All posts by Jonathan Chevreau

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…

Canadian Financial Summit 2022 (Virtual)

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This week a veritable who’s who of Canadian financial personalities and personal finance bloggers will be featured at the 2022 (and virtual) edition of the Canadian Financial Summit, starting this Wednesday. Hub readers will recognize several guest bloggers, including (pictured above) Robb Engen of Boomer & Echo; Bob Lai of Tawcan; Kyle Prevost of Million Dollar Journey and MoneySense; myself; as well as well-known media commentators like Robb Carrick of the Globe & Mail, Peter Hodgson of the Financial Post, Fred Vettese of the G&M, financial planner Ed Rempel and many more. There will also be MoneySense colleagues Dale Roberts (of Cutthecrapinvesting) and MoneySense executive editor Lisa Hannam

The online summit runs from Wed., Oct. 12 to Saturday, Oct. 15th, 2022.

To register, click on the home page here.

Here are just some of the topics that will be covered:

  • How to plan your own retirement at any age
  • How to save money on taxes by optimizing your RRSP to RRIF transition
  • What cryptocurrencies like Bitcoin actually are – and if you should be investing in them
  • How to maximize your Canadian Child Benefit (CCB)
  • How to efficiently transition your investing nest egg to a steady stream of retirement income
  • What Canadian real estate investments looks like in 2022
  • How to deal with inflation on your bills and in your investment portfolio
  • How to avoid crippling fees and terrible advice
  • When to take your OAS and CPP
  • How to buy your own pension – income for life!
  • Why Canadian dividend stocks might be the right fit for you
  • How to use your housing equity to maximize your retirement lifestyle

Here’s what MillionDollarJourney had to say about the conference:

I’m proud to say that MDJ’s own Kyle Prevost is co-hosting the event alongside MDJ writers Kornel Szrejber and Dale Roberts – so I can speak firsthand to the quality of the product!

One thing I always appreciate about this Summit each fall is that it is produced by Canadians – for Canadians.  Too much of the money-related content we see is American-based in nature – but you won’t have to translate any talk about 401Ks or American private health insurance at this event!

Together, the roster of All Star Speakers have authored more than 100 personal finance books, hosted 1,000+ podcast episodes, written 20,000+ blog posts and newspaper columns, and have been featured in thousands of media articles and interviews from every news and financial publication in Canada.  

Needless to say – you will not find this elite group in one place anywhere else!

And it’s free!

Here’s a sampling of the event’s FAQ:

Is the Canadian Financial Summit really free?

Yes. The videos are completely free to view for 48 hours. After that you need the any-time, anywhere All Access Pass.

What’s the catch?

There. Is. No. Catch.  We believe you’ll think the information presented by our 35+ Canadian experts is so solid, so actionable, so lacking in fluff and sales jargon – that we think you’ll pay for it after already seeing it for free.

How do I watch The Summit?
Simply click here to claim your free ticket. You should immediately get an email confirming your registration – just follow the directions in that email and you will get a link sent to you 24 hours before The Summit goes live. You can view The Summit on any phone, tablet, or computer.
I signed up for the 2017,2018, 2019, and 2020 All Access passes, but am not sure how to access those membership pages.

Click here, and simply fill in your info.  You will be be taken to a page that allows you access the 2017, 2018, 2019, and 2020 content. If you have forgot your Canadian Financial Summit password, simply click here to re-set it.

A sampling of the sessions

Rob Carrick

Where is Housing Headed?

In a drastic change from past years, we’re seeing some major pull backs in the Canadian housing market. Join Rob and I as we break down how this is affecting Canadians’ net worth, who is getting hit the hardest, and where we go from here. We also discuss if renting is still an option that we’re recommending and what we think could happen in regards to the long-term trends of immigration and housing stock within Canada now that the pandemic is in the rearview mirror.

Ellen Roseman

Addressing Canadians’ Inflating Sense of Worry

Longtime Canadian consumer advocate Ellen Roseman is back and wants to help Canadians weather the recent storm of inflation and rising costs of living.  Her personal experience with Canada’s last bout of quickly rising prices have given her some hard-won wisdom in practical ways to deal with modern inflation issues.  We talk about what to pay attention to, watch out for, and some top tips in this high-price environment.  We wrap by speculating on what all of this will mean for Canadians’ investment portfolios. Continue Reading…

Defined Benefit pensions lagged in third quarter but continue to withstand volatile markets and historic inflation: Mercer

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Unlike the first half of 2022, the financial position of most defined benefit (DB) pension plans “decreased slightly” in the third quarter, as they were buffeted by inflation and volatile stock markets. Investment returns were mostly negative in the quarter, and yields on long-term bonds were lower at the end of the quarter than they were at the beginning, according to The Mercer Pension Health Pulse (MPHP), released on Monday.

The MPHP tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, which decreased from 109% as at June 30, 2022, to 108% as at September 30, 2022.

Of the plans in Mercer’s pension database, at the end of Q3:

  • 72% of plans were estimated to be in a surplus position on a solvency basis,(vs. 73% at the end of Q2)
  • 17% of plans were estimated to have solvency ratios between 90% and 100%,(vs. 16% at the end of Q2)
  • 5% have solvency ratios between 80% and 90% (unchanged from Q2), and
  • 6% have solvency ratios less than 80%. (also unchanged from Q2).

In a press release, the Calgary-based Principal and leader of Mercer’s Wealth business, Ben Ukonga,  said that “In spite of the significant market volatility, the financial health of most DB plans would have experienced only a slight decline in the third quarter of 2022. As for what can be expected for the remainder of the year, plan sponsors should continue to expect significant volatility.”

Mercer says experts “urge caution and encourage plan sponsors to be prepared for anything, with more volatility on the horizon. Markets will most likely remain volatile in the short to medium term due to numerous risks such as the continued war in Ukraine, the upcoming US midterm elections, the potential confrontation between the US and China over the status of Taiwan, risks of a global energy supply shortfall, and of course, the ongoing inflationary environment.”

Continued short- and medium- term volatility

Markets will most likely continue to remain volatile in the short to medium term due to numerous global risks, including the war in Ukraine (and the Russian Government’s actions in response to Ukraine’s recent successes on the battlefront, such as the recent annexation of parts of Ukraine in violation of International Law, and the geo-political fallouts from these actions). Mercer is also cautious about the upcoming US mid-term elections, the increasing political gridlock and polarization in the US, and the potential for a confrontation between the US and China over the status of Taiwan. The recent volatility in the UK currency and bond markets and the risk of contagion to other markets.

Mercer also sees risks from a global energy supply shortfall, and the effect such a shortfall would have on the global economy: “… plan sponsors should pay attention to the risks associated with energy insecurity in Europe – such as the risk of the Russian Government using Russian gas supplies against Europe in retaliation to sanctions on Russia, and the effects on European economies if their energy supplies are curtailed.”

Inflation at levels not seen in 30 years

With inflation running at levels not seen in over 30 years, central banks globally are “on an aggressive monetary tightening mission in order to get inflation under control. Will they succeed without triggering a hard-landing global recession? Will higher interest rates make governments, corporations and households unable to meet the interest payments on debts they accumulated during the very long period of low interest rates? This could lead to an increase in bankruptcies and crowding out spending and investments, further exacerbating the risks of a hard landing global recession.”

As workers see a decline in the purchasing power of their wages, there will be increased pressures on employers for higher wages, Mercer says. “Sponsors of indexed DB plans will see increases in the cost of these arrangements, and sponsors of non-indexed DB plans may face pressure from their pensioner groups to provide ad hoc cost of living adjustments. Coupled with labour shortages, some employers may have no choice but to increase their labour costs. And companies that are unable to pass these increased costs to their customers will face profit margin pressures and reduced profitability, hurting their future economic outlook.”

Covid still poses macro risk

The global health landscape also poses a macro risk, Mercer says. “As the western hemisphere is entering the winter months, will a new vaccine-resistant strain of the COVID-19 virus appear? And how will governments and citizens deal with such a resurgence? Will the Chinese government continue with its zero-COVID policy? And how much of a negative impact will this policy, along with what some would call draconian lock down measures, have on the Chinese economy? And how deep will the negative knock-on effects be on China’s trading partners?” Continue Reading…

MoneySense Retired Money feature on Canada’s new “Tontine” Retirement solutions

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My latest MoneySense Retired Money column looks at the revolutionary “Tontine” type Retire Solution announced by Guardian Capital and finance professor Moshe Milevsky earlier this month. My initial take was here on the Hub and the more in-depth MoneySense feature story can be viewed by clicking on this highlighted headline: Tontines in Canada — Moving from Theory to Practice as a solution to our Retirement Crisis.

We’ve illustrated this blog with financial projections of one of the three new Guardian Capital Retirement solutions developed in partnership with Milevsky. Some of the ideas were adapted from Milevsky’s latest book: How to Build a Modern Tontine. The theory behind this book is a driving force for Guardian Capital’s efforts to commercize these concepts and put them in the hands of retirees and would-be retirees worried about outliving their money. Nobel Laureate Economist William Sharpe has described this as “the nastiest, hardest problem in finance.”

Milvesky’s book is certainly aimed at industry practitioners and sophisticated financial advisors and investors, and contains a lot of mathematics that may beyond the reach of average investors or retirees. So rather than attempt to review it, we’ll move on to the efforts to bring these ideas to the market. What Milevsky calls “tontine thinking” is belatedly showing up in the marketplace in Canada, starting last year with Purpose Investments’ and now with three different solutions from Guardian Capital. Hub readers also can read an excerpt of the book which ran earlier Wednesday: Longevity Insurance vs Credits — a Primer.

All this has been a long time coming. MoneySense readers may recall two of my Retired Money columns about Milevsky and the future of tontines published in 2015: Part one is here and part two here. Also see my 2018 column that explains tontines in detail: Why Ottawa needs to push for tontine-like annuities.

Last June (2021), Purpose got the tontine ball rolling in Canada with its Purpose Longevity Fund. Here’s my MoneySense take on that one: Is the Longevity Pension Fund a cure for Retirement Income Worries? 

As the MoneySense feature explains, Milevsky is Guardian Capital’s Chief Retirement Architect. It sums up the original 2021 launch of Purpose Longevity Fund, and how it compares to Guardian’s three solutions.

Think of Purpose’s product as a lower-case tontine, and Guardian Capital’s as a Tontine with a capital T.

Guardian Capital’s Modern Tontine  

Guardian Capital’s September 7th press release uses the term “Modern Tontine.” There, Guardian Capital Managing Director and Head of Canadian Retail Asset Management Barry Gordon said “With our modern tontine, investors concerned about outliving their nest egg pool their assets and are entitled to their share of the pool as it winds up 20 years from now … Over that 20-year period, we seek to grow the invested capital as much as possible to maximize the longevity payout.”

 Along the way, investors who redeem early or pass away leave a portion of their assets in the pool to the benefit of surviving unitholders, boosting the rate of return. “All surviving unitholders in 20 years will participate in any growth in the tontine’s assets, generated from compound growth and the pooling of survivorship credits. This payout can be used to fund their later years of life as they see fit, and aims to ensure that investors don’t outlive their investment portfolio.” Continue Reading…