Contents: The occasional fiduciaries, emergency travel health insurance: will you get paid? an albatross:  a large home in retirement, volatility your friend but risk your enemy, Chevreau’s new FindependenceHub, US hope prices continue to decelerate, high real estate dependency can jeopardize retirement, stock allocation in retirement-forget glide-paths, meaning of 10% probability of running out of money? Zweig: best investment books, (sustainable) alpha increasingly elusive, international stocks in portfolio, to stick with the plan you must understand the risks, “Best cities for successful aging”, Canada inflation at 2.4%, Greenspan: gold a viable currency.

Personal Finance and Investments

In the WSJ’s “On blurring the fiduciary standard” Samuel Scott, after discussing the differences between fiduciary and suitability standards, warns about the growing proliferation of dually registered  “fee-based” advisers wearing simultaneously both fiduciary (SEC regulated) and non-fiduciary (FINRA regulated) hats. “Depending on whichever compensation structure benefits them in a given situation, they can choose which hat to wear.” He further notes the trend to “further blur these lines between a salesman, a broker, an insurance agent and a fee-only RIA”, under the all-encompassing title of “financial or investment advisers”, and concludes with a recommendation to “adopt a fiduciary standard for all professionals who serve the investing public”.

In the Globe and Mail’s “Read the fine print: Travel insurance can bring expensive surprises” Rob Carrick writes that while the requirement for travel medical coverage when traveling to the USA has been fully internalized, there remains much “work to do in ensuring that people buy policies that will actually cover their bills”. He notes that the biggest pitfall is related to pre-existing medical conditions; specifically, their disclosure to the insurance company and the policy requirement and the stability definitions that go along with stability of such conditions over 90, 180 or 360 day periods prior to travel.”If you make a claim and you’re found to have a condition that wasn’t disclosed or hasn’t been stable for the required period, your insurer will deny payment.” Carrick reports that policies are becoming available with riders to cover “up to $150,000 on claims related to health issues that were stable for just seven days before your trip” (from Travel Guard) and a policy which “caps your bill at $10,000 (from Travel Underwriters) if you either don’t disclose a medical condition when buying a policy, or make a mistake in the details”. (These new types of policies are encouraging BUT what is really needed is for underwriting to be done before policy is issued instead of after a claim is made; yes it would be more expensive, but it might be real insurance.)

In the WSJ’s “Large homes can be a retirement hazard” Jonathan Clements warns that in preparation for retirement one should consider the annual cost of the (otherwise mortgage free house), and the “more expensive your home, the more of a drain it’ll likely be in terms of property taxes, maintenance, homeowners insurance and more”. He quotes Farrell that based on a 4% withdrawal rule the assets required to carry a $1000/mo expenses are $300,000 vs. $600,000 for $2,000/mo expenses. During working years it is also harder to save for retirement with a more costly rather than a more modest home. He recommends two rules of thumb: (1) to minimize financial stress while working, keep fixed/living costs to 50% or less of your pre-tax income, and (2) “temporarily cutting back spending is a key financial tool, especially for retirees faced with rough financial markets. The lower your fixed living costs, the more flexibility you’ll have”. As an estimate, to buy and then own through retirement, it will cost you 2.5x the purchase price of a home.

You might be interested in Morningstar’s series during the past week on their “Risk Management Week Homepage”. One paper you might find of particular interest there is “Risk, not volatility, is the real enemy” where Christine Benz discusses some of the flaws of using risk questionnaires in general, especially when they are focused on “investor’s response to short-term losses inappropriately confuses risk and volatility. Understanding the difference between the two–and focusing on the former and not the latter–is a key way to make sure your reach your financial goals.” She notes that while one often sees the terms risk and volatility used as synonyms, they actually have different meanings. Volatility is a measure of price changes (up or down) over a relatively short period of time (typically “a day, a month or a year”). Whereas the “most intuitive definition of risk, by contrast, is the chance that you won’t be able to meet your financial goals and obligations or that you’ll have to recalibrate your goals because your investment kitty come up short”. So “what might be merely volatile for another person is downright risky for you. That’s because there’s a real risk that you could have to sell out and realize a loss when your investment is at a low ebb. On the flip side, some of the most volatile investments (namely, stocks) may not be all that risky for you if they help you reach your long-term financial goals. And it’s possible to completely avoid volatile investments but come up short in the end because your safe investments only generated small returns.” (i.e. volatility might be your friend but risk is your enemy!)

Jonathan Chevreau, long time personal finance editor at the Financial Post and more recently at MoneySense has a new financial independence hub FindependenceHub which you might wish to peruse.

Real Estate

The just released September 2014 U.S.  S&P/Case-Shiller Home Price Indices show that “home prices continue to decelerate…The 20-City Composite gained 4.9% year-over-year, compared to 5.6% in August. The National and Composite Indices were both slightly negative in September…National Index posted a -0.1% change for the month.” Miami had the highest YoY at 10.3% (double the national average) and MoM at 0.6% increase. Among cities in the composites, major cities like New York, Chicago and Washington showed some of the lowest YoY increases, coming in at about half the national average.

 In the Palm Beach Post’s “Early snowbirds push home sale, prices up” Kimberly Miller reports that in October Palm Beach County single family home sales were up 19%, inventory up 14% and prices up 2% compared to year ago according to the Realtor Association of the Palm Beaches. Statewide Florida sales were up 18% and prices up 5%.

In the Financial Post’s “Safe as houses? Not for this 52-year-old who has 84% of her $1.7-million wealth tied up in risky real estate” Andrew Allentuck demonstrates how a 52 year old person who has accumulated over $1.7M net assets (85% in leveraged real estate) and has $56K of after tax annual expenses, is assuming a significant risk in her planned move into real estate sales. The combination of the vast majority of her assets being in real estate, taking on a job in real estate sales going from a stable to variable income situation, could jeopardize her retirement.

Retirement Income and Pensions

Just in case you failed to notice the change of title of this blog post subsection from Pensions and Retirement Income to Retirement Income and Pensions to reflect the decreasing relevance of traditional pensions today with their disappearance from all but public sector employees’ benefit packages. The future retirement crisis created with the demise of traditional (DB) pension plans among private sector employees, without credible pension reform to replace it. This crisis is only exceeded in urgency by the present crisis of many of retirees who had participated is such private sector DB plans which subsequently failed to deliver on their promises, but were discouraged/prevented from making other retirement savings arrangements. These failures must ultimately be laid at the doorsteps of the federal and provincial governments in Canada, as Canada is just about the only G30 country without BOTH adequate preventative regulatory protections before AND without post-failure benefit protection of private sector pensions.

In InvestmentNews’ “Loading up on stocks -after you retire” Robert Powell discusses views on how your stock allocation should be changing with age with approaches such as: (1) percent stock allocation based on the old (100-age) (more recently updated to (110-age)), (2) rising equity glide-path or more precisely U-shaped equity glide-path where you actually have the lowest allocation around retirement “when you’re the most vulnerable to losses in wealth”, or  the view that (3) glide-paths are meaningless, because “your asset allocation at any time during a retirement should reflect your current risk tolerance and risk capacity…every year to look at how much money you have, look at what your expected expenses are, consider your risk tolerance and your risk capacity — your risk capacity is going to include things like how much of a floor you have”, and of course asset allocation is just one ingredient in baking a retirement, the other key ingredient being the (4) changes in withdrawals/spending in response to portfolio performance. (Personally I am a believer in an approach melding the latter two of the approaches mentioned, and doing this each and every year. Each year understand your: spending musts/wants, risk tolerance (ability and willingness to bear risk), your assets, your planning horizon and then you can decide on asset allocation and withdrawals; after all the start of each year is the start of the rest of your retirement! )

In a related article, Elizabeth O’Brien in WSJ’s “Making your money last: Two contrasting approaches” discusses the meaning of having a 10% (or some other) probability of running out of money in retirement vs. a “safety-first” approach of just buying annuities to insure (note, not ensure) that your needs are covered. (Besides the error of forgetting Hamming’s admonition that (Monte Carlo) “computing is for insight not numbers”,  or that annuities (without inflation indexation) in some way ensure that your needs are met, one should at least explore the proposal I discussed in a recent blog entitled  “The only spending rule article you’ll ever need” by Waring and Siegel- A review which offers a deterministic approach to the decumulation problem which shows a conservative but dynamic way to adjust your spending to reflect your assets and longevity, while still allowing you to get the benefit of taking some risk with your assets, compatible with your risk tolerance.)

Things to Ponder

Jason Zweig’s WSJ article “Best books for investors: A short shelf” tables “a list that I would still be comfortable with decades from now. Every book below has stood the test of time and, I’m confident, will remain useful for generations to come. You will quickly note that some aren’t even about investing.”  (Great list especially if you add my all time favorite (Ellis’s “Winning the loser’s game”) mentioned in a number of comments on the article.)

In ETF.com’s “Why Alpha’s getting more elusive” Larry Swedroe discusses how the “paradox of skill” which “means that even as skill level rises, luck can become more important in determining outcomes if the level of competition is also rising”. In many competitive spheres the relative, rather than absolute, level of skill determines outcome; and as the average skill increases, it becomes more difficult to outperform by large margins. In other words, the standard deviation of outcomes narrows”. In active management “the quest for alpha has become ever-more frustrating because the level of skill of the competitors has been rising.” Swedroe also quotes Ellis from his book “Winning the Losers’ Game” in which he wrote 16 years ago that “while it’s not impossible to win the game of active management, the odds of doing so are so low that it’s not prudent to even try. Hence, the surest way to win the game of active management is to not play”. Now the game is even more competitive.

In the WSJ’s “When it comes to stocks, no investor is an island” Jason Zweig make the case for international investing on the current lower P/E ratios compared to US market; US CAPE is at 24.7 compared a number of other market (e.g. UK, Italy, Brazil…) at less than half of the US. Allan Roth then piles on in WSJ’s “A smart way to include international stocks in your portfolio”  using a market timing argument, or better put, a rebalancing argument to maintain a target allocation between international and US stock markets; that way insuring that we buy the cheap ones and sell the expensive ones.

In ETF.com’s “Know the risks, stick to the plan” Larry Swedroe writes that more important than choosing the “perfect portfolio” even if it existed, “choosing the asset allocation that’s most likely to allow you to adhere to your financial plan is even more important than the allocation itself… it’s critical that your plan not assume more risk than you have the ability, willingness or need to take. It’s equally critical you don’t invest in any strategy that contains risks you don’t understand… before you invest in any strategy (asset allocation), you should fully understand the nature of its risks and be prepared to experience long periods of underperformance.”

Ann Cairns’s NYT article on “Finding a retirement haven to suit you” includes resources such as Milken Institute’s “Best Cities for Successful Aging” that you may find interesting.

Michael Babad’s Business Briefing column in the Globe and Mail quotes a David Parkinson report that “Canada’s annual inflation rate unexpectedly spiked to 2.4 per cent in October, up from 2 per cent in September, as falling fuel prices were outweighed by higher prices across the rest of the major components of the consumer price index”. (Hopefully October is an aberration, rather than the start of a trend.)

And finally, in the Financial Times’ “Gold: Worth its weight?” Gillian Tett writes that “Ordinary people are unnerved about how money works in a bottomless cyber space. Gold seems tangible, clear and timeless”. In fact she quotes Alan Greenspan’s recent revelation, after a youthful fascination with gold followed by a career that “charged with defending the value of fiat currencies…he now considers gold a viable currency, let alone an attractive investment bet.”