blog21oct2007

Hot Off the Web
Short selling has arrived to Canadian mutual funds as reported in “Mutual funds add short selling to their arsenal”  . While new in Canada, this is seen a growing trend, though here it comes with many restrictions (maximum short position 5% and must be kept in cash rather than additional equities). In the U.S. Deborah Brewster’s piece from the Financial Times’ “The long and the short of it”  130/30 funds and 120/20 funds have about $80B in them with forecast of $1T in five years. A 130/30 funds shorts 30% of the assets and then invest the full 130% in assets expected to outperform. Some analysts are quoted as indicating that these funds may actually be fairly conservative in that they will underperform in high-flying markets and over-perform in downdrafts due to short positions.
In “Critical illness can throw retirement into disarray” Bruce Gillespie of the Financial Post explores the exposure of being without “critical illness” (a lump sum benefit of say $50,00-200,000 in case of a heart attack, cancer or stroke) and “long-term care” (with benefit of $150-2000/week for 2 or more years) insurance. Premiums are indicated to be about $150/month for $10,000 benefit for individuals in their 50s. (I haven’t looked at this in detail, but at an annual premium of $2,000 for a $10,000 benefit, it may be worth considering paying the $2,000/year into your own critical illness account, if you have the discipline).
Rob Carrick in the Globe’s “Don’t relax just yet” quotes Criterion Investments analysis that even with the major run-up of the Canadian dollar in recent years, it is not time to allow us to become complacent even if you have a well diversified global portfolio. If you are opinionated about the additional upside left for the Canadian dollar (say 20%) then they suggest that 20% of the global portfolio should be in hedged funds; otherwise use 50:50 split.
Globe and Mail’s Roma Luciw reports that “Work until you die”  is the plan of one in five of the 45-60 year olds who retired early or plan to do so. And Jonathan Chevreau in “No pension? Get ready for the new reality”  indicates that with DB pension plans becoming increasingly extinct in the non-public sector, this means a more uncertain future for Canadians in retirement. For those interested in this pension topic, you may wish to read Pension Reform at this website.
In “The more hedges the better, right?” WSJ’s Zuckerman indicates that while there is a much richer menu of hedges available to investors to protect their portfolios as compared to 1987, but this may lead to a false sense of security. Only time will tell how the new mechanisms will work if “everyone runs for the door at the same time”, due to the lack of transparency of many of the over-the-counter mechanisms.
Given the litigious nature of the U.S. “Protecting your assets in case you find yourself in court”  is an area of concern for homeowners in case they are personally sued. (This should be of concern as well to Canadians who own property in the U.S.). Jonathan Clements explains that what assets may be protected from creditors under the law is a function of what state the property is located in. In general 401(k) or DB pension plans are protected thoughout the U.S.. Homes, annuities and life insurance are also protected in Florida and Texas. He recommends that you know your state’s laws. Possible precautions are: a personal umbrella liability insurance policy, max out retirement plans, own assets jointly with spouse (if permitted as “tenants in entirety”), or see a lawyer to discuss more costly techniques like trusts. Also look at apbook.com for some state by state information.
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