account. The median American has neither. “  (For that matter, despite the fact that the source of U.S. ranking is the 2012 article entitled “Are Canadians richer than Americans” in which Canada is shown at 8^th vs. US as 17^th, middle class Canadians are probably just as disadvantaged as Americans, rather than being more like Europeans or Australians, the only exception might be that in retirement the combination of OAS/GIS put a income floor under Canada’s poor. )

In the Financial Times’  “Radical pension plan pitched to UK government” Marriage and Newlands report that an influential UK pension expert recommends a major rework of the UK incentives to save for retirement “to encourage more young people to save and end the unequal application of pension tax relief”. In addition to the recommendation to offer passive default funds as the investment vehicle, his proposal is for the “…Treasury to commit to giving savers 50p for every £1 they put into the Lifetime Isa, up to an annual allowance of £8,000. This would be funded by scrapping the current pension tax relief system, which many believe unfairly advantages high earners.”

In InvestmentNews’ “Lockheed Martin retirement plan case gets trial date” Darla Mercado reports that the 2006 case which was granted class action status will go to court in December. “…retirement plan participants at Lockheed Martin claim that the firm breached its fiduciary duty to its participants and their beneficiaries in a variety of ways, including assessing fees that were “unreasonably” high.”

Things to Ponder

In ETF.com’s “Is the S&P 500 actively managed” Larry Swedroe examines Mebane Faber’s comment that the S&P 500 index is really actively managed and therefore it is an inappropriate benchmark to be used to compare other actively managed funds’ performance. While Swedroe agrees that there is an ‘active’ element in its management, he points to S&P 500 performance compared to CRSP 10.06% vs. 10.12%  over 57 years of S&P 500’s existence and to the Russell 1000 purely passively managed index return 11.96% vs. 12.03% over Russell 1000’s 35 year of existence. “The conclusion we can draw is that it makes no difference which index we use as a benchmark for active managers—the majority fail to outperform. Another conclusion we can take away from these comparisons is that a lot of smart people at the S&P committee appear to be wasting lots of time that could be spent on more productive endeavors… The bottom line is that Faber’s point about the S&P 500 not being a truly passive vehicle is totally irrelevant to whether active management is likely to be the winning strategy.”

As we all know, forecasting is difficult- especially about the future, but in the Financial Times’ “Gundlach reveals 2020 vision for bond market” Stephen Foley reports that Gundlach (with a great track record as a bond manager) predicts that the Fed will be returning to QE by 2020 due a series of factors such as: requirement to refinance a large amount of high yield debt, federal government’s need to borrow to pay for depleted Social Security and healthcare funds burdened by growing numbers of baby-boomers, ageing Chinese population and maturing Fed Treasury holdings. In fact he argues the recent QE driven zero interest rate policy just delayed the refinancing problem and it will come back to haunt us with a vengeance in 2020.

And finally, in Bloomberg’s “Russia sanctions accelerate risk to dollar dominance” Rachel Evans writes that “U.S. and European Union sanctions against Russia threaten to hasten a move away from the dollar that’s been stirring since the global financial crisis… The greenback’s share of global reserves has already shrunk to under 61 percent from more than 72 percent in 2001… This nasty turn between Russia and the West related to sanctions, that can be an accelerator toward a more multicurrency world… now you have to worry about potentially sanctions and other kind of regulatory liabilities, so it’s baggage”.