by John Darer CLU ChFC CSSC RSP CLTC
What role should diversification play in structured settlements and settlement planning for plaintiffs?
First of all, 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!
How does diversification apply in a 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.
Classic reasons why 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
1500 structured settlement annuitants whose structured settlement were funded in the 1980s were placed "all eggs in one basket" (with the highest yielding company, despite warning signs about the company and two well publicized failures of companies promoting aggressive yielding annuities) are facing shortfalls when the Executive Insurance Company of New York liquidation fees through as scheduled August 8, 2013.
An August 1, 2013 ABC news story by Philadelphia reporter Nydia Han, features ELNY annuitant Cathy Lawley of Bridgeport, PA and her attorney Edward Stone underscores the importance of diversification
Following is my August 2, 2013 video podcast on the subject of structured settlement diversification which touches on the ABC News Story " A Cautionary Tale About Annuities". Regrettably, other than diversification, the recommendations from the otherwise well done ABC news story do not apply to structured settlements and apply to regular annuities.