Non-Correlated Assets in Your Portfolio Reduce Volatility and Stabilize Returns
In simplest terms, diversification means don’t put all your eggs in one basket. Diversification has and will continue to be the bedrock of solid financial planning strategy because over time, it works.
So, all you have to do is load up your portfolio with a bunch of different asset classes that don’t all go down at the same time and you’re golden right? Pour yourself a martini and forget about it! If it were only that easy…
“Investing is simple…but it’s not easy” – Warren Buffet
The concept of correlation is what we are talking about here:
“Investopedia: Correlation is computed into what is known as the correlation coefficient,which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, eitherup or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0,the movements of the securities are said to haveno correlation; they are completely random. In real life, perfectly correlated securities are rare, rather you will find securities with some degree of correlation.”
In the past, an astute investor included various holdings like real estate, precious metals & commodities and perhaps artwork to their traditional market-based holdings to hedge against the ebbs and flows of the markets. The credit markets crashed, the global banking system nearly imploded and myriad other financial traumas ensued. The credit markets were at the heart of our nearly averted financial Armageddon, Gold has become a currency and now the lines have been blurred forcing us to rethink what we have always believed to be true. Too big to fail is now a household term, the DJIA sets new all time highs on an almost daily basis and governmental intrusion changes our fundamental thought process still further.
Someone once said that if you want a new idea…read an old book.
Little known to most other than large institutional banks, hedge funds and the like is that an old idea has become new again.
In 1911 U.S. Supreme Court case of Grigsby v. Russell established a life insurance policy as private property, which may be assigned at the will of the owner. Justice Oliver Wendell Holmes noted in his opinion that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner may transfer without limitation. Wrote Holmes,
“Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.”
His opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property, such as stocks and bonds. As with these other types of property, a life insurance policy could be transferred to another person at the discretion of the policy owner.
Many of you reading this article own life insurance for the reasons one would. To assure solvency for heirs, to pay estate taxes, to assure payment of liabilities…what have you. The US Legal Reserve Life Insurance industry has a flawless track record. There has not been a single precedent of a legitimate claim ever having been failed to be paid in its history. If you believed the likes of a Northwestern Mutual or New York Life would ever welch on their bets, would you buy it?
A cottage industry of a mere $20-$30 Billion market capitalization exists that few, other than billionaires like Warren and institutional concerns, have kept to themselves…Until now! It is called the Senior Life Settlement industry. Albeit in its infancy, Bernstein research estimates that the Senior Life Settlement market is growing at a pace that it should eclipse a market cap of $160 billion by 2016.
A Senior Life Settlement is a no longer wanted, needed or affordable life insurance contract that an insured (typically 75 years of age or older) sells to a third party for more than the surrender value offered by a US insurance company but less than the face amount of the insurance policy. The new owner becomes the beneficiary of the death benefit and assumes responsibility for the payment of premiums until maturity.
The same promise you bought into when you purchased your own life insurance now exists to be purchased as an investor. This asset class has one unique characteristic unlike any other…the yield derived from owning this asset class is triggered by only one single factor…the mortality of the insured.
By including a portfolio of multiple, Senior Life Settlements in your asset allocation, you effectively avoid the gyrations of the markets, geo-political events, natural disasters and all other manners of capital risk other than human longevity. This is the last bastion of true buy & hold, non-correlated investment. Risk is avoided, cost and total projected yield are known in advance and there are no moving parts.
All other asset classes are still as important as they ever were, but now you have an option for a portion of your assets that has permanence and definition. You know in advance what is going to happen.
We revert to the conversation about non-correlation. You can effectively hedge market volatility and stabilize your overall investment yield by including this unique alternative asset class into your mix.
So what is the risk/reward relationship? Senior Life Settlements have a credit risk greater than a US Treasury Bond but less than a major banking institution issued Certificate of Deposit (CD). You can expect equity market type returns.
