My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Winter 2025
P&C Insurance
We do not sell property and casualty insurance (auto, homeowners, etc.) but we review it because inadequate insurance could thwart the best of investment strategies. This month I will focus on an oft-neglected corner of financial planning and give you a few tips on that most boring of topics, your property and casualty insurance. The following are what I consider the three most common mistakes individuals make in this area:
Having deductibles that are too low. Many people are carrying deductibles on their vehicles and homes that are far too low. Many people carry $250 or $500 deductibles because that is the level they selected years or decades ago, and they have never changed the amounts. Individuals for whom a few hundred dollars of increased expenses in an accident would be a problem have far more serious and fundamental financial issues than determining their optimal deductible. For the rest of us, there are three reasons to consider raising deductibles:
1) Small insurance claims can lead to higher rates or non-renewal of coverage. This is becoming increasingly true for homeowners coverage.
2) Premium savings can be substantial. In many cases you can “save” the amount of the increased deductible in just a few lower premiums. Remember there is no such thing as a free lunch. Insurance companies price their policies to cover their costs including overhead to process claims. If you raise your deductible, you save them processing costs on small claims and signal through your willingness to assume some of the risk that you may be a less costly customer overall.
3) Hassles are reduced. In the case of a small problem, you can just handle it (or not) at your discretion and leisure, without having to deal with filing a claim.
Failing to carry umbrella liability coverage. Many people with substantial assets to protect fail to secure a personal liability policy. There are three reasons to consider one:
1) A personal umbrella policy is generally very inexpensive (generally only a few hundred dollars per year per million dollars of coverage).
2) Insurance companies won’t write an umbrella policy if the underlying insurance you carry is inadequate. By getting an umbrella policy you are “forced” to increase your underlying coverage to acceptable levels if they aren’t already.
3) Given the low costs, in today’s litigious society do you really want to be without it?
(See Umbrella Coverage for more on how to select the appropriate amount.)
Carrying medical payment coverage. This is not coverage for other people – they are covered by the liability section of your policy when you are at fault. Medical payment coverage is for you or your family. There are two reasons to drop this coverage:
1) Obviously, your premium will be lower without it.
2) If you have adequate health insurance coverage, it is redundant. If you do not have health insurance, you will need this coverage, but you have a larger problem – you need health insurance!
By reviewing your coverage with your agent and avoiding these three common mistakes, you may well be able to both decrease your risks and save money simultaneously.
Who Knows?
I wrote the following to our clients the morning after the election, but thought it was worth sharing more broadly here:
All,
Last night and this morning as I watched and thought about the election results, I was reminded of a Chinese parable from the second century BCE.
Here is the translation of the fable from wiktionary:
It can be difficult to foresee the twists and turns which compel misfortune to beget fortune, and vice versa.
There once was a (father), skilled in divination, who lived close to the frontier (with his son). One of his horses accidentally strayed into the lands of the Xiongnu, so everyone consoled him.
(But) the father said, “Why should I hastily (conclude) that this is not fortunate?”
After several months, the horse came back from the land of the Xiongnu, accompanied by another fine horse, so everyone congratulated him.
(But) the father said, “Why should I hastily (conclude) that this can not be unfortunate?”
His family had a wealth of fine horses, and his son loved riding them. One day (the son) fell off the horse, and broke his leg, so everyone consoled (the father).
(But) the father said, “Why should I hastily (conclude) that this is not fortunate?”
One year later, the Xiongnu invaded the frontier, and all able-bodied men took up arms and went to war. Of the men from the frontier (who volunteered), nine out of ten men perished (from the fighting). It was only because of (the son’s) broken leg, that the father and son were spared (this tragedy).
Therefore, misfortune begets fortune, and fortune begets misfortune. This goes on without end, and its depths can not be measured.
Some of you are undoubtedly pleased with the election results (you believe it is fortunate), others despairing (you believe it is unfortunate), but either way I think the fable is apt. We simply don’t know yet if, in the long run, the outcome was good or bad.
Subsequently, the market seems pleased with the election results. Tax cuts (or simply extensions of previous cuts) and deregulation are expected and would be good (in my opinion). The deficit/debt, as well as the funding of Social Security and Medicare, will be an issue at some point but politicians (on both sides) are happy to let it be someone else’s (larger) problem later. The primary (economic) danger in the short run is probably restrictions on the free flow of goods (tariffs) and people (immigration) – if taken too far.
It has been particularly hard lately to infer policies from what politicians say. They (again, on both sides) seem to just say anything to get elected even if they have no intention of following through (or, less charitably, are simply lying). Thus, we don’t know exactly what is in store for the country. For example, I expect the promises of no taxes on tips, overtime, Social Security, etc. to be very quickly memory-holed. Despite this, I am not particularly concerned (I’m always a little concerned!) at the moment and all of our client’s portfolios are very well diversified.
If you have any specific questions (or simply need to talk), of course, we’re happy to answer them (or listen).
Fall Ruminations
My latest quarterly ramblings to my Financial Professionals list are out: Financial Professionals Fall 2024
Efficient Markets
As wealth managers, we are frequently asked some variation of the question “So, what do you think the market is going to do?” or “What do you think of XYZ stock?” Those are difficult questions to answer, and this month’s post is an attempt to explain our perspective.
The reason that those questions are problematic is because no one knows. Certainly there is no shortage of prognosticators who pretend (or may even believe) they know, but the current price of a security, and by extension the market, generally incorporates all of the information possessed by millions of investors, most of whom are institutions. These market participants are intelligent, informed, and motivated. Thus the odds that any individual will consistently be able to find mispriced investment opportunities are extremely small. (Many excellent books have been written on this topic. I heartily recommend Winning the Loser’s Game by Charles Ellis as an excellent introduction.)
In light of that, the answer I want to give to the first question is, “It will fluctuate.” (Credit to J.P. Morgan, possibly, for that bon mot.) and to the second, “It is probably correctly priced.”
This doesn’t mean that there is nothing that can be done to try to increase our client’s odds of success, but rather than the futile exercise of stock picking, here are the main things we focus on:
Risk Management. There are two aspects to this. First, the portfolio should be positioned so that the amount of risk is not greater than the client can bear. In a bad market we expect the value of risky assets (e.g., stocks) to decline by approximately half. Thus, most clients should not have all of their investments in risky assets. Second, the portfolio should be diversified among a variety of risky assets, not all of which will go up at the same time or by equivalent amounts. (Risky assets do have the unsettling tendency to all decline together however.)
Behavior Management. Keeping clients invested in an appropriate asset allocation during times of euphoria (the late 1990’s) or panic (early 2020) is probably the most important function of a good wealth manager. One of the differences between a salesperson and a quality investment manager is their willingness to go along with (or even encourage) client’s emotional investing impulses.
Even worse, some advisors are themselves not temperamentally suited to investing and get caught up in the emotion of the market. When I say behavior management is important, I don’t just mean the client’s behavior. I mean the advisor’s too.
Asset Class Opportunities. While individual securities tend to be correctly priced relative to similar securities, occasionally entire areas may be mispriced because of widespread emotion. This is one of the most difficult areas to exploit because while the mispricings are blindingly obvious in hindsight, they are almost impossible to see in real time. They also don’t exist all the time, so as an investment strategy this has low “breadth.” If a mispricing seems to be occurring, a small adjustment to a portfolio rather than a large adjustment is generally appropriate because of the level of uncertainty.
Costs. The outperformance of asset classes and active investment managers may come and go, but expenses are permanent. Controlling costs (both explicit and implicit) is crucial over time.
Factor Tilts. There is substantial evidence that some factor tilts can be advantageous. For example, value stocks are likely to outperform growth stocks over time (particularly in small companies and at current valuations).
To recap, “Is my porfolio constructed soundly to meet my long-term financial goals?” is a much more pertinent question than, “What’s the market going to do?”
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