Hot Off the Web- April 16, 2012

Topics: Dividend-funds? long-term care insurance? tax rate, uninsured home-business, timeshares=$1, buy a house? PRPP-Not, longevity insurance take-off, civil service pensions, volatility-linked products, ban speculative energy investments, sell-bonds buy-stocks, prepare to retire later.


Personal Finance and Investments

In the WSJ’s “The dividend-fund dilemma” Jason Zweig warns dividend investors who are piling into dividend funds chasing yield or past performance, that they should think twice. The risks mentioned are numerous including: they don’t offer extra safety (their value dropped almost as much in 2008 as the rest of the market), their value may drop if interest rates rise or if dividends are cut, US tax rate on dividends may increase, and they may be concentrated in a few sectors thus providing less diversification.

Kelly Greene in the WSJ’s “Don’t grow old without it” reviews the state of and need for long-term care insurance. With fewer providers and at times insurance companies doubling premiums on existing policies, it is clearly a challenging environment for insurance companies and policyholders. Policies are still not standardized, yet “even for coverage that is basically identical, according to a March study by the long-term-care insurance group. For example, a $150 daily benefit, lasting three years for a married couple aged 65 in “standard” health, ranges in price from $3,815 a year to $7,129.  That means you could pay nearly twice as much for the same benefits as someone insured by a different carrier.” The article discusses factors affecting premiums like age, health (insurability), daily benefit, length of coverage and level of inflation protection, and that you will still be exposed to premium increases. Greene discusses assorted other options like: federal/state assistance, tax breaks, single premium options which may prevent premium increases and hybrid policies (i.e. LTCI combined with permanent life or annuity policies. (The other little details to consider are that LTCI policies come typically with load factors as high as 50% and that insurance company will have to be around 10, 20 or even 40 years in the future to pay benefits and that it generally makes little sense to insure against relatively high probability events (as is the case for people 65+). You might also care to read my Long- term Care Insurance (LTCI- I) and Long-Term Care Insurance (LTCI) II- Musings on the Affordability, Need and Value: A (More) Quantitative View blogs.)


In the Financial Post’s “What’s my tax rate” Jamie Golombek discuses your tax rate (which is a function of the type of income you have) and the differences between marginal and average/effective tax rates; effective tax rate is total tax divided by total income, and it is also affected by your deductions and tax credits. The article also compares tax rates in different provinces.

Shelley White in the Globe and Mail’s “An uninsured home business could put you on the street” explains the importance of business insurance should you be running a home-based business.  The issues are not just coverage for loss of the business inventory to theft or fire, but also liability should a customer or supply be injured in your home (e.g. Fedex delivery person falls on your icy driveway).


Real Estate

In WSJ SmartMoney’s “Timeshare prices plummet to $1” AnnaMaria Andriotis discusses the difficulty of trying to sell a timeshare for any price. Buyers perceived the value of timeshares to be that they were offering a vacation stay for less than similar hotels; however some owners can’t afford the cost of travel to their timeshares and/or the monthly maintenance cost of the units. Rather than selling at a huge loss the article suggests considering renting the unit or explore whether the resort will buy back the unit.

Business Insider’s “Buy a house” article by Wiggin and Buker looks at the US housing crash as an opportunity. “US housing isn’t just cheap; it is the cheapest it has been in more than 40 years. And when one considers the possibility that inflation may rear its head soon, housing looks even cheaper still…(based on) the median home price in terms of per capita disposable income…home prices are lower than they have been in 40 years!… because home prices and interest rates are both at extremely low levels, the cost of buying a home with a 30-year mortgage is at an all-time low” The authors also indicate that the long-term supply and demand for housing are at a very favorable levels with low new supply and the demographic driven demand.



In the Financial Post’s “Choose pensions over Pooled Registered Pension Plans” Jason Heath discusses the problems with Canada’s proposed PRPP (adequate fiduciary framework? Financial industry benefits and consumers suffer) and suggests that the CPP is a better solution. (And those are not the only problems.)

In the WSJ’s “How to create a pension with a few catches” Anne Tergesen writes that the pure longevity insurance is finally taking off; New York Life started selling the product (which is a deferred income annuity) in February and they sold over $230 million and this product now represents 35% of their annuity sales. “Like an immediate income annuity, a longevity policy allows purchasers to convert a lump sum into a pension-like stream of income for life. But while an immediate annuity starts issuing payments almost instantaneously, longevity policies require policyholders to pick an income start date in the future.” Even in the less desirable low interest rate context for annuities “a 65-year-old man paying $100,000 for an immediate fixed annuity can get about $6,950 a year for life, according to, a website that provides free quotes from insurers. But with a longevity policy that starts issuing payments at age 85, his annual payout will be $63,990… Knowing this safety net will fall into place, you might be able to withdraw a higher percentage of your savings earlier in retirement than you would otherwise”. The risks mentioned include that: given current low interest rate environment, investors might do better with a balance portfolio, that inflation might render the income starting at age 85 of significantly reduced buying power, and insurer insolvency (mitigated by some level of industry-backed guarantees). (No mention of fees, but it would be beneficial that you enquire and understand the level and impact of the fees associated with the policy. You might also be intrested in reading some of my blogs on longevity insurance, e.g. Longevity Insurance- What does it buy you?)

In the Financial Post’s “Winners and losers in civil service pensions” Fred Vittese reviews C.D. Howe’s report “Winners and losers: The inequities within Government=Sector Defined benefit Plans” and concludes that the “proposals have merit but they still ignore the elephant in the room: that Canada has a two-tier pension system that is under increased scrutiny. The changes he suggests to the public sector plans would be seen as major takeaways by the public sector unions but to everyone else, they will seem more like tweaks that will nudge the plans modestly in the direction of lower costs without doing much to close the gap between public sector plans and private sector plans.”



Things to Ponder

In the Financial Times’ “Volatility-linked ERFs boost Source” Chris Flood discusses how investors are showing strong interest in volatility-linked products intended to protect them in case of a market correction. “However, maintaining a continuous exposure to volatility via futures contracts can be expensive” and the article mentions a product called Voltage from Source/Nomura which replaces continuous exposure to volatility with a combination of “varying exposures to volatility futures and US Treasuries”. (I wouldn’t bother, it is active, relies on timing the market correctly and it raises your costs; instead set your risk exposure to a level compatible with your risk tolerance.)

In Reuters’ “Ban index funds, ETFs to rein in oil groups” Roberta Rampton writes that a coalition of consumer and public interest groups advocate a ban on commodity index and exchange traded funds “blaming the speculative investment vehicles for surging oil and gasoline prices”. “You’re not banning money that goes into production, you’re not banning money that creates market liquidity… You’re banning gambling that has no productive value whatsoever” according to Professor Greenberger, “a former official at the Commodity Futures Trading Commission”.

In InvestmentNews’ “Time to shift to stocks from bonds: Loomis Sayles’ Fuss” Jason Kephart reports that “We’re in the foothills of a gradual rise in interest rates,” said Mr. Fuss, vice chairman of Loomis Sayles & Co. LP and manager of the $21.2 billion Loomis Sayles Bond Fund (LSBRX). “Once they start to rise, you’re probably looking at a 20- or 30-year secular trend of rising interest rates.”

And finally, in Benefits Canada’s “Why we will no longer retire early” Fred Vittese argues that “For the last four decades, demographics and capital markets have worked in our favour, enabling us to enjoy ever-longer periods of retirement. But that era is coming to an end, and the change to the OAS retirement age is not the cause—it is a symptom…The point isn’t about how well our retirees are currently doing but rather about how this is about to change…The ultimate result is that Canadians will retire later.”


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