blog20jul2008

Hot Off the Web- July 20, 2008
As you can imagine with the recent poor market performance, there are lots of articles focused on what, if anything, you should be doing with your portfolio. Here is a sample. In WSJ’s “Market’s swoon prods investors to try options” Eleanor Laise discusses how the market swoon is driving some investors to options such as: covered call writing (selling the option to somebody to allow them to buy a stock that you own at some future specified price up to a certain time; this works well as a return enhancer in sideways markets but caps your gains if the market takes off) and selling a cash-secured put (selling the right to another to sell you a stock, that you already like, at a specified lower price than today). One could also buy put options as an insurance against excessive losses on an existing investment. Option strategies are numerous and complex, but not for the inexperienced.
Chris Flood writes in the Financial Times that “Investors seek solace in gold”  . With all the bad news floating about, fears/evidence of rising inflation and the drop in market, many are finding refuge in gold (easily accessible via ETFs, like GLD), despite the fact that the rising gold prices dampen interest in gold consumed on jewellery. (Perhaps not a bad form of insurance, though some think it is already expensive, in small doses, say about 3-5 %.)
Jon Chevreau in the Financial Post article “Sir John and the point of maximum pessimism”  reminds readers about, the just deceased, Sir John Templeton’s advice to “sell at the point of maximum optimism and buy at the point of maximum pessimism” (if you know when those points occur.) He then proceeds to list the bearish opinions of various pundits. He concludes with his personal view, and practice, that the best strategy is to stick with one’s long-term strategic asset allocation. (I agree that it’s likely too late to sell, and I hope that you have a defined strategic asset allocation that you have implemented. If you don’t know what that is, you can start reading about it at the Asset Allocation  tab under Education section at this website)
WSJ’s Brett Arends lists “Ten reasons to buy stock now”  Among the reasons he includes are: a lot of money already left the market, media reports of the financial world coming to an end, closed-end funds at near record discounts, and short sellers under attack.
In “Protect your nest egg, tread carefully”  WSJ’s Tom Lauricella explores what retirees can do to recover from the “double whammy of stock market losses and withdrawal of money to meet living expenses”. He suggests that one must first determine if any changes are in fact required. Perhaps changes are not required; jumping into products with guarantees comes with significant fees and restricted access to the funds. He also warns that high yields usually come with, often significantly, higher risk. He does suggest looking at possibility of taking losses for taxes.
Among topics other than how to respond to market woes, Financial Post’s Jon Chevreau draws attention to C.D. Howe Institute’s new proposal “Time to scrap minimum annual RRIF withdrawal rates”  which (rightly) suggests that minimum RRIF withdrawals are an anachronism and it is time to scrap them or at least lower them. (Scrap is the right answer). You can read William Robson’s paper “A better RRIF on retirement” .
Also Jon Chevreau in “Malcolm Hamilton’s take of Tax-free savings accounts and pensions” describes the great opportunities associated with Canada’s Tax Free Savings Account (TFSA) effective 2009. Among the short-term advantages: (1) for the affluent, they will be able to maximize their contributions in all three tax shelters (RRSPs, RESPs and now TFSAs), (2) a great vehicle for the young who are saving for a down payment for a first home, (3) for low/medium-income Canadians it may a superior vehicle to RRSPs as it would not affect OAS claw-back, and (4) for seniors forced to remove more from their RRIFs than they need it is a vehicle for re-investment.
And finally the CFA Magazine has published my letter  on problems with Guaranteed Minimum Withdrawal Benefits (GMWBs) and traditional annuities, the opportunity presented by the new “longevity insurance products” in the form of much more efficient delayed-payout annuities with survival contingent payments beginning years after purchase.
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