PrefBlog

This essay extends the prior discussion of annuities presented in Annuities Part 1 and The Annuity Decision.

A retirement calculator is provided and discussed, with notes on its design, shortcomings and potential for future enhancements.

I conclude in part:

My advice is to remain as flexible as possible. Retirement plans should be updated annually, while eschewing the temptation to over-manage one’s assets. Investors should focus on a 15-year plan (at the most) rather than a 30-year plan, while keeping a sharp eye not on the prospects for ruin, but for the prospects of large cuts in final results.

If, for instance, the first 15 years of retirement investment go badly, there is no need to continue with the same allocation for the next 15; and this should be recognized at year zero. In year 15 an annuity will be a lot cheaper than it is at year zero, and risk should be assessed with this in mind. In many cases, I suggest, an annuity purchase should be deferred, using the potential for annuity purchase as a safety net for one’s retirement planning. After all, they grow a bit cheaper every day of your life! They also represent an irreversible decision – so plan to drop off your cheque on your way home from the doctor’s office, not on the way there!

Cash is important. If at all possible, withdrawals from the portfolio should be funded by portfolio income; if there is a shortfall, consider shifting to higher yielding assets (without assuming too much risk, of course! It should be recognized that a higher cash yield will result in a lower expected capital gain). If that still does not solve the problem, an annuity should be considered.

And, by all means, don’t take this or any other financial projection too seriously. They are useful as background, to allow you to play with the effects of different decisions, but they all rely on highly uncertain predictions of future events. Remember: I didn’t predict a wave of revolts across the Middle East this year – and neither did anybody else.

Look for the research link!

My introduction to this essay says it all, I think:

I didn’t really want to write about this topic again, for the third time running, but it is important to the analysis of the Canadian preferred share market now and will probably remain important for the next ten years – so it’s best if we get things started on a solid footing.

Additionally, it became plain to me from the response to the last edition1 that not only did readers want to hear more about this big change in the markets, but that I was insufficiently clear in parts of my discussion for many – so I will commence this appendix with a recapitulation of OSFI’s advisory and draft advisory released February 4, 2011 and how this affects analysis.

The first two articles in the series are available HERE and HERE.

Look for the research link!

The NVCC rules for bank capital, which would have a dramatic effect on the preferred share market, were first discussed in PrefLetter in January of 2011. When the official approach became known the following month, there was much more to discuss!

Look for the research link!

The first rumblings of the NVCC rules for bank capital, which would have a dramatic effect on the preferred share market, were heard in January of 2011. Here’s the first PrefLetter discussion of the potential effects:

Look for the research link!

The innumeracy of regulators knows no bounds, so they permit statements in prospectuses such as:

In order to achieve the Company’s initial targeted dividends of $1.20 per Class A Share per annum, the Company will be required to generate an average annual return on the Portfolio of 8.58% if the value of the Portfolio is maintained intact until the Termination Date.

This calculation goes beyond the word ‘average’. Due to Sequence of Returns Risk, the required long term average will increase with the price volatility of the underlying portfolio, as the targeted dividends will be a significant cash drag on the company – just like a normal retirement portfolio!

In this essay, which was later distilled into a shorter version for popular appeal, I look at the determinants of credit quality for SplitShare preferreds.

Look for the research link!

The concept of ‘market impact’ – the effect an order might have on the market price of the security being traded – achieved headline status with the 2010 ‘Flash Crash’. In this essay, I examine the role of market impact in more ordinary trading – very important in thin markets such as Canadian preferred shares! – and discuss the Flash Crash and its subsequent SEC investigation.

Look for the research link!

In October, 2010, it became apparent that the market was ascribing increased importance to Implied Volatility Theory as it applied to Straigh Perpetuals. In this essay, I review the evidence supporting this statement and consider the investment implications of this increased sophistication.

Look for the research link!

Preferred share funds can have very different characteristics; sometimes well explained by the issuer; sometimes less so. In this article I look at a few funds as they existed in 2010.

Look for the research link!

Pricing of FixedReset issues was bizarre in the first few years of their existence, until the surprising (for many) and traumatic (for many more) December, 2014, reset of TRP.PR.A, convinced the market that maybe something a little more rational was required.

In this effort, I continued my investigation of what on earth was driving relative pricing in the FixedReset market in 2010, with the ‘Total Expected Loss Model’ and the ‘Expected Loss Rate Model’.

Look for the research link!

This essay continues a discussion of Implied Volatility Theory in the world of preferred shares, although I wasn’t referring to it in that manner. Only Straight Perpetuals were examined (a taxonomy of preferred shares is included in the article), and a rudimentary calculator was provided. This essay builds upon the earlier effort, Implied Volatility of Straight Perpetuals.

Look for the research link!