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How to retire and fill 40 hours a week

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By Tea Nicola

(Sponsor Content)

“Can you believe it, honey? Friday’s my last day at work! Time sure flies. I can’t wait to start spending all of our free time together!”

Did this thought warm your heart, or get your pulse racing in panic? That probably depends on whether you’ve given some good thought to what you’re doing after retirement.

But what do you actually want to do after you stop working? Your retirement income goals will depend much on your answer to that question, as your financial adviser is apt to tell you.

We’re living longer — and that’s a good thing, if you plan for it

‘Retirement’ wasn’t really a thing, until recently. You lived, you worked, you died … and the world kept turning as youth picked up the baton of life’s track meet. That’s partly the reason pension age was set at 65: few were expected to live long enough to claim it! When the USA passed their Social Security Act in 1935, American men were expected to live to about 58.

But with our longer life spans, you could still be shuffling around decades after you’ve stopped working. According to Statistics Canada and the 2016 Census, “there were 5.9 million seniors in Canada, which accounted for 16.9% of the total population. In comparison, there were 2.4 million seniors in 1981, or 10% of the population.”

There are more retirees than ever! So, our question is a practical one: how do you retire and still fill 40 hours a week?

What Canadian retirees are already doing with their time

How to retire and fill 40 hours a week. Time chart

Does this all seem inspiring … or overwhelming? Is the room spinning at the prospect of playing shuffleboard and doing yard work for the next two or three decades? Fortunately, we’ve picked up an important idea from doing retirement income planning with countless clients. Continue Reading…

New mandatory risk rating is misleading Canadian investors

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By Nick Barisheff (Sponsor Content)

Canadian securities regulators may be putting investors at risk. They implemented a new mandatory risk weighting system in September 2017 based on 10-year Standard Deviation. Every Canadian mutual fund and exchange-traded fund (ETF) must now include a risk rating based on the following:

Before implementing this policy, the Ontario Securities Commission (OSC) asked for submissions from the industry. These can be viewed here.

Over 50 submissions were received (mine included.) and out of those, three warned about the deficiency that Standard Deviation does not differentiate between upside and downside volatility.

Scott C. Mackenzie of Morningstar made a particularly succinct comment:

“A conservative investor’s portfolio that is missing a key sector or asset class, essential for prudent diversification (and risk reduction), may demand the inclusion of a small amount of a concentrated sector mutual fund or ETF. A single measure risk score for such a vehicle may be higher than recommended for the investor and they are consequently dissuaded from incorporating it. The irony and potential downside is that the risk of the conservative portfolio may actually be higher than otherwise would have been had the investor included the diversifying investment. “Diversification as a risk-reduction activity is a sensible approach, practiced by many, and supported by decades of investment research.” http://www.osc.gov.on.ca/documents/en/Securities-Category8-

Comments/com_20140312_81-324_mackenzies.pdf

There are two major flaws with the methodology:

  1. It does not differentiate between Standard Deviation and Downside Deviation; and
  2. It measures individual portfolio components rather than the overall Standard Deviation of the entire portfolio.

This policy will not protect investors from experiencing losses, but may prevent investors from structuring portfolios for reduced volatility, optimal performance and effective diversification. The resulting reduction in investment demand in sector funds will result in a negative impact for many Canadian public companies.

The overall weakness of this approach is best exemplified by the fact that Bernie Madoff’s fund had the lowest Standard Deviation in the industry for over 30 years – yet investors lost most of their money.

David Ranson of H.C. Wainwright & Co. published a report entitled “Why Standard Deviation Won’t Serve to Classify the Risk of a Portfolio.” This report details why Standard Deviation is a poor and overly simplistic approach to measuring the risk of a portfolio.

“The riskiness of an investment product cannot be represented by the Standard Deviation (volatility) of its historical returns, or by any other single statistic … On a real risk scale, cash could be assessed as risky and gold as safe.” 

http://bmg-group.com/wp-content/uploads/2017/12/why-standard-

deviation-wont-serve-to-classify-the-risk-of-a-portfolio.pdf

As an example of how flawed this policy is, Morningstar Canada lists 9,412 equity classes of mutual funds. Of these,1,932* have 10-year performance histories. The best-performing fund is the TD Science and Technology Fund, which achieved an 18.00% 10-year annualized return net of MER. A $10,000 investment in 2007 would now be worth $66,554*.

On the other side of the performance scale is the Brompton Resource Fund. It ranks as 1,932*(last) in performance and has experienced a-21.8% annual decline over the same 10-year period. A $10,000 investment ten years ago would now be worth only $643*.

*As of July 18, 2018

The 10-year (2008-2017) Standard Deviation for the TD Science and Technology Fund is 17.7% (MEDIUM to HIGH RISK) and for the Brompton Resources Fund it is 29.57% (HIGH RISK). However, the Downside Deviation is 10.6% (LOW to MEDIUM RISK) for the TD Fund and 25.7% (HIGH RISK) for Brompton Fund.

It should be obvious, even to the unsophisticated investor, that the risk of these funds that are at opposite ends of the performance spectrum is not similar.

This flawed methodology is more pronounced when it comes to physical bullion funds such as the BMG Funds. According to this methodology, the Standard Deviation for gold results in a MEDIUM to HIGH risk rating. Silver and platinum would be rated HIGH RISK.

This new risk rating methodology is in direct contradiction to the suggested risk rating for gold established by the Basel Committee on Banking Supervision (BCBS). BCBS brings together regulators from 28 countries, and establishes rules governing the appropriate level of capital for banks. The current version of these rules, known as Basel III, is a key element of the international regulatory reform agenda put in motion following the global financial crisis of 2008. During the 2008 financial crisis, gold was used in international settlements as a zero-risk asset after many decades of being sidelined in the monetary system. Gold’s old emergency usefulness resurfaced, albeit behind closed doors, at the Bank of International Settlements (BIS) in Basel,Switzerland. Continue Reading…

Italian Economics: Watch Salvini

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By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

In April, the Italian public was so incensed by the country’s broken government budget, endemic graft and unaffordable inward migration that half of the general election vote went to two protest parties. On the left, the Five Star Movement topped all, with 32% support, while the right-wing League party took 18%. Since then, the League has gathered even more support. Its leader, Matteo Salvini, may now be the most powerful person in Italy.

Salvini’s answer to the European Question

With a wave of migration from North Africa and the Middle East in recent years, Italy finds itself dealing with culture clashes and a scramble to find the money to house and feed the new arrivals.

But amid all the talk of the migrant crisis, what has gone largely unnoticed is that both Five Star and the League have some economic policies that are irrational at best, dangerous at worst. With the news cycle focused on cultural issues, we are wise to remember that Salvini, currently positioned as the champion of nativist Italy, has communist roots. His economic belief system has shifted with age, but this is no solace to EUR longs.

Key planks

The coalition government’s common ground includes overturning the Fornero Law, which increased retirement ages, and putting a universal basic income of €780 (C$1,193) per month on the table. However, the coalition does interestingly entertain the idea of a flat tax. All of these together would conspire to blow out Italy’s 2.3% budget deficit-to-GDP ratio.

Positive backdrop

Italy’s 1.4% GDP growth may be anemic, but it is above water, and high by Italian standards; the norm this century is +0.4%. The manufacturing purchasing managers’ index, at 52.7, has essentially been in nonstop expansion since the first quarter of 2015.1 Unemployment is down to a still-troubling 11.1%, but it was nearly 13% in 2014. Investors must ask: what odd fiscal and/or monetary policies will voters demand if conditions become recessionary?

Start with one such policy, which Brussels fears, that is haunting the bond market and EUR.

The specter of a parallel currency

A “New Lira,” side-by-side with the euro. The state will not come out and say it at the moment, but that’s what the proposal for “mini-BOTs” will mean. If Five Star and the League do go down this path, mini-BOTs would be short maturity debt instruments that can be used to state obligations. On the other side of the ledger, owners of the mini-BOTs could use them to pay taxes. This risk has been haunting the bond market and EUR since the idea entered the conversation in mid-May.

For this privilege 

Figure 1 highlights in green the few bonds that yield more than two-year Canadian sovereigns. Australia and the U.S. generally yield more across the board, but investors have to reach for seven-year bonds in Italy to exceed Ottawa’s 2020 maturities.

Figure 1: Sovereign Yields (Highlighted Green if > Canadian Two-Year Government Bond)

Figure 1_Sovereign Yields

December looms

The stated aim of the European Central Bank (ECB) is to “keep prices stable, thereby supporting economic growth and job creation.” But in the last decade, what mattered is its implicit mandate: keep Europe together. The combination of fuzzier European economic data and the potential for Italian mini-BOTs could cause a “dovish” surprise by the ECB’s Mario Draghi, who is set to end the central bank’s €30bn bond purchase program in December.  Perhaps the surprise is an extension of the bloc’s zero interest rate policy for another year or so. That could harm EUR bulls.

European banks not yet indicating Contagion

One way in which European systemic risks can be priced is via bank credit default swaps (CDS). Figure 2 shows current CDS levels along with the peak fear points of the last five years. Continue Reading…

It isn’t what it used to be: Prospects for interest rates and inflation

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When I talk to serious, successful investors, few ask, “Do you think the central banks will raise rates two or three times by a quarter-point before the end of the year?” or “Do you think inflation will hit 3% in the next year?” They are more likely to ask things like, “What are the chances that interest rates and/or inflation will get back up to the peaks of the 1970s/1980s?”

That is a much more important question.  A quarter-point change in interest rates or inflation is a fluctuation. A return to the peaks of the 1970s/1980s would be a disaster.

No one can predict the future, of course. The easy way out on the question would be to say, “Oh no, that could never happen again.” But the productive way to address a question like this is to look at those earlier decades and to try to figure out what was special about them.

It seems to me that in the years prior to those decades, three specific political/economic factors worked together to unlock a lot of pent-up demand for money, goods and services, and funnel it into a narrow timeframe where it could have great impact. These factors helped spur the rise in interest rates and inflation that followed.

The first factor was that, during four decades between the early 1930s and the early 1970s, the U.S. managed to fix the price of gold at around $35 U.S. per oz.

Greenback became a world currency in three crucial periods

This helped set up the U.S. dollar as something of a world currency during three crucial, historic periods: the 1930s depression, World War II and the post-war boom. The role of world-currency issuer let the U.S. expand its money supply without burdening itself with a heavy load of domestic inflation — not burdening itself right away, that is. But eventually the $35 gold peg gave way, like a dam that bursts when the force of a rising river becomes too much. The breaching of that $35 barrier helped set off a worldwide wave of inflation, as the value of the U.S. dollar withered in relation to the value of gold. Continue Reading…

Sh*it my advisor says

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Some investors eventually leave their commission-based advisors and opt to set up a simple portfolio of index funds or ETFs on their own. There are plenty of compelling reasons to do so; the reduction in fees alone can save investors thousands of dollars a year, and academic research shows that the lower your costs, the greater your share of an investment’s return.

Related: Steak Knives, Yes. Financial Advice, Maybe Not

In my fee-only planning service, many clients end up doing exactly that. I always enjoy hearing the rebuttals from bank and investment firm advisors whenever they hear their clients want to move to a lower-cost portfolio. Here I’ve tried to capture some of that conversation with sh*t my advisor says:

Sexism: When my husband told him we’re choosing simple index investing and that I handle the family finances he smirked and said to my husband, “What credentials does your wife have to manage money?”

The real enemy: Our investment company is being vilified when the true villains are credit card companies with their interest rates.

Proof of concept: I have tons of clients with assets over $500,000 so I must be doing something right.

Working for free: My advisor told me she basically worked for me for free for the past eight years and accused me of dumping her just as my assets were growing.

It takes a professional: People think they can trade mutual funds or ETFs on their own but it’s not as easy as you think. Plus, you don’t have anyone like me to call up and ask if you’re doing the right thing. Re-balancing a portfolio is easy if you have the background, but doing it like you’re thinking about (indexing) is very tough without the training and knowledge.

What’s in a fee?: The fees are at 2 per cent (Ed. Note: actually, 2.76 per cent) because this isn’t just about buying and selling. We created a complete portfolio with you for your tolerance in the market and deal in actively traded mutual funds that most of the time outperform the market.

Nortel: ETFs aren’t all that great. When you buy an ETF you buy the whole fund. In the late 90s when Nortel owned 30 per cent of the TSX it crashed. If you purchased that ETF you’d be down 30 per cent too! But with a mutual fund you can’t buy that much. You are only able to purchase up to 10 per cent of any one company. So you would have been fairly safe with the crash of Nortel.

Downside protection: If the market goes down 20 per cent your ETFs will too. You are much more protected with mutual funds.

Apples-to-apples: All of our fees are wrapped up together in our MER. We do not charge account fees, transaction fees, advisory fees, admin fees or fees for our service. It is just the MER.

Clairvoyance: The bond market has likely reached its peak and appears to moving in a different direction. The equity markets are very risky at this time. In my mind the only safe place left is guaranteed deposits. Continue Reading…