Contents: Fiduciary-shameless opposition, mortgage vs. retirement savings, TFSA vs. RRSP, RRSP withdrawal strategy, sell your snowbird property now? pension crisis aggravated by longevity, models don’t trump common sense, sin-vesting, Canada’s health system: symbol of contradiction, too much finance bad for the economy.

Personal Finance and Investments

In the NYT’s “Making brokers toe the mark” Tara Siegel Bernard examines the last ditch efforts of the brokerage industry to prevent the fiduciary requirement (to act in the clients’ best interest) expected to be imminently tabled by DOL, even for retirement accounts only,. “Protecting workers’ precious, tax-advantaged retirement dollars seems anything but controversial. But drafting the requirement has been a long and arduous process, now four years and counting, with powerful and well-funded opponents in the financial services industry.” But “Consumers may not buy into the logic that a rule to protect investors will actually hurt them, but some members of Congress already have.” The article concludes with “Let’s hope any Labor Department rule is strong enough to resist the opposition and will, at the very least, make it easy for investors to plainly and effortlessly see where those conflicts lie.” (This is a world where black is white, good is bad, and commissioned salesperson are called adviso/ers. Many people need financial advice, and there are many advisers who are more than happy to provide unconflicted advice on a fiduciary basis (RIAs). Let’s create an environment where the average worker is fully protected by a fiduciary requirement. For a more in-depth look at the subject you can read my take on the subject 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”)

In the Globe and Mail’s “How saving for retirement beats paying down your mortgage” Rob Carrrick quotes Jamie Golombek of CIBC that “adding to your retirement fund instead of paying down debt can in some cases make you richer by tens of thousands of dollars…(based on) If a realistic investment return in an RRSP or TFSA is higher than the interest rate on your debt, then you’re better off investing”. (This comparing zero risk assets with risky assets! It’s a little bit like telling you don’t put any money into low return fixed income, instead just put all your money into stocks? Or like borrow, using your home as collateral, to invest? I struggle with this, and mostly came down on the side of getting rid of the mortgage as expeditiously as possible, admittedly the rates were a lot higher when I was doing that, but I’d recommend the same today to my kids. What’s even worse is that in many cases of the same people who didn’t pay down/off their mortgage in order to put money into the RRSP, chose to ‘invest’ that into low yielding fixed income securities. I can’t even describe the relief/liberation that comes in the months/years after having paid off your mortgage; not having that $2000/month albatross that you must attend to each month. )

In the Financial Post’s “The rising power of the TFSA: are RRSPs even relevant anymore?” Jonathan Chevreau discusses the trade-offs between RRSPs and TFSAs, and he argues that for many such as younger savers/investors, lower income individuals and those convinced that their tax rates in retirement will be higher than while working, are better off with TFSAs. (I suspect another way of looking at things is for most to take advantage of both if for no other reason than for tax-diversification; tax laws do change and the changes might not necessarily be in your favour. If interested in the topic you might also consider reading my October 2008 blog post (when TFSAs were born) on this subject entitled Contribute to RRSP or TFSA? 401(k) or Roth 401(k)? Tax-free or Tax-deferred?; so perhaps when really in doubt just split contributions between TFSA and RRSP until TFSA limit is reached. )

In the Financial Post’s “How to know when to start drawing on your RSP” Jason Heath discusses times when you must (e.g. convert to RRIF by age 71 and start mandatory minimum withdrawals), can (e.g. Home Buyers’ Plan, Lifelong Learning Plan, financial difficulty)) and should (e.g. possibly start  withdrawing in the 60s to lower tax rate before mandatory amounts kick in, benefit from $2,000 pension credit starting at age 65) consider making RRSP/RRIF withdrawal. Heath recommends a specific plan which addresses RRSP withdrawals.

Real Estate

In the Globe and Mail’s “Is it time to sell your U.S. snowbird property?” Shelley White explores whether it is time for Canadian snowbirds to sell that winter property in Florida or Arizona, especially those who bought at the 2011 market lows and benefitted from strong appreciation since then. Speaking to realtors she has anecdotal evidence of an “uptick in Canadian clients eager to sell”. Suggested reasons for selling range from: wanting to lock in gains especially if they bought at par and gains are enhanced by 25% due to exchange rate changes, or finding that the 2-bedroom condo is too small when they would like more of the kids/grandkids there during holidays/school-breaks, or expected rate of increase on property prices is decelerating, or the dream of that ocean front condo has corroded by the reality of rising costs (insurance, maintenance fees, assessments, property taxes), or the desire to go to varied destinations but feeling guilty not to go to the condo, or having decided that renting might be better/cheaper/more flexible that owning. (Most snowbirds I’ve come across who own their sun-property are not flippers, but own for decades; but arguments in the article are all credible. Snowbird property is not an investment, but a discretionary expense.)

Retirement Income and Pensions

In Business Insider’s “The trillion-dollar pension crisis is only getting worse because people are living too long” John Mauldin discusses the U.S. pension crisis and some potential solutions. For example, to deal with the unknown but growing risk of increasing longevity of pensioners, he mentions that a pension sponsor might consider the creative approach of buying a life insurance company, which will appreciate in value should longevity continue to increase. However some of the pension fund problems are self-inflicted wounds such as assuming highly optimistic annual returns of 7.5-8.0% on plan assets, comparing very unfavorably to the actual 3.2% in the past decade. Some forecasters even project, based on current valuation levels, a negative real -1.8% and -2.9% return on U.S. large and small cap stocks over the next 7 years (not encouraging, even for those who take forecasts with a large grain of salt). Combining low (or even negative) U.S. equity returns with ultra-low bond returns, the assumed 7.5-8% return rates will likely  further aggravate the funding shortfalls for pensions, many of which already are underfunded (average funded status of about 400 large U.S. companies is 80% according to a study). Public pension are underfunded to the tune of about $4T assuming 3.5% returns; this pushes pension fund managers further out on the risk curve, just to stay in place. Mauldin furthermore argues that longevity increases will continue based on improvements he hears from researchers. His bottom line, whether you have a pension or not, you’ll likely have to cover your expenses for longer than you expected/planned; a good place to start for the U.S. is to “aggressively increase retirement age for Social Security”.

Things to Ponder

In the Financial Times’ “The financial dangers of swapping common sense for risk models” John Kay ridicules ‘financial experts’ who make excuses for unexpectedly rare events suggesting that they were “25 standard deviation events” (i.e. were predicted by models to be so rare as essentially unlikely to occur). The problem of course is that standard deviation assumes normal distributions which are not representative of the behaviour of markets, and since standard deviation is backward looking it certainly is not representative of risk going forward. Risk models also exclude ‘black swans’, “the event to which you cannot attach a probability because you have not imagined the event”. Kay concludes that extremes in observed outcome have less to do with small probabilities than things (unknown unknowns) left out from the models. (Good luck with fixing that.)

In WSJ’s “’Sin-Vestors’ can reap smoking-hot returns” Jason Zweig uses the outperformance of sin-stocks (“butts, booze, bets and bombs”) over the S&P500 is due to investors’ distaste for sin-stocks; this “also suggests that if you seek to beat the market, you should favor whatever is most profoundly unpopular”. He concludes that “before you climb onto the bandwagon for an alternative strategy (like smart-beta), ask why something that is becoming so popular should offer a durable performance advantage. Until investing in it feels like a sin, maybe you should wait.”

In the Globe and Mail’s “Medicare, Canada’s symbol of contradiction” Jeffrey Simpson explores the contradictions in Canadians’ perception of their Medicare system. While Canada’s systems tends to look good when compared to the USA’s but it “doesn’t do well compared most other countries’ public health systems”. In fact ne notes that even the politicians “have shut down the old rhetoric about Canada having the best system in the world”. Areas of deficiency have to do with “access problems”, “slower discharge rates” from hospitals and therefore “the highest spending per discharged patient”, “hospital bottleneck/cost problem” due to lack of space in long-term care facilities. Canadians know it as well, as indicated in surveys showing that they have the “lowest proportion of those who agree that health care “works well, and only minor changes are needed (42%) and the highest rate who said “fundamental changes needed” (50%)”. Still Simpson doesn’t believe that Canadians are ready for a fundamental change which might mean that “people could buy basic health care instead of relying on the state”. But the ultimate contradiction is that “We have a series of provincial health-care systems that offer so-so results by international standards for what the public sees, strangely, as a national symbol.”

And finally, the Economist’s “Warning: Too much finance is bad for the economy” Buttonwood refers to a new BIS study which suggests (what many have always suspected) that “rapid finance sector growth is bad for the rest of the economy”. Indicators of when there can be too much of a good thing include: private sector debt over100% of GDP, and finance sector employment over 3.9%. The reasons are a combination of: finance luring away highly skilled people from (productive) industry and the tendency to prefer to lend to firms which have high collateral. Thus low R&D-intensive industries are preferred over high ones, resulting in lower overall growth rates in the economy.