Q: Are viatical settlements good investments?
A: They might be reasonable under some circumstances, but they can be risky and can cause a little discomfort, too.
Viatical settlements involve buying a terminally ill person’s life-insurance policy.
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If someone is expected to live only three more years and needs cash to pay for medical bills or just to spend and enjoy, he might sell his life-insurance policy.
If it’s set to pay $100,000 on his death, the buyer might pay, say, $66,000 for it.
It sounds like a win-win plan, as the seller gets a load of cash and the buyer can expect to receive $100,000 in about three years — roughly a 15 percent annual return.
It’s not so simple, though. The middlemen who arrange these settlements charge fees. And the sick person might live for many years, significantly reducing the investment’s ultimate return. A cure or powerful new treatment might even have him outliving the buyer.
Many people are uneasy about investing in something that has them rooting for speedy deaths and against medical breakthroughs. Also, there have been many instances of fraud with viatical settlements.
Q: Is it bad if a mutual fund no longer permits new investors?
A: It’s usually a good sign, suggesting that the fund managers aren’t finding enough top-notch investments for their shareholders’ money and they don’t want to resort to less-promising ones.
When funds get huge, it’s harder for managers to earn high returns, as they have to spread out the money more.
Dear Fool: My dumbest investment was buying $5,000 worth of Netflix shares when they were trading near $75 in 2012 — and then selling them when they fell to $50 per share.
The Fool responds: You’re right — that’s a painful loss. With the stock recently trading near $450 per share, you’d have had roughly $30,000 worth of shares today, for a sixfold gain.
It’s natural to think about selling when a stock is crashing, as Netflix has done several times in recent years.
But you should ask yourself a few questions before selling.
For starters, have you truly lost faith in the company? If so, then sell. If not, has it fallen due to short-term, fixable problems (such as flooding at a supplier’s factory) or serious, long-term ones?
Netflix fumbled when it planned, and then canceled plans, to split off its DVD-by-mail service as “Qwikster.”
It has come back strong, though, gaining millions of members and sealing deals to offer more content. Its move into original programming, such as with “House of Cards,” has also been successful.
International Business Machines (NYSE: IBM) shares recently had fallen more than 14 percent from their 52-week high this year.
That reflects a lack of confidence in the company, but it also presents an attractive entry point for believers — and there’s plenty of reason to believe in its future.
IBM is a financially sound company in the middle stages of a successful transition, with strong leadership in CEO Ginni Rometty. Consider that she and other bigwigs gave up sizable 2013 bonuses after a lackluster year.
Some think its “predictive analytics” technology will make major contributions to health care, too. It has also been selling off its lower-margin businesses such as PCs and printers. (It recently sold its x86 server business to Lenovo for $2.3 billion, for example.)
IBM’s cost-cutting efforts have boosted profitability, too, as net income increased to $16.5 billion in 2013 from $10.4 billion in 2007.
With a recent price-to-earnings (P/E) ratio near 12, a growing dividend yield that recently stood at 2.1 percent, and solid growth potential, IBM deserves consideration for a berth in your portfolio.