Contents: Right level of investment risk in retirement? TFSA: best tax shelter? Housing decision in retirement, house prices down in China/London- impact on Canada? Nortel bankruptcy judge nixes post-bankruptcy bond interest, pension assets confiscation? UK insurers hit hard by end of mandatory annuitization, Hussman’s (and others’) forecasts not what it’s drummed up to be, alternatives/hedge funds inappropriate for 401(k)s, Canadian boomers’ retirement healthcare worries, technology companies seek to disrupt financial sector?
Personal Finance and Investments
In the WSJ’s “Do retirees take too much or too little risk with their investments?” a number of experts discuss their views on appropriate risk for retirees. Blanchett:(110-age) percent stock allocation subject to risk tolerance (i.e. ability and willingness to bear risk), Reichenstein: uses Fidelity and Vanguard target retirement fund allocations as models an suggests for those retiring next year“55% stock allocations including 30% of the stock portion in international stocks” with a slow decline from there to 24-30%; he also notes that this advice might be inappropriate for those with substantial wealth or substantial defined benefit income, Guyton: retirees need “portfolio income…sustainable throughout their retirement and gradually increase over time” and he considers retirees real risk when their “asset allocation may not be appropriate for the withdrawal rate they are asking their portfolio to sustain” though notes that retirees usually have flexibility to adjust some wants/need and costs tend to rise less than inflation, Pfau: “the true risk isn’t being able to meet one’s lifestyle spending needs over their retirement” though he feels that those “who have enough assets to safely cover their spending goals with bonds and income annuities, they are taking unnecessary risks by exposing their assets to stock market volatility”. (Mostly, solid advice worth considering in your plan.)
In the Financial Post’s “Confusion aside, a TFSA is still the best tax shelter in town” Jonathan Chevreau argues that using TFSAs invested in 1% GIC makes no sense especially if you have consumer debt or mortgage; so assuming that you have none of the former and are “well on the way to paying down your mortgage” he recommends using the TFSA to shelter dividend income from Canadian stocks or the CAD-hedged Vanguards US Total Market ETF (VUS on TSX). (Other options instead of the 1% GIC for very conservative investors might be a 5-year GIC paying about 2.6% or if you need more liquidity then consider Vanguard Canadian Short-Term Corporate Bond Index with YTM of about 2% and current payout of about the same as the 5-year GIC. But equity investments suggested by Chevreau for the very long term risk tolerant investors will also resonate with many.)
In the NYT’s “For older couples, house-hunting begins with soul-searching” Harriet Edelson points to some advice to experts on the subject of preparing for retirement: “Research different areas, then rent a place in each of them for two weeks or more to get to know the place better and make sure you both like it. If you have children or grandchildren, consider how they will be involved in your decision. Do you want to be near them, or will you go back and forth to visit them? Think about whether you want (and can afford) a second home. Will you keep your original home at first and sell it later? If you haven’t spoken to your partner in detail about how and where you want to spend the last part of your life, do it now.”
In South China Morning Post’s “Home prices drop in record 64 mainland cities” Langi Chiang reports that “New home prices fell month on month in 64 of the 70 cities tracked by the National Bureau of Statistics… indicating that the property market downturn is deepening despite the relaxation of curbs in an effort to stimulate demand..” In Bloomberg’s “London home asking prices plunge most in more than six years” Jillian ward reports that “London values fell 5.9 percent from the previous month to an average 552,783 pounds ($922,300), the biggest drop since December 2007, property website Rightmove Plc said today. Nationally, prices declined 2.9 percent, a record for an August.” In the Globe and Mail’s “World’s hottest real estate market plunges” Scott Barlow concludes that “The Bank of England enacted restrictions on mortgages that did affect the housing market, but the news may also form a sign that the Chinese government’s crackdown on corruption and capital flight is starting to bite. If so, it will cause some justifiable anxiety for those who are over-extended in Vancouver real estate.”
In the Globe, Tara Perkins in the “RBC economist predicts home price declines in 2016 as rates rise” reports that according to “An economist at Canada’s biggest bank says home prices could start falling in 2016 if interest rates return to more normal levels. And he warned that, in the meantime, what goes up will likely come down if salaries and incomes don’t keep pace.” He still predicts 4.3% increase in prices this year and 1.1% next, on the back of falling sales and rise in interest rates. (Forecasting is difficult, especially about the future.)
Pensions and Retirement Income
In the WSJ’s “Canadian judge says Nortel Bondholders can’t collect interest” Peg Brickley reports that “A Canadian judge has rejected a bid by investors to collect interest on some $4 billion of bonds issued by now-defunct telecommunications company Nortel Networks Corp…Justice Newbould said interest on the Nortel bonds stopped accruing when the former telecommunications giant sought protection from its creditors around the world. His decision appears to have no direct effect on the proposed settlement in the U.S. case, which will be evaluated under U.S. laws.” Even though, the article further notes that, “In an experiment in joint decision-making, the two judges presided together over a cash allocation trial held simultaneously in Toronto and Wilmington, Del., in May and June.” In the Financial Post’s “Nortel settlement may be in sight as Canadian judge denies U.S. bondholders $1.6-billion in post-claim interest” Julius Melnitzer reports that “Justice Frank Newbould of the Ontario Superior Court of Justice today ruled that U.S. bondholders who are claimants on the remaining assets of now-defunct Nortel are not entitled to $1.6-billion in interest that accrued after they filed their claim in the bankruptcy.” Given what appears to be a disagreement between the US and Canadian judges, it is unclear whether this will in fact accelerate the over five year old bankruptcy proceedings, whose only winners so far have been the lawyers and other “professionals” by collecting well in excess of $1B in fees from the Nortel carcass; the main losers have been Nortel’s pensioners and long-term disabled because Canada is just about the ONLY developed country which offer no pension protection. This is the first decision that I can recall which, if it sticks, might in fact be of benefit to Canadian pensioners.)
In Bloomberg’s “Unlike Russia, the U.S. government won’t take your pension outright” Allison Schrager reports that Russia follows Argentina, Hungary, Poland, Portugal and Bulgaria in confiscation of its citizens’ pensions when “Earlier this month, the Russian government seized its citizens’ pension contributions. Normally, 6 percent of Russians’ salaries is invested in financial markets, earmarked for their retirement. This year that $8 billion in contributions will finance Russian spending instead”. The article notes that the stealing of pension funds is a relatively new phenomenon, since developed countries used to finance pensions on a pay-as-you-go basis (like Social Security in the US. But starting in the 80s many developed countries like Chile, Australia, UK and the Netherlands started to “supplement or even replace government pensions with individual saving accounts invested in financial markets”. In the US such confiscation would unimaginable by most but “it’s not unrealistic to think that the American government could take a bigger bite out of individuals’ 401(k) assets with higher tax rates”.
In the Financial Times’ “UK life and pensions industry hit by drop in annuity sales” Alistair Gray reports that now that the government has lifted the requirement for mandatory annuitization upon retirement “…Britain’s life and pensions industry is reeling from a drop in sales of annuities, which have been among its biggest and most lucrative products.” The article estimates profits in the asset management business at 1% compared to 5-10% in the annuity business. Prudential CEO comments that some will still purchase annuities much later in life as they look for longevity protection. (Time will tell…but obviously UK retirees instinctively don’t believe that annuities (insurance) are the answer to a secure retirement.)
In the Financial Times’ “Canada pension fund sees long-term India opportunity” James Crabtree reports that CPPIB (Canada Pension Plan Invest Board) is ramping up its activities in India with “investments across a range of asset classes, including private equity and private credit, in anticipation of long-term growth in India”.
Things to Ponder
In ETF.com’s “Why care what Hussman forecasts?” Larry Swedroe rips into Hussman specifically but also into market prognosticators and active managers in general, concluding that “So, what’s the takeaway? Hussman is a very bright man. He provides compelling analysis and opinions, which I typically find quite interesting. The only problem is that the evidence, including his own track record, demonstrates that investors are best served by ignoring his opinions… The best advice is, instead of worrying about what some guru has to say, to focus your attention on the things you actually can control, such as the amount of risk you’re taking, diversifying those risks as much as possible, keeping costs low and keeping tax efficiency high. That’s playing the winner’s game.” (As usual great advice from Swedroe!)
In WSJ’s “Hedge funds in 401(k): Do they fit?” Jason Zweig argues that alternatives (hedge funds, private equity, real estate, commodities, etc) intended to help fight inflation in a portfolio may be useful in a portfolio but “there are simpler, cheaper ways to realize many of the goals alternative funds set out to achieve”. Other experts note that while these may have a place in the portfolios of endowments, foundations, pension funds but are inappropriate as 401(k) options. Jonathan Clements in the WSJ’s “How to think about ‘alternative’ investments” suggests that you keep three things in mind about alternatives: future performance is unknown, future returns will be lower as more people pile in assets and active management takes its toll, and will you rebalance. On the same topic in Bloomberg’s “Hey, SEC, a modest proposal: Ban ‘alternative’ investments” Ben Steverman writes that “Other alternatives are hard for even experts to understand. There are merger arbitrage funds, momentum funds and long-short funds. These complex strategies, borrowed from hedge funds, are often designed to hold value even when stock or bond markets are in free fall. Of course, no one can say for sure they’ll work during the next crisis. He ends with a Benjamin Graham quote: “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
In the Globe and Mail’s “Healthcare may tarnish golden years, baby boomers fear” Andre Picard reports that according to a “new poll, commissioned by the Canadian Medical Association… Baby boomers are getting increasingly antsy about the availability and quality of health care as they age.” 78% are worried about potential lack of access to “necessary health services like homecare and long-term care in a timely fashion when they need them” and 81% “expressed worries about the quality of the care they will able to access”. The CMA believes that “Canada desperately needs a seniors’ strategy”. Seniors represented 8% of the population in 1971, 15% today and heading to 25% by about 2030.
And finally, in the Financial Times’ “Upstarts prepare to ambush the lords of finance” Gillian Tett warns that technology giants (Google, Amazon, etc) and upstarts are taking aim at disrupting the financial sector on “both the retail and wholesale sides…from asset management to loans and payments” as they have already done to other sectors “from the travel industry to media”. (Bring them on! More competition is needed.)