Contents: Retirement questions, buying-high & selling-low, marketable ‘limit order’, advancing the retirement planning clock, DOL: disclosure insufficient-best interest standard required, US home prices advance but sales slower, Canadian condo supply: demand ratio 20:1 in some cities, 401(k) advisors’  have ongoing responsibility, Canada/UK/US pensions’ funded status deteriorates, deferred-income annuities misused? if DB pensions so good then annuities must also be so? Ontario business leaders don’t like ORPP? SEC fiduciary decision timeline unknown, what return are you measuring: price, total, hedged, real? 30/70 rather than 60/40 portfolio for retirees? active managers use selected poor performance to outperform, Canadian retirements delayed, financial models work until they don’t.

Personal Finance and Investments

In the Globe and Mail’s “Retirement anxiety: Even the secure have questions” Jennifer Lewington reports that everyone is trying to answer the question “Will there be enough money for retirement?” but they are asking “Am I doing the right thing with my investment?” instead of ‘Where do you want to be, by when, and what are you doing now to get you there?” People know how to save, but have no understanding on how to spend in retirement. “Taking control, developing a plan and creating a strategy to execute the plan is what alleviates the fear…”  (That makes sense, because that what retirement spending is about: living within (below) your means.)

In the Financial Times’ “Being a sore loser can work in an investors’ favour” James Mackintosh discusses investors’ bad behavior as sore losers when investors “…buy into what has done well, and sell what has done badly”; i.e. selling low and buying high, instead of having patience and sticking with their strategy if it is still sound. (One can’t repeat this often enough to remind ourselves; that’s why a rebalancing discipline makes sense because it forces us to sell appreciated assets and buy depreciated ones.)

In WSJ’s “Smart trading for those who seldom trade” Jason Zweig discusses “market order” vs. “marketable limit order”. This means that if “…the best bid on a stock is $10.00 and the best ask is $10.02. If you want to buy immediately but don’t want to pay more than a few pennies extra, submit a marketable buy-limit order at $10.05. Such an order should be filled at $10.02 unless the market instantly runs up, in which case you are protected against paying more than $10.05. If the market drops, you will buy at that lower price.” (This is a good practice.)

In the Globe and Mail’s “Turn the clock ahead and get serious about your retirement plan” Tom Bradley encourages people, who typically get serious about asking questions about the state of their retirement plans in their 50s, to turn the clock back a decade. Start asking in your 40s about: savings discipline, risk tolerance, making money work, fee-drag, paying for services not received.

In the Economist’s “Advise and dissent” Buttonwoood quotes Warren Buffett to “never ask your barber is you need a haircut”, as a lead-in to a discussion of the DOL report on fiduciary requirement for those handling IRAs, in order to protect investors from the costs of conflicts of interest. He concludes that disclosure of the conflicts and reliance on caveat emptor are insufficient; “…the report argues convincingly that this is inadequate; disclosures often appear in fine print, in the contest of documents that are thousands of words long. Investors rarely read them. If the disclosure is presented at the point of sale, that may be too late; the client may be emotionally committed to the decision by that stage. The only answer is to get rid of the conflicts by changing the payment system.”

Real Estate

The December 2014 U.S.  S&P Case-Shiller home Price Indices report “… shows a slight uptick in home prices across the country…) YoY 20-city composite increased  at 4.5% in December compared to 4.3% in November and fastest increases were in San Francisco (+9.3%) and Miami (+8.4%). MoM the 20-city composite was up 0.1%, the highest increases were in Miami (+0.7%) and Denver (+0.5%) while the largest decrease was in Chicago (-0.9%) for the month. “The housing recovery is faltering. While prices and sales of existing homes are close to normal, construction and new home sales remain weak.” Bloomberg’s take on the same data in  “Home-Price Gains in 20 U.S. Cities Accelerated in December”slightly different (as you can see by the title) by focusing on the 20-city seasonally adjusted monthly number of +0.9% rather than the unadjusted +0.1%.

Existing home sales were down in January 4.9% from previous month at 4.8M annualized rate according to Bloomberg’s “Home sales drop as lack of supply dives up prices: Economy” due to “rising property values boost homeowner wealth and spending power, too-rapid increases are outstripping wage gains, representing a hurdle for young or first-time buyers (or perhaps due to the cold weather?). Nonetheless, strengthening employment, historically low mortgage rates, more expensive rents and easier financing will probably sustain demand and give sales a boost this year over last “ (Forecasting is difficult, but not for financial journalists and economists.  J)

New home sales were interpreted as a positive picture in Bloomberg’s  “Purchases of new homes in the U.S. hold near six-year high: Economy” or  somewhat more cautiously in the WSJ’s “U.S. new home sales edge lower” which emphasized the 0.2% drop in from previous month or flattening of sales, using the same data.

In Canada, in the Globe and Mail’s “In many Canadian cities unsold condos are stacking up” Tamsin  McMahon reports that “There are now nearly 20 condo sellers for every one buyer in Quebec City and downtown Montreal, well above the long-term average…. Yet despite a rising stockpile of unsold units, prices in Montreal’s condo market haven’t fallen, rising 1 per cent last year, in large part because developers are choosing instead of offer generous incentives instead of price breaks.” In another article  “The price gap between condos, houses swells to record level” McMahon reports that “In December the average price gap between a condo and a single-family house in the resale market of Canada’s four major cities, Vancouver, Calgary, Toronto and Montreal, hit $320,000… more than doubled in the past decade as the average resale price of a house in urban centres grew 90 per cent, while the price of a condo grew by just 48 per cent.” (I didn’t notice whether the size of condos also decreased over the past decade, which would suggest that the price/SF gap may not have increased as much; but I don’t have the data.)

Retirement Income and Pensions

In InvestmentNews’ “Pivotal 401(k) fee lawsuit in front of Supreme Court means big changes for plan advisers” Darla Mercado reports that even the defendants agree that advisers have an ongoing responsibility to insure that the lineup of funds is prudent, what the argument is about is how far back the statute of limitations of duty apply. But “regardless of the outcome, advisers can expect changes to the way they do business”.

The Globe and Mail’s “Big deficits mean big cash contributions to corporate pensions” reports that deteriorating funded status at Canadian corporations is bad news but not companies’ fault. The blame is being assigned to Bank of Canada’s 0.25% interest rate cut. The Financial Times’  “Pension funds driven to take higher risks” reports that while “rock-bottom interest rates have brought relief to mortgage holders, debt-laden governments and businesses across Europe” the low interest rates after the European QE are “inflicting increasing pain on insurers and pension funds” (and retirees in general). The WSJ’s   “Longer lives hit companies with pension plans hard” reports similar funded status problems in the U.S. , but here the article is focused first on the increasing pension cost of Americans living about 2-yearslonger  (did this happen suddenly? is this a surprise?) since the last (2000) mortality table update (or it was conveniently left ‘unrecognized’ until now); only then is the impact of the low interest rates discussed . (As indicated before that in the context of pensions, “actuarial science” is an oxymoron or another ‘profession’ which allowed its conflicts of interest to govern its recommendations; interest rates are ‘external’ factor but low-balling longevity and high-balling expected returns and at times even using these inflated returns as the discount rates for liabilities predictably do not end well.)

In InvestmentNews’ “Deferred-income annuities grab spotlight from traditional variable annuities” Darla Mercado reports that interest is growing in deferred-income annuities (DIAs) whereby a client buys a future (rather than an immediate as in SPIAs) income stream, usually starting around age 85. This way it’s a lower cost longevity protection that might even be used as a form of LTC insurance. However, it appears that unfortunately much of the actual market is focused at people in their 50s buying income streams starting at age 65. Then there is also the pitch of combining these with Variable Annuities (What’s wrong here? While all sounds good that longevity insurance is taking off, some might construe this article as advert for insurance companies pushing people to buy DIAs at age 55 with income starting at 65 and juice it with a toxic VA without the guarantee. Like take really toxic part (the expensive funds), but leave behind the guarantee which actually may have some cost effectiveness element.)

In the Globe and Mail’s “How annuities can gold plate a silver pension” Rob Carrick argues that since we worship DB we should not disrespect annuities. The support the thesis is based on arguments from insurance executives in the business of selling annuities. But the difference is that in one case the employer pays the cost of the DB plan (and more than likely is cheaper than the annuity an individual can buy), whereas with an annuity you are paying for the annuity with your assets (and likely paying more for it.). (A number of questions were not addressed in the article, such as: What about inflation? Can you buy the income stream of your DB pension plan using the CV being offered? Are you getting actuarially fair value for the annuity? Are you prepared to lock in your assets at government of Canada bond rates +0.5% and get the payment risk that comes with the insurance company rather than the government credit/guarantee? Rates quoted are for males/females/joint (pensions usually come with survivor benefits)? Why has the UK just removed the requirements for compulsory annuitization-was this because it was so effective?…and many other questions. If you must have an annuity then you should get one after speaking to an adviser who has no personal stake in the choice, but to a large extent it has to do with your risk tolerance. Here a blog post (and references in it) Annuity/Pension vs. Lump-sum- Part 5: Putting it all together which looks at annuities from a more holistic perspective. )

BenefitsCanada’s “ORPP could hurt economy: Survey (of employers)”  report that a survey of employers indicates that they (unsurprisingly) believe that the ORPP will hurt Canada’s economy. (Surprised? This is the same group (together with the financial industry) that contributed to killing the expanded-CPP a few years ago.)

Things to Ponder

In InvestmentNews’ “SEC’s White sidesteps direction for fiduciary duty”  Mark Schoeff Jr. warns that our expectations that the SEC will make a decision in 2015 about fiduciary standards for brokers should be moderated by the reluctance of its Chairperson to provide a timeline for a decision. And while she indicated that “fiduciary duty rule is among “important priorities that will occupy 2015”… “Ms. White’s mention of fiduciary duty consumed 12 words of a 2,959-word speech”.  (So don’t hold your breath.)

In the Financial Times’  blog “How to play Footsie” James Mackintosh (and commenters on the article) demonstrates how careful one must be with assessing FTSE 100 (and other indexes) performance as you not only must consider value of the index (without dividends), but must also look at its Total Return (with dividends), and when comparing to indexes of another country you must consider whether the foreign index for a UK investor was hedged or not, and don‘t forget inflation adjustment if you want to get the ‘Real’ Return. The article also discusses the index exposure to different sectors and whether a county’s index performance is a reflection of its economy, which it is not because listed companies’ revenues/profits typically come from international sources and stock market price changes also reflect valuation changes. (So, it’s complicated. You might find it interesting to look at the FTSE All-World index   (total return of stocks in USD) referred to in another FT article which indicates that this “worldwide gauge covering more than 3,000 large and mid-cap companies, is up fractionally to 285.32 and a whisker below its best closing level”!)

In ETF.com’s “Wisdom of 60/40 portfolios timeless” Rick Ferri opines that while Bernstein’s 60/40 “ideal asset allocation” recommendation for long-term investors, may be correct for accumulating investors but “may not be the right starting point for someone living off their savings because the returns can be too volatile”. Instead, he recommends 30/70 allocation just pre- and in-retirement. He argues that this is because “Retirees and those almost retired shouldn’t care what their highest level of risk tolerance is because they shouldn’t be investing anywhere near it. There is no economic reason for a person to take more investment risk than necessary once they’ve accumulated enough money for retirement. The focus should be on the minimum amount of risk needed to achieve an income required in retirement.” (Do we know what that is, given that we don’t know how long we are going to live, or how much inflationary headwind we’ll have to face, or what major unexpected expenses we’ll have to deal with? So I don’t know what the right answer is, but risk tolerance still comes into play, though you may not want to take it to the limit.) At the end he qualifies his opinion that his recommendation is for the average investor in retirement but “Some people will decide 30/70 is too conservative and move up the risk scale.  Others may decide to move a bit lower in stocks.”

In the Financial Times’ “Desperation of active fund management” John Authers writes that “active fund management model is not fit for purpose”. In the article he discusses: misleading performance claims based on earlier bad performance which then drives superior reported results used in advertisements, performance pay not driven “by recent good performance, but by anomalies of poor performance years in the past”, only-1 in-5 active managers beat their passive benchmarks and not just due to fees but also because they became better at identifying mispricing and the bad ones exit the business so it’s harder to outperform. Still we need active managers for doing price discovery, but there will always be those who will step up to the challenge of trying to outperform.

The Globe and Mail’s “Dear Seniors: Please don’t retire yet. Signed, The Canadian economy” is less about seniors needing to keep working for the benefit of the economy than about seniors not being able to retire when they want due to financial reasons. (Judge for yourself.)

And finally, in the Economist’s “Demography is destiny, maybe” Buttonwood discusses failure of financial models to predict where things are going. In the case of one particular model it predicted, in 2005 based on demographic driven lifestyle model, that interest rates will be rising about 5% each decade, meaning 9% now and 14% by 2025. Updates to the study in 2010 had lower but still high 20-year yield of 10% by 2020. While the demographics were known and correct “other factors have weighed on bond yields; the aftermath of the debt crisis, quantitative easing, the euro zone’s problems, falling inflation and so on”. But financial models are only correct until they are not (as the old saying indicates that you can predict the future market value, just don’t specify the date), and “when we construct models, we know what happened in the past; it guides our judgments. But future changes are, by definition, impossible to fit into the model; it is a bit like the man who fell off a skyscraper, remarking as he passed the 23rd floor “All right so far”.” The same study this year predicts “Demographics are thus likely to generate a strong secular headwind for asset prices in the coming decades”. (And the other old saying is still true…forecasting is difficult, especially about the future.)