Stocks, Stocks or Stocks…What’ll It Be?

“It ain’t what you don’t know that gets you into trouble.

It’s what you know for sure that just ain’t so.” – Mark Twain

Stocks are the only game in town, right?  For all the reasons you already know, many of the traditional security options investors relied upon in the past to diversify their portfolios away from equities are just not useful right now. 

Interest rates are too low to keep up with ultra-low inflation, so bonds are a tough sell.  Real estate is bound to reprice given the general disruption to business.  I mean, who knows what fallout will come from the Covid Crisis, protests, record unemployment, oil price collapse, China, the election, demand destruction, supply disruptions, economic stimulus…and on and on?  In a word, uncertainty.

These are the things that make markets great…and terrible at the same time.  The wildest wild card however is the investor.  The market is said to perfectly price a security at any given time because every investor’s gut feeling is baked into the price an investor is willing to pay or take for a position.  The rational, the irrational, the panicked and the capitulant thought processes of trillions of dollars in real time make for a very volatile ride.  Isn’t it ironic that the thing you hate about investing is the same thing that creates the reward…risk.

Equity investing is a zero-sum game.  For every winner there is a loser.  There are good times and bad to buy and sell.  And for sure, a lot of the price action on the rumors and the news just acts counter-intuitively.  I genuinely love the stock market.  I really do.  I believe it is an absolutely necessary mechanism to build long-term wealth and continue to ensure the proliferation of free market capitalism.  But being all-in stocks is sort of a teeter-totter for one.  It takes a lot of effort to rise, you land real hard and generally lack balance.  Of course, I’m talking about diversification.  I’m talking about differentiation.  I’m talking about risk management.  I’m talking about playing to win and playing not to lose at the same time.

In the space vacated by the fixed-income segment, an alternative asset class has emerged that can anchor a portion of your portfolio from the volatility storm to protect principal and grow capital safely. 

The Senior Life Settlement Asset Class works in an entirely different way than a market does.  Much of the value is in the mechanics.  A Senior Life Settlement Investment is a Passive, Buy and Hold Strategy that eliminates Downside Capture because it’s a non-managed, non-volatile, non-correlated asset.  From a high-level view, life settlements work as an effective Hedging Mechanism and a sound Risk-Adjusted capital growth strategy when contra-positioned against other risk assets.

Broker-Dealers and Registered Investment Advisors won’t tell you about this for two reasons:  1). They can’t sell it to you, and 2). They can’t sell it to you.  The advisor is restricted from selling any security the firm doesn’t support. 

Life settlements are problematic for the big box firms because they lack standardization.  There is no generally accepted valuation method, liquidity is limited and Senior Life Settlements are primarily transacted in the private capital markets.  Family offices and institutional investors feast at the life settlement trough while most retail investors are left unaware that this utilitarian asset class exists.

Caveat Emptor.  Some of the most fabled Wall Street firms are casting a net into the alternative space with their own market made solutions to risk management but in a lot of cases, it’s just a repackage job of the same old thing.  Here is a disclaimer from one of the Goliath investment banks offering their clients a solution to manage volatility and risk:

Hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; can be highly illiquid; are not required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; and often charge high fees.  Further, any number of conflicts of interest may exist in the context of the management and/or operation of any hedge fund.  While investments in private equity funds provide potential for attractive returns, access to opportunities not available in the public markets and diversification, they also present significant risks including illiquidity, long-term time horizons, loss of capital and significant execution and operating risks that are not typically present in public equity markets.  Private equity funds typically have a 10 to 15-year term and will begin to monetize investments after holding them for 4 to 5 years.

At the end of the day, they’re still trying to manage volatility risk by using volatile assets, complicated structures, active management, etc.  A life settlement is simply a contract wherein the investor is a counter party.  The contract’s execution hinges on only one triggering event…the mortality of the insured.   The primary risk is time.  Life settlements, by their nature, hedge investment risk.  The value of the investment is the spread between the acquisition cost and the face amount of the insurance policy.  It’s literally Anti-Volatile.

To further illustrate the point we recommend watching the short video, “It’s Not About The Nail” (https://www.youtube.com/watch?v=-4EDhdAHrOg).  Take a sec and watch the video…It’s hilarious.  But when you’re done laughing, stop and take stock (pun intended) in the subtext of the message.  We only see what we want and are pre-conditioned to see…perception is reality.

Like the poor woman in the video, many investors are walking around with a nail in their head and simply believe they have no choice or access to new ideas to deploy in the new economy.  Help your clients to live without the pain of doing the same old thing over and over again hoping it turns out differently this time.

This is what it sometimes looks like on the distribution-end for a group of life settlement investors where a policy recently matured from a portfolio investment.  This is a real case by the way:

 

Face Amount $1,000,000
Sex & AgeMale 78
Settlement DateMay 29, 2014
Maturity DateApril 29, 2020
Median LE65 Months
LE + 289 Months
Holding Period-to-Maturity71 Months
Acquisition Cost$ 596,552
Yield-to-Maturity $$ 403,408
Yield-to-Maturity %67.63%
5-Year Total Return S&P 500       43.08%*
5-Year Total Return DJIA40.39%*
* Google Finance June 11, 2020

Now will life settlements always outperform the broader equity indexes…most likely not.  Life settlements are an alternative fixed income play.  It’s never been asserted that life settlements should be compared to equities.  But in connection with a portfolio of equities and other risk assets, life settlements perform in a predictable way to mitigate principal risk and enhance overall returns.  In turbulent times like these or soaring markets, that’s not so bad. 

Senior Life Settlements are a great value story your clients want and need to hear. Call West Coast Settlements at (657) 254-4300 or send an email to info@westcoastsettlements.com to learn more and to find out how Life Settlements provide a stable investment alternative to clients who are leery of today’s stock market.