How to Lose
50%
in a Single Day
Financial advisors worry about a lot of things when it comes to managing money and providing top notch client service. A significant amount of time is spent researching investments and allocating assets for maximizing performance. Nothing is more disheartening than having an advisor do a good job investing and increasing your net worth only to lose 50% of your portfolio in a single day. The greatest single day decline (as measured by the Dow Jones 30 Industrials Average) A fourth event is the untimely death of a key person, was October 19, 1987 when the market lost 22.68%. So, I am not privately-held, business owner with a limited amount of liquid referring to investment performance. I am referring to events assets. The value of the business may likely be reduced which arise unexpectedly and devastate one’s net worth dramatically with the loss of a key person. In addition, it may despite intelligent investing and pro-active planning. be necessary to sell the business at a less than optimal time The first event which comes to mind is divorce. Today, in order to create the liquidity necessary to pay the estate tax over 50% of all marriages in the U.S. end in divorce. Property liability which is due nine (9) months after the owner’s death. settlements are likely to divide the assets between spouses in Finally, owning life insurance policies individually rather than approximately equal parts. This may lead to losing one-half or owning them through an Irrevocable Life Insurance Trust may more of your pre-divorce assets. Even worse may be neglecting lead to the inclusion of life insurance death benefit proceeds to change an ex-spouse beneficiary on a qualified plan, IRA in the decedent’s estate. By the insured giving up the incidents or life insurance policy. The assets may end up going to an of ownership, the life insurance death benefit may be excluded unintended recipient leaving a current spouse or child with from a decedent’s taxable estate and therefore not be subject fewer assets than anticipated. to estate tax. This is accomplished by having an Irrevocable A second event is dying without a formal estate plan to Life Insurance Trust (“ILIT”) own the policy. There is a three year properly utilize the decedent’s estate tax exemption. The loss ‘look-back’ period in which a transferred life insurance policy of the exemption may result in tax dollars (current maximum death benefit may be included in the decedent’s estate should federal estate tax rate is 45%) being paid to the government a death occur. Newly issued policies owned by the ILIT do not unnecessarily. Every person has an estate tax exemption run the risk of having the death benefit returned to the taxable amount of $5.25 million in 2013. A surviving spouse has the estate. Investors have found consistentlyproper beat market ability to utilize the exemption of a deceased spouse by that filingmany portfolio Wemanagers have seenclaim how to relationships, estateaverages planningand indices.even Realistically, though, half of all managers outperform “the market” over any time an estate tax return with a proper election if no estate tax only and effective use or could ownership of life insurance may help lead period or remain above average. And, that performance may not speak to the real performance is due (portability). There may be a significant long-term benefit to the protection and retention of assets. Some events, like of these managers. Subtract thedivorce fees and shouldn’t a have shocklimited that more managers under to working with a qualified estate planning attorney to formalize are itnot plannedbe and means of protection. perform themaximize averagethe than outperform. While many investors beginning to realize the flaws your estate planning wishes in writing. This will However, many events may beare planned for with very adequate associated with certain or investment strategies, has been a migration opportunity for those wishes to be carried out despite the productsmeans of protecting againstthere a negative outcome. Similartowards indexing. That may not be a much better solution. Indices were not immune to the inevitable estate tax law changes which will undoubtedly occur. means may be used but every situation is unique market’s and mustrapid descent in 2008-09, and be positioned against the for severe declines A third event with even greater potential devastation is they maybenot analyzed to strivewell to minimize thepotential risk of losing fifty percent in thechildren future. Inand fact,failing I believe that relying indices virtually dying intestate (without a will) with minor (50%) ofinyour portfolio in aguarantees single day.participation in the market’s volatility and potentially minimizes the chance of asset protection. to leave instructions for guardianship. In many states, children Capital preservation is more important than ever as millions of Baby Boomers approach are entitled to one-half the property of a deceased parent after Statistics show that millions of American’s approaching retirement doopinions not havestated enough providing a statutory amount for theretirement. surviving spouse. Without This article was written by Marc Schliefer. The saved. some the places these soon be retirees arenot being told to expose themselves a valid will, a guardian appointed bymoney the court mayIncontrol in here aretoMarc’s and are necessarily that of the broker/ to more riskcontrol with the potential danger of losing their irreplaceable capital. This of type of Eric advice can assets of a minor child. In addition to losing of one-half dealer. The opinions do not represent those John Home. be dangerous. Instead of being in an index shell, investors should be seeking out managers with the assets of the deceased spouse, a surviving parent will be The article is not intended to serve as investment advice or a a sound tactical investment that can provide that aresecurity. designed to offer an required to petition the court to spend or invest assets and may strategy recommendation to buystrategies or sell a specific of risk likely have little say in how the fundsappropriate are spent orlevel invested onand upside potential based on your risk tolerance and the future you envision. Unless you have a very long investment horizon, losing a significant amount of your behalf of their own children. portfolio in a downturn shouldn’t be an acceptable possibility. Especially when you consider the fact that, for a one-year loss of 40%, it takes nearly 5 years of 11% returns to just get back to where you started.
John Eric Home 95