by John Darer CLU ChFC MSSC CeFT RSP CLTC
What role should diversification play in structured settlements and settlement planning?
First, What is Diversification?
- Diversification is the process of investing a portfolio across different asset classes in varying proportions depending on an investor’s time horizon, risk tolerance, and goals. Diversification does not guarantee better performance and cannot eliminate the risk of investment losses, however this disciplined approach does help alleviate some of the speculation that is often involved with investing.
- The subject of diversification is highlighted in the work of American economist Harry M. Markowitz, who introduced Modern Portfolio Theory, in 1952 and in a 1959 book and seminal text [see Portfolio Selection Efficient Diversification of Investments Cowles Foundation for Research in Economics Yale University and John M. Wiley & Sons].
Say You Wanted to ” Dumb it Down”, what would you say about diversification?
- Don’t Put All Your Eggs In One Basket!
Diversification in Structured Settlement and Settlement Planning Context
- Consider a structured settlement as a core financial planning tool, but do not fail to address other current and known future needs and sources and uses of funds as part of an overall settlement plan.
- Consider the nature of the cash flows (e.g. amount, duration,purpose) and whether you want only one company” shouldering the load.
- Recognize the symptoms of “rate seduction”. When it comes to your life, It’s not the size of the rate, it’s how long it can perform.
Reasons People Diversify
- To maintain a disciplined long-term nvestment strategy
- To maintain an appropriate level of risk exposure
- To temper market volatility
- To participate on the upside and mitigate loss on the downside
Consequences of not Diversifying structured settlement annuity placement
In the mid 1980s, 1500 structured settlement annuitants put their trust in a single high-yielding company, ignoring warning signs and the notorious collapse of two similar firms. Three decades later the annuitants faced deficits due to the liquidation of the Executive Insurance Company of New York on August 8, 2013. A news story by Nydia Han on ABC, dated August 1, 2013, highlighted the plight of ELNY annuitant Cathy Lawley from Bridgeport, PA, and her lawyer Edward Stone, emphasizing the critical need for diversification. Unfortunately, the advice given in the ABC report, “A Cautionary Tale About Annuities,” is pertinent to regular annuities and not to structured settlements.
The question I keep asking…
Lessons from ELNY: Why were all their Eggs in One Basket?
Last updated May 19, 2024
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