All posts by Jonathan Chevreau

Retired Money: What Asset Class charts can teach about risk and volatility

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My latest MoneySense Retired Money column addresses a topic I have regularly revisited over the years: annual charts that help investors visualize the top-performing (and bottom-performing!) asset classes. You can find the full column by clicking on the highlighted headline here: Reading the “Annual Returns of Key Asset Classes”—what it means for Canadian investors. 

As the column notes, I always enjoyed perusing the annual asset classes rotate chart that investment giant Franklin Templeton used to distribute to financial advisors and media influencers. I still have the 2015 chart on my office wall, even though it’s years out of date.

Curious about the chart’s fate, I asked the company what had become of it, and learned it’s still available but now it’s only in digital format online. As always I find it enormously instructive. It’s still titled Why diversify? Asset classes rotate. As it goes on to explain, “one year’s best performer might be the next year’s worst. A diverse portfolio can protect your from downturns and give you access to the best performing asset classes this year – every year.”

The chart lists annual returns in Canadian dollars, based on various indexes.

Right off the top, you see that U.S. equities [the S&P500 index] are as often as not the top-producing single asset class. It topped the list five of the last nine years: from 2013 to 2015, then again in 2019 and 2021.

On the flip side, bonds tend to be the worst asset class. Over the 15 years between 2007 and 2021, at least one bond fund was at the bottom seven of those years: global bonds [as measured by the Bloomberg Global Aggregate Bond Index] in 2010, 2019 and 2021, US bonds [Bloomberg US. Aggregate Bond Index] in 2019, 2012 and 2017, and Canadian bonds [FTSE Canada Universe Bond index] in 2013. And consider that all those years were considered (in retrospect) a multi-decade bull market for bonds. You can imagine how bonds will look going forward now that interest rates have clearly bottomed and are slowly marching higher.

As you might expect, volatile asset classes like Emerging Markets [measured by the MSCI Emerging Markets index] tend to generate both outsized gains and outsized losses. EM topped the chart in five of the last 15 years (2007, 2009, 2012, 2017 and 2020) but were also at the bottom in 2008 and 2011. EM’s largest gain in that period was 52% in 2009, immediately following the 41% loss in 2008. Therein lies a tale!

The latest Templeton online charts also include a second version titled “Risk is more predictable than returns.” It notes that “Higher returns often come with higher risks. That’s why it’s important to look beyond returns when choosing a potential investment.” It ranks the asset classes from lower risk to higher risk and here the results are remarkably consistent across almost the entire 15-year time span between 2005 and 2021.

The missing alternative asset classes

This is all valuable information but alas, these charts seem to focus almost exclusively on the big two asset classes of stocks and bonds, precisely the two that are the focus of all those popular All-in-one Asset Allocation ETFs pioneered by Vanguard and soon matched by BMO, iShares, Horizons and a few others. Continue Reading…

Life after Twitter: Mastodon & other alternatives

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As I posted on Twitter a few days ago, Elon Musk’s ownership is causing a lot of Twitter regulars to rethink their commitment to the platform. Personally, I have invested a lot in the Bird since joining in 2009 and so I am reluctant to storm out of there merely out of sheer petulance. Better, I think, to take a wait-and-see approach and give Elon a chance to salvage it or to burn it to the ground.

But it does behoove regulars to have a contingency plan or Plan B. Once upon a time, I viewed Google Plus as an alternative but it proved to be a virtual ghost town until Google pulled the plug on it. If Twitter keep imploding, perhaps the folks at Google will think of giving it a go again. But in the meantime, there are still LinkedIn and Facebook.

While in Spain this month, I started to experiment with the platform that seems most likely to accumulate disaffected Twitter users: Mastodon. (spelt with the letter o in two places, NOT the letter “a”!

Unlike the centralized Twitter platform, Mastodon is decentralized and that’s the first thing you need to know about it when signing on. First you have to pick a server, which is run by volunteers around the world. I picked one of the few (or only?) Canadian ones: mstdn.ca. It’s also called Mastodon Canada and bills itself as being run by Canadians for Canadians

A new meeting ground for Canadian finance Tweeters and bloggers?

 

Perhaps it’s too early to say, or that it’s wishful thinking, but it seems possible that a critical mass of disaffected Canadian Twitter users may be building there, including a subset of Canadian financial tweeters; I mean tooters!

For me, Truth Social was never an option, for reasons that should be obvious, given its ownership. If there are other Canadian Mastodon servers and there may be, Google Canadian Mastodon servers.

Mastodon takes some getting used to and the learning curve seems steeper than Twitter was in its heyday. At the same time, it’s fun to give one’s atrophied social media little grey cells a new workout, and it’s a learning experience to see new networks and patterns of networks evolve almost from the ground up.

It was helpful to be fairly early with Twitter and in the same way Mastodon has that pioneering feeling here in November of 2022, the first full month of Elon’s Twitter ownership. Mastodon has been around much longer but there’s little doubt there is now a wave of Twitter users descending on the place. Most of the new arrivals admit they’re looking for a possible alternative, or don’t really know why they are there, and most either need a bit of help or encouragement or are a bit more experienced and willing to offer assistance to the newbies.

In fact, mstdn.ca is so new they are still asking for volunteers to moderate and assist with the technical side for those who have the skills. They’ve also just set up a PayPal account to accept donations to offset the server costs.  Continue Reading…

Revenge Travel in the post-Covid era, global Market Volatility, US mid-terms, Confidence Man

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Malaga, Spain. Image by Pixels: Oleksandr Pidvalnyi

By the time you read this, I should be in Malaga, Spain, where we’re spending a few weeks. Call this our version of what Robb Engen described in yesterday’s Hub as “Revenge Travel” in the post-Covid era.

I realize that the term post-Covid is hardly an apt one as, from where I sit, Covid and its ever-propagating new variants seem ever with us.

Back in 2020 and 2021, it seemed Covid was something a friend of a friend of a friend contracted: these days, it’s more likely to be a next-door neighbour, friends or family, or perhaps the person staring you in the mirror in the morning. This is not a time to be complacent: I still believe in being cautious, keeping vaccinated and boosted to the max, social distancing in public places, and masking wherever there are significant gatherings.

One thing we noticed early in this trip to Spain is a higher use of masks than in North America: masks are still mandatory or highly encouraged on public transit, trains and for air travel. Last week, the Washington Post and other papers warned of a resurgent Covid wave, possibly coupled with the ordinary Flu and other respiratory viruses, constituting a dreaded possible “tridemic.”

I’m writing this as a grab-bag of recent items. As per usual, the Hub will be publishing every business day, with the help of the many generous financial bloggers who grant permission to republish their excellent insights. You know who you are! (Looking at you, Robb Engen, Bob Lai, Michael Wiener (aka James), Dale Roberts, Kyle Prevost, Mark Seed, Pat McKeough, Steve Lowrie, Adrian Mastracci, Noah Solomon, Anita Bruinsma, Mark Venning, Fritz Gilbert, Billy and Akaisha Kaderli, Beau Peters, Victoria Davis, Emily Roberts, and occasional others, including our regular Sponsor bloggers.)

I do of course  have wireless access and my laptop while abroad, and am at least partly plugged into the blogosphere and markets. As I wrote recently in my monthly MoneySense Retired Money column, 2022 has been a challenging one for investors: even those holding a version of the classic 60/40 Balanced portfolio. Pretty distressing to see both sides of the stock/bond pendulum falling!

Are GICs the answer to the Fixed-income Rout?

I see Gordon Pape commenting recently in the Globe & Mail [paywall] about the fact that most investors will be looking at significant losses this year, unless they were mostly in energy stocks, GICs or short the market. He suggested 1-year GICs paying around 4.5% are one possible remedy. After last week’s Bank of Canada rate 0.5% rate hike, you can now get 5% or more on 5-year GICs, so it seems an apt time to start building or rebuilding 5-year GIC ladders. The way I figure it, the BOC will hike again at the end of the year, perhaps 0.25% or at most 0.5%, and perhaps once or twice in 2023. But if they do succeed in restraining inflation, then that will be that: if rates top out maybe 0.5% more from here and then start to fall again, you may end up kicking yourself for not locking in 5% for 5 years or as long as you can find. This is assuming you are building a ladder and reinvesting prior GICs every quarter or so: as long as SOME money is coming due every three or four months, the locking-in factor is less of a negative.

But before going overboard on GICs, read Robb Engen’s recent blog  at Boomer & Echo: The Trouble with GICs. Robb has an issue with locking your money up for 5 years: an Asset Allocation ETF can do much the same thing if things become normal again, with instant liquidity.

Of course, as many of our guest bloggers have been noting recently, it’s also a good time to “dollar-cost average” your way into high-quality decent-yielding Canadian and US dividend stocks, which to some extent I also have been doing. Continue Reading…

Retired Money: Are Balanced Funds really dead or destined to rise again?

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Is the classic 60/40 balanced fund destined to rise again, like the phoenix?

My latest MoneySense Retired Money column addresses the unique phenomenon investors have faced in 2022: for the first times in decades, both the Stock and Bond sides of the classic balanced fund or ETF are down.

Click on the highlighted headline to access the full column: The 60/40 portfolio: A phoenix or a dud for retirees? 

While the column focuses on the Classic 60/40 Balanced Fund or ETF, the insights apply equally to more aggressive mixes of 80% stocks to 20% bonds, or more conservative mixes of 40% bonds to 60% stocks or even 80% bonds to 20% stocks. Most of the major makers of Asset Allocation ETFs provide all these alternatives. Younger investors may gravitate to the 100% stocks option: indeed with most US stocks down 20% or more year to date, it’s an opportune time to load up on equities if you have a long time horizon.

However, we retirees may find the notion of 100% equity ETFs to be far too stressful in environments like these, even if the Bonds complement has thus far let down the tea. As Vanguard says in a backgrounder referenced in the column, the classic 60/40 may yet rise phoenix-like from the ashes of the 2022 doldrums.

“We’ve been here before.”

On July 7th, indexing giant Vanguard released a paper bearing the reassuring headline “Like the phoenix, the 60/40 portfolio will rise again.”  “We’ve been here before,” the paper asserts, “Based on history, balanced portfolios are apt to prove the naysayers wrong, again.” It goes on to say that “brief, simultaneous declines in stocks and bonds are not unusual … Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time. That’s a month of joint declines every seven months or so, on average. Extend the time horizon, however, and joint declines have struck less frequently. Over the last 46 years, investors never encountered a three-year span of losses in both asset classes.”

Vanguard also urges investors to remember that the goal of the 60/40 portfolio is to achieve long-term returns of roughly 7%. “This is meant to be achieved over time and on average, not each and every year. The annualized return of 60% U.S. stock and 40% U.S. bond portfolio from January 1, 1926, through December 31, 2021, was 8.8%. Going forward, the Vanguard Capital Markets Model (VCMM) projects the long-term average return to be around 7% for the 60/40 portfolio.”

It also points out that similar principles apply to balanced funds with different mixes of stocks and bonds: its own VRIF, for example, is a 50/50 mix and its Asset Allocation ETFs vary from 100% stocks to just 20%, with the rest in bonds.

Tweaking the Classic 60/40 portfolio

While very patient investors may choose to wait for the classic 60/40 Fund to rise again, others may choose to tweak around the edges. The column mentions how TriDelta Financial’s Matthew Ardrey started to shift many client bond allocations to shorter-term bonds, thereby lessening the damage inflicted to portfolios by bond funds heavily concentrated in longer-duration bonds. Continue Reading…

High inflation in 2022 changes calculus on delaying CPP till 70

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Actuary Fred Vettese had a couple of interesting (and controversial!) articles in the Globe & Mail recently that may give some near-retirees  who were planning to defer CPP benefits until age 70 some pause.

The gist of them is that because of inflation, those nearing age 70 in 2022 might want to take benefits sooner than later: despite the almost-universal recommendation of financial pundits that the optimum time to start receiving CPP (or even OAS) benefits is at age 70. From what I glean from Vettese’s analysis, those who are 69 this year should give this serious consideration, and possibly those who are currently 68 (or even 67!)  might also think about it.

You can find the first piece (under paywall, Sept 27) by clicking the highlighted headline:  Thanks to a Rare Event, Deferring CPP until age 70 may no longer always be the best option.

The second, quite similar, article ran October 6th:  Deferring CPP till 70 is still best for most people. But here’s another quirk for 2022, when inflation is higher than wage growth.

Certainly, Vettese’s opinion carries weight. He is former chief actuary of Morneau Shepell (LifeWorks) and author of several regarded books on retirement, including Retirement Income for Life.

My own financial advisor [who doesn’t wish to be publicized] commented to his clients about these articles,  noting that they:

“aroused interest among some of you on when to begin receiving the Canada Pension Plan (CPP) given an unusual wrinkle that has occurred over the past couple of years where it may be more beneficial  to not defer it to 70 in order to maximize the dollar benefit.  It is particularly relevant for those who are within a year or two of approaching  70 years old and have so far postponed receiving CPP … My take on the piece is that if you are not receiving CPP and you are closer to 70 years old than 65, then the odds move more favourable to taking it before reaching 70. That is particularly true if there are health concerns that affect longevity.”

I must confess that I found Vettese’s thought process hard to follow all the way, but I respect his opinion and that of my advisor enough that it altered our own CPP strategy.  People who had originally planned to take CPP  at age 70 early in 2023 may be better off jumping the gun by a few months, opting to commence CPP benefits late in 2022. This is because of a unique “quirk” in the Canada Pension Plan that is occurring in 2022, whereby “price inflation is higher than wage inflation.”

Personally, I took it at age 66 (3 years ago) but we had planned to defer my wife Ruth’s CPP commencement till 70, still about 18 months away. Vettese himself turns 70 in late April [as do I] and in an email he clarified that because of the inflation quirk, he’s taking his own CPP in December: 5 months early.  But as his example of Janice below demonstrates, even those a year or two younger may benefit by doing the same.

A lot is at stake with such a decision, however, so I would check with your financial advisor and Service Canada first, or engage a consultant like Doug Runchie of DR Pensions Consulting, to make sure your personal situation lines up with the examples described in the article.

2022 is the exception that proves the rule

Actuary and author Fred Vettese

Vettese starts the first article by recapping that CPP benefits are normally 42% higher if you postpone receipt from age 65 to age 70. However, he adds:

“Almost no one knows – and this includes many actuaries and financial planners – that the actual adjustment is not really 42 per cent; it will be more or less, depending on how wage inflation compares with price inflation in the five years leading up to age 70. It turns out this arcane fact is crucial. The usual reward for waiting until 70 to collect CPP is that the pension amount ultimately payable is typically much greater than if you had started your pension sooner, such as at age 65. In 2022, that won’t be the case. As we will see later on, someone who is age 69 in 2022 and who was waiting until 70 to start his CPP, is much better off starting it this year instead.”

Those most directly affected are people over 65 who have not yet started to collect their CPP pension. Here’s how he concludes the first article:

“In a way, 2022 is the exception that proves the rule. It is the result of COVID, a once-a-century event, creating a one-year spike in price inflation without a corresponding one-year spike in wage inflation. This analysis, by the way, has no bearing on when to start collecting the OAS pension.

This should send an SOS to financial planners and accountants, as well as retirees who take a DIY approach. Deferring CPP will usually continue to make sense but not necessarily in times of economic upheaval.”

In an email to Fred, he sent me this: “I wouldn’t spend too much time on the Wade example (first article). Situation is rare. More common is the Janice example (second article). It applies just as I state in the article.”

Example of those turning 68 early in 2023

For the Janice scenario, Vettese describes someone currently age 67 who had planned to start taking CPP benefits in April 2023, a month after she turns 68: Continue Reading…