Thailand’s Bumrungrad Hospital, courtesy of RetireEarlyLifestyle.com
By Billy and Akaisha Kaderli,
RetireEarlyLifestyle.com
Special to the Financial Independence Hub
From hip replacement, dental procedures to heart surgery, more people are discovering the advantages of traveling abroad for their medical needs.
In just the past few years, medical vacations have gone from a tiny niche market to an impressive growth story with substantial market-share gains.
Hospitals in countries such as Mexico, India, Guatemala, Costa Rica and Thailand are taking advantage of this global trend. And U.S. companies are taking note as well tailoring their corporate health insurance plans to give employees the opportunity to head to India or elsewhere for surgeries such as knee replacements and the more modern, less invasive approach to hip replacement, hip resurfacing.
In the Western Hemisphere, Costa Rica is currently one of the “in” destination for travelers, especially for dental and cosmetic surgery needs. You can schedule online and receive a custom-made package, appointment and prices in your email response.
For years, people in the American Southwest have capitalized on the high-quality dental work available south of the border for a fraction of U.S. prices. Now more people are traveling to Guadalajara in Mexico for body augmentation and other surgeries, too. Many of the doctors there are US-trained, and the equipment is top of the line. (We know, because we’ve used it.)
In Asia, one of the world’s most acclaimed hospitals is located in Bangkok, Thailand. Bumrungrad looks more like a five-star hotel than a medical facility — until you get to the third floor. World leaders from around the globe fly here for medical procedures. Their website is user-friendly, as is its professional, English-speaking staff. The hospital has more than 200 surgeons who are board-certified in the United States. We have quipped many times that the cheapest health care plan is an air ticket to Bangkok.
Also close by is the Bangkok Heart Hospital. Both of these facilities are located in the center of the city, with easy access to shopping and attractions. If necessary, they will arrange your hotel stay along with the medical procedure you’re having performed, all without waiting times or disqualifications. Your entire extensive physical will be done in one morning, with your blood results and consultation that afternoon. In and out in a single day. How’s that for service?
Is it safe?
Many people interested in medical tourism are concerned about the quality and safety of going abroad for technical and complex medical care, and how to get post-operative care once they return home. All of the hospitals mentioned here use the latest equipment and are either internationally accredited facilities or have US- trained physicians on staff. Some U.S. health plans also provide an in-state network of physicians who will treat a patient who’s gone abroad for medical care. The one thing that sets these hospitals apart from many of their U.S. counterparts is their attention to customer service — they are professional and courteous in a way you rarely see any more at home.
For instance, award-winning Fortis Escorts Heart Institute in Delhi and Faridabad, India, manage over 14,500 admissions and 7,200 emergency cases in a year.
India also has top-notch centers for hip and knee replacement, cosmetic surgery, dentistry, bone marrow transplants, and cancer therapy. Virtually all of these clinics are equipped with the latest electronic and medical diagnostic equipment.
By Erin Allen, CIM, VP Online ETF Distribution, BMO ETFs
(Sponsor Content)
Asset allocation is one of the most critical investment decisions an investor can make. Studies, such as the influential Brinson, Hood and Beebower paper, “Determinants of Portfolio Performance,1” suggest that the long-term strategic asset allocation of a portfolio accounts for over 90% of the variation of its return.
According to the study, the portfolio’s strategic – or target – asset allocation will have a greater impact on its performance than security selection or any short-term active or tactical asset allocation shifts.
The first step when constructing a portfolio is to determine the appropriate asset allocation, based on your risk profile and investment objectives, and then select investments across each asset class.
There are several approaches to constructing an investment portfolio. One such strategy is to adopt a core-satellite approach. Core-satellite investing involves using a core portfolio to anchor the portfolio’s strategic asset allocation, and adding satellite investments to enhance returns and/or mitigate risk.
Fundamentals of a core-satellite portfolio
A typical investment portfolio is comprised of traditional asset classes that represent the broad market, and generally include investment-grade fixed income securities and large-cap Canadian, U.S. and international equities, for example BMO S&P TSX Capped Composite Index ETF (ZCN), BMO S&P 500 Index ETF (ZSP), and BMO MSCI EAFE Index ETF (ZEA). These asset classes make up the portfolio’s “core” investments. Specific securities within each asset class will depend on the investor’s return objectives and risk tolerance.
In order to further diversify the portfolio, non-traditional asset classes – referred to as “satellite” strategies – are used to enhance returns and manage risk. Satellite strategies often have greater return potential than core asset classes, but may be considered higher risk (with greater volatility) when held on their own. However, they often have a lower correlation – a measure of the degree to which two investments move in relation to each other – to traditional assets classes. Satellite strategies can include asset classes or themes that can be used as either short-term, tactical investments, or held for longer periods of time. Combining investments with a low correlation can improve the risk/return characteristics of a portfolio.
Examples of satellite strategies are shown in Table 1 [below]. By using one or more of these satellite strategies in tandem with a core portfolio, investors can further diversify their portfolio across additional asset classes, regions, sectors, market capitalizations, currencies and/or investment styles. For example, real assets such as commodities, infrastructure and real estate have a tangible value that can rise during periods of inflation.
Infrastructure and real estate can also offer a steady and predictable cash flow. Global fixed income securities provide Canadian investors with exposure to bonds in countries with different currencies and interest rate cycles, which can help reduce interest rate risk; while hedge funds, such as market neutral or multi-strategy funds, can actually lower volatility and improve a portfolio’s risk-adjusted performance.
Table 1: Courtesy BMO ETFs
Constructing a core-satellite portfolio
A core-satellite portfolio can be implemented by using:
Active strategies that seek to add value through security selection;
Passive strategies that seek to track the performance of an index representing a particular investment market;
A combination of active and passive strategies.
There is a fundamental investment theory that states markets are efficient and the price of any individual security already reflects all available relevant information, which makes it more difficult for active managers to outperform. Investors who share this view would generally purchase passive investments. Conversely, others believe markets are not efficient and do not always behave rationally, providing active managers with the opportunity to select undervalued securities and avoid overvalued securities – and increasing their potential to add value above the market and/or provide better risk controls and downside protection. While some studies show that the “average” active manager does not add value, well-selected managers have demonstrated the ability to add value and/or reduce risk over the long term.
One approach to constructing a core-satellite portfolio is to use passive investments for efficient markets and active investments for less efficient markets. Many traditional asset classes, such as the U.S. equity market, are considered to be very efficient, making it difficult for active managers to outperform. Non-traditional asset classes, such as Emerging Markets equities or high yield bonds, are often considered less efficient. Many of these asset classes may be more difficult to access, can be less liquid, and are not covered as broadly by research analysts, which can enable active managers greater potential to add value.
The most critical step
Determining the appropriate asset allocation (mix of stocks, bonds and other asset classes) is the most important step when building your portfolio. Whether you use a passive strategy, an active strategy, or a combination of both, the addition of one, or more, satellite strategies to a core portfolio can potentially enhance returns, reduce risk and provide a better return/risk profile for your portfolio.
Simple to use All-in-One Core Portfolio ETFs
BMO ETFs offers a range of all-in-one Asset Allocation ETFs you can select as your core investment portfolio, based on your risk tolerance and time horizon. These ETFs are a one-ticket solution where the asset allocation is determined by professional managers, and where the asset allocation is automatically rebalanced for you on a regular basis to ensure you are on track to meeting your goals. They are low cost, and there is no double dipping on the fees (all-in MER of 0.20%* includes the cost of the underlying ETFs). Examples include our BMO Balanced ETF (ZBAL), or BMO Growth ETF (ZGRO) and BMO All-Equity ETF (ZEQT). Click Here to learn more.
Erin Allen has been a part of the BMO ETFs team driving growth since the beginning, joining BMO Global Asset Management in 2010 and working her way through a variety of roles gaining experience in both sales and product development. For the past 5+ years, Ms. Allen has been working closely with capital markets desks, index providers, and portfolio managers to bring new ETFs to market. More recently, she is committed to helping empower investors to feel confident in their investment choices through ETF education. Ms. Allen hosts the weekly ETF Market Insights broadcast, delivering ETF education to DIY investors in a clear and concise manner. She has an honors degree from Laurier University and a CIM designation.
* Management Expense Ratios (MERs) are the audited MERs as of the fund’s fiscal year end or an estimate if the fund is less than one year old since the audited MER of the ETF has not gone through a financial reporting period.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
Commissions, management fees and expenses (if applicable) may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus of the relevant mutual fund or ETF before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF . BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
S&P®, S&P/TSX Capped Composite®, S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “TSX” is a trademark of TSX Inc. These trademarks have been licensed for use by S&P Dow Jones Indices LLC and sublicensed to BMO Asset Management Inc. in connection with the above mentioned BMO ETFs. These BMO ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones LLC, S&P, TSX, or their respective affiliates and S&P Dow Jones Indices LLC, S&P, TSX and their affiliates make no representation regarding the advisability of trading or investing in such BMO ETF(s).The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.
BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Where have all of the investors gone? It’s no surprise that “advised” Canadian mutual fund investors have been bailing on the wealth building thing. Most of them are sold high-fee funds and see little or no advice. They lose out on two counts. And in 2022 even ETF investors have largely bailed on buying growth assets (stocks and REITs) as they go on sale. The ETF’ers are moving to cash ETFs and bonds. Where I see continued enthusiasm (OK, they are rabid) is in the Canadian dividend investor camp. They love the lower prices that can bring bigger dividend payments. Dividend investors are leading the charge on the Sunday Reads.
As of the end of November, Canadian mutual funds had outflows of $35.6 billion in 2022, or 2% of 2021 year-end assets, National Bank Financial (NBF) said in a report on Jan. 5th. (Full-year mutual fund data is yet to come.)
“Only money market mutual funds recorded inflows, an indication of the capital-preservation mode that informed many investor decisions this year,” it said.
During 2021’s rising markets, mutual fund sales soared to a dramatic record-breaking $112 billion, outselling ETFs for the first time since 2018.
ETFs back on top
Canadian ETF inflows in 2022 landed back on top, with a “whopping” $35.5 billion in net flows in 2022, or 10% or of 2021 year-end assets, the report said.
As part of tactical positioning, cash-alternative ETFs were a “major story” of 2022, the report said, describing them as “an inflow darling” since the first such fund was launched in 2013. In 2022, the funds more than doubled in assets to $15 billion amid the year’s bond selloff. CI High Interest Savings ETF was the fund with the most inflow ($3.2 billion) for the year.
Equity ETFs scored $13 billion in 2022, or about 37% of ETF net flows.
(Back to Dale)
The move to safety
So while ETF investors did add equities in modest fashion, there was a greater move to safety: cash and bonds. Of course, we’re supposed to do the opposite: buy more growth assets as they go on sale. You know that ‘be greedy when others are fearful’ Warren Buffett kind of thinking.
I’ve continued to ask readers: what stocks and ETFs are you buying? That post was from the end of September. Looking back that was near the bottom for 2022. Stocks have bounced back modestly from the time of the post. We could go below September of 2022 prices or not. Who knows? But sale prices are good, that we know.
While focusing (too much) on the dividends can have its drawbacks, there’s no denying that dividend investing leads to very good behaviour. I am truly pleased to see that Canadian dividend investors (friends) are chomping at the bit to buy more stocks and greater dividends.
In Mark’s post you’ll find a few portfolio and dividend focused updates for the investing year of 2022. Included in the mix – drip investor, and Jordan at Money Maaster.
Rob at Passive Canadian Income updated his dividend and portfolio performance for December in this post.
Totals For 2022
Dividends Year To Date Total – $10,692.84
Other Passive Income Year to date – $13,491.23
Total Passive Income for 2022 —– $24,184.07 Year End Goal – $25,000
Canadian stocks are offering very good value these days. Kyle delivered a very good post on MoneySense – Making sense of the markets. Kyle included some very good broader market and investment commentary. And on Canadian stocks …
Our current P/E valuation discount relative to the U.S.’s S&P 500 shows that as a group, Canadian stocks are substantially cheaper than in the past when compared to American stocks.
That crazy good savings rate
For some inspiration Bob offers 9 weird things he did to save money in his 20s. Bob has always had a crazy (good) savings rate. That is certainly one of the keys to building wealth. It’s not what you make, but what you keep, and then what and how you invest. Continue Reading…
Here, I examine how a seemingly minor detail, the size of the sampling blocks of stock and bond returns, affects the final conclusion of the safe withdrawal percentage. It turns out to make a significant difference. In my usual style, I will try to make my explanations understandable to non-specialists.
The research
Bengen’s original 4% rule was based on U.S. stock and bond returns for Americans retiring between 1926 and 1976. He determined that if these hypothetical retirees invested 50-75% in stocks and the rest in bonds, they could spend 4% of their portfolios in their first year of retirement and increase this dollar amount with inflation each year, and they wouldn’t run out of money within 30 years.
Researchers Anarkulova, Cederburg, O’Doherty, and Sias observed that U.S. markets were unusually good in the 20th century, and that foreign markets didn’t fare as well. Further, there is no reason to believe that U.S. markets will continue to perform as well in the future. They also observed that people often live longer in retirement than 30 years.
One of the challenges of creating a pattern of plausible future market returns is that we don’t have very much historical data. A century may be a long time, but 100 data points of annual returns is a very small sample.
Bengen used actual market data to see how 51 hypothetical retirees would have fared. Anarkulova et al. used a method called bootstrapping. They ran many simulations to generate possible market returns by choosing blocks of years randomly and stitching them together to fill a complete retirement.
They chose the block sizes randomly (with a geometric distribution) with an average length of 10 years. If the block sizes were exactly 10 years long, this means that the simulator would go to random places in the history of market returns and grab enough 10-year blocks to last a full retirement. Then the simulator would test whether a retiree experiencing this fictitious return history would have run out of money at a given withdrawal rate.
In reality, the block sizes varied with the average being 10 years. This average block size might seem like an insignificant detail, but it makes an important difference. After going through the results of my own experiments, I’ll give an intuitive explanation of why the block size matters.
My contribution
I decided to examine how big a difference this block size makes to the safe withdrawal percentage. Unfortunately, I don’t have the data set of market returns Anarkulova et al. used. I chose to create a simpler setup designed to isolate the effect of sampling block size. I also chose to use a fixed retirement length of 40 years rather than try to model mortality tables.
A minor technicality is that when I started a block of returns late in my dataset and needed a block extending beyond the end of the dataset, I wrapped around to the beginning of the dataset. This isn’t ideal, but it is the same across all my experiments here, so it shouldn’t affect my goal to isolate the effect of sampling block size.
I obtained U.S. stock and bond returns going back to 1926. Then I subtracted a fixed amount from all the samples. I chose this fixed amount so that for a 40-year retirement, a portfolio 75% in stocks, and using a 10-year average sampling block size, the 95% safe withdrawal rate came to 2.7%. The goal here was to use a data set that matches the Anarkulova et al. dataset in the sense that it gives the same safe withdrawal rate. I used this dataset of reduced U.S. market returns for all my experiments.
I then varied the average block size from 1 to 25 years, and simulated a billion retirements in each case to find the 95% safe withdrawal rate. This first set of results was based on investing 75% in stocks. I repeated this process for portfolios with only 50% in stocks. The results are in the following chart.
The chart shows that the average sample size makes a significant difference. For comparison, I also found the 100% safe withdrawal rate for the case where a herd of retirees each start their retirement in a different year of the available return data in the dataset. In this case, block samples are unbroken (except for wrapping back to 1926 when necessary) and cover the whole retirement. This 100% safe withdrawal rate was 3.07% for 75% stocks, and 3.09% for 50% stocks.
I was mainly concerned with the gap between two cases: (1) the case similar to the Anarkulova et al. research where the average sampling block size is 10 years and we seek a 95% success probability, and (2) the 100% success rate for a herd of retirees case described above. For 75% stock portfolios, this gap is 0.37%, and it is 0.32% for portfolios with 50% stocks.
In my opinion, it makes sense to add an estimate of this gap back onto the Anarkulova et al. 95% safe withdrawal rate of 2.7% to get a more reasonable estimate of the actual safe withdrawal rate. I will explain my reasons for this after the following explanation of why sampling block sizes make a difference.
Why do sampling block sizes matter?
It is easier to understand why block size in the sampling process makes a difference if we consider a simpler case. Suppose that we are simulating 40-year retirements by selecting two 20-year return histories from our dataset.
For the purposes of this discussion, let’s take all our 20-year return histories and order them from best to worst, and call the bottom 25% of them “poor.”
If we examine the poor 20-year return histories, we’ll find that, on average, stock valuations were above average at the start of the 20-year periods and below average at the end. We’ll also find that investor sentiment about stocks will tend to be optimistic at the start and pessimistic at the end. This won’t be true of all poor 20-year periods, but it will be true on average.
When the simulator chooses two poor periods in a row to build a hypothetical retirement, there will often be a disconnect in the middle. Stock valuations will jump from low to high and investor sentiment from low to high instantaneously, without any corresponding instantaneous change in stock prices. This can’t happen in the real world. Continue Reading…
During the OPEC oil embargo of the early 1970s, the price of oil jumped from roughly $24 to almost $65 in less than a year, causing a spike in the cost of many goods and services and igniting runaway inflation.
At that time, the workforce was much more unionized, with many labour agreements containing cost of living wage adjustments which were triggered by rising inflation.
The resulting increases in workers’ wages spurred further inflation, which in turn caused additional wage increases and ultimately led to a wage-price spiral.The consumer price index, which stood at 3.2% in 1972, rose to 11.0% by 1974. It then receded to a range of 6%-9% for four years before rebounding to 13.5% in 1980.
Image New York Times/Outcome
After being appointed Fed Chairman in 1979, Paul Volcker embarked on a vicious campaign to break the back of inflation, raising rates as high as 20%. His steely resolve brought inflation down to 3.2% by the end of 1983, setting the stage for an extended period of low inflation and falling interest rates. The decline in rates was turbocharged during the global financial crisis and the Covid pandemic, which prompted the Fed to adopt extremely stimulative policies and usher in over a decade of ultra-low rates.
Importantly, Volcker’s take no prisoners approach was largely responsible for the low inflation, declining rate, and generally favourable investment environment that prevailed over the next four decades.
How declining Interest Rates affect Asset Prices: Let me count the ways
The long-term effects of low inflation and declining rates on asset prices cannot be understated. According to [Warren] Buffett:
“Interest rates power everything in the economic universe. They are like gravity in valuations. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that’s a huge gravitational pull on values.”
On the earnings front, low rates make it easier for consumers to borrow money for purchases, thereby increasing companies’ sales volumes and revenues. They also enhance companies’ profitability by lowering their cost of capital and making it easier for them to invest in facilities, equipment, and inventory. Lastly, higher profits and asset prices create a virtuous cycle – they cause a wealth effect where people feel richer and more willing to spend, thereby further spurring company profits and even higher asset prices.
Declining rates also exert a huge influence on valuations. The fair value of a company can be determined by calculating the present value of its future cash flows. As such, lower rates result in higher multiples, from elevated P/E ratios on stocks to higher multiples on operating income from real estate assets, etc.
The effects of the one-two punch of higher earnings and higher valuations unleashed by decades of falling rates cannot be overestimated. Stocks had an incredible four decade run, with the S&P 500 Index rising from a low of 102 in August 1982 to 4,796 by the beginning of 2022, producing a compound annual return of 10.3%. For private equity and other levered strategies, the macroeconomic backdrop has been particularly hospitable, resulting in windfall profits.
It is with good reason and ample evidence that investing legend Marty Zweig concluded:
“In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”
To be sure, there are other factors that provided tailwinds for markets over the last 40 years. Advances in technology and productivity gains bolstered profit margins. Limited military conflict undoubtedly played its part. Increased globalization and China’s massive contributions to global productive capacity also contributed to a favourable investment climate. These influences notwithstanding, 40 years of declining interest rates and cheap money have likely been the single greatest driver of rising asset prices.
All Good things must come to an End
The low inflation which enabled central banks to maintain historically low rates and keep the liquidity taps flowing has reversed course. In early 2021, inflation exploded through the upper band of the Fed’s desired range, prompting it to begin raising rates and embark on one of the quickest rate-hiking cycles in history. Continue Reading…
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