When I was just a young man, I would go with my dad to visit his mom (my grandmother).  She was a very frugal, former school administrator, who lived in a duplex near our home.
 
For whatever reason, the duplex did not have air conditioning and instead she would open all the windows and doors and run an old box fans during the summer months.  I can remember getting bored with the adult conversation and I would sit in front of the fan to feel the cool breeze and hear the calming hum of the fan.

​Like many a kid, I would eventually move to the backside of the fan and marvel at how the beating of the fan blades distorted the sounds of my voice. 
 
“Hello, hello, hello,” I would say. 
 
I would marvel at the way that the fan distorted my voice into a deeper, drawn out version of the original hello.
 
The fan helped to circulate the air from one window and out another using cross ventilation.  However, I can also remember hearing thunder clouds and lightning while there and my grandmother and father would quickly work to close many windows, some 100% and some less, but they heeded the warnings.
 
Sometimes, we would be too slow to close the windows and doors or the storm would sneak up on us. When this happened, we would feverishly work as a team to close all the windows and doors to keep that rain from coming in the house. 
 
This process was a form of risk management.  If we closed the window and doors, even if not entirely, we hoped to manage the possible risk of loss from water damage if the rain was able to blow into her duplex.
 
Risk Management Today
 
Similar to the risk management my grandmother displayed before a summer rainstorm, we as prudent money managers also must perform risk management.  Like the approaching Indiana summer storm, we are really never sure how violent the storm will be, nor whether it will produce significant damage to the portfolio or not.  However, much like closing doors and windows, it is better safe than sorry, even though a majority of storms produce very little in the way of damage.
 
One of the things we do well as a firm is practice this risk management.  Our average portfolio since 2003 has captured less upside over the years, just 88% of the benchmark’s upward movement. 
 
However, the big news is the same average portfolio has only captured 72% of the benchmark’s decline in percentage terms.
 
We believe there is a time to open the windows and doors and turn the fans on high.  In money management this is a new bull market or market move after an extended correction.

There is also a time to partially shut the windows and doors, so that a light rain does not damage the portfolio.   This is where we move portfolios when we deem caution is warranted.
 
Finally, there is a time to shut all the windows and doors and if you are in Florida, to board them up, because the storm is going to be a big one and has the potential to create a lot of damage.  This is when that caution turns into a major bear market, like we had in 2007-2008.
 
History Says, Risk Management Pays
 
Unfortunately, in the highly competitive, managed market we now find ourselves, too many managers have forgotten the risk management element or portfolio management.  They will say “it doesn’t pay to manage risk, or the Fed has our backs.” 
 
You know what?  They may be right in 9 out of 10 occurrences.  However, it’s number 10 that defies the odds and creates long-term damage.  After the longest bull market in history, you have to ask yourself, is this one the one out of ten.  You know the occurrence that is different from the rest.
 
We thought we had that in March of 2020, but quick intervention by the Federal Reserve and by Congress saved the day.  Will they be able to save the day next time now that we are at even higher highs and have blown an even bigger bubble?
 
As a student of history, all we need do is go back to the market declines of the 1920s and 30s to see what can happen after a market bubble.  An investor that was fortunate enough to get out before those crashes, may have lost a little of their returns, but was quickly back to breakeven and then profits in the years that followed. 
 
The investor who rode down those markets spent the next 25 years wishing they had practiced better risk management!  Only in 1954 did they finally get back to breakeven.  Tell me that would not have fatally altered your retirement planning?
 
I am not saying we are headed for a new depression, although it is possible.  What I am saying is it only takes one “big one” to ruin everything you have saved a lifetime to grow. 
 
Think of it liking buying insurance.  Sure, there is a cost to insurance, especially if you never need it.  However, it provides peace of mind and even more if you ever need those funds.  All it takes is one!
 
So maybe my “hello, hello, hello” in the fan as a youth was really closer to the “hello McFly” from the movie Back to the Future?  A wake-up call to those who continue to cheat fate and practice no or limited risk management, while the world blows bigger and bigger financial bubbles!
 
Let us know if we can help!  We are happy to offer a free second opinion on your portfolio.
​

​As I mentioned in my previous post, when I first entered the business way back in 1995, it was quite common to look at portfolios and see a diverse set of assets including gold and silver, commodities, hedge funds and CTAs, as well as, equities and fixed income or bonds.
 
Over the past ten to fifteen years however, the amount of market intervention by Central Banks and from global governments has made such diversification almost moot.  Today, it’s much more common to see just portfolios of stocks and bonds. 
 
In fact, one of the greatest migrations we have seen is to portfolios that contain just passive index funds or ETFs.  Part of this move has been due to cost, but the rest of the story is it has just not paid over the past 10 to 15 years to be in anything but the S&P 500 index.    As the saying goes, “a rising tide lifts all boats” and the S&P 500 has been the broadest, lowest cost boat.

However, as you know, tides don’t always rise and neither do stock and bond markets.  We are already in the longest bull market on record for equities and bonds have enjoyed a thirty-year period of falling yields (rising prices) and there is just not much upside left with yields near the zero bound unless the Federal Reserve takes rates negative, which they have pledged not to do.
 
As we noted in our post called “Is This the End of the Growth Cycle?”, eventually the growth cycle becomes corrupted by greed, fiat currency devaluations and debt expansion, which then replaces fundamentals (where we are today).  As we saw in this same post, the solution is greater diversity of holdings to include precious metals, commodities, and volatility traders.
 
Sounds simple enough but hold on there Kemosabe!  It is not that easy!
 
As we are seeing now, we may have continued Central Bank or Congressional intervention, which may prop markets up for periods of time.  We have rolling bouts of deflation, with inflation in some areas.  Eventually deflation may give way to inflation.  This is a process, and it is fluid!
 
Enter the active manager, no longer the goat of the past 15 years, this guy may add a great deal of value going forward.  By goat I do not mean the Tom Brady type of goat (Greatest of All Time).  I mean the type that eats your schoolwork or craps on your floor if you bring it in from the field.  The bad type!
 
In our opinion, the days of buying and holding the S&P 500 Index are drawing to a close.  This doesn’t mean low-cost index funds do not make sense.  It just means that days of buying and holding through thick or thin are probably drawing to a close.
 
Volatility is on the rise, and it has remained elevated as you can see here from this weekly graph of the VIX or volatility index.  This means more heart burn generally and much less stability in stock and bond prices.

​With volatility elevated, this is the time that active management shines.  The active manager is first and foremost a risk manager.  He presses the gas petal when conditions are right.  He stomps on the brake petal when conditions change.  He may even raise his foot some and take some pressure off the gas petal in our proverbial car when conditions are starting to look dicey.
 
History also shows that outperformance tends to be cyclical.  With the latest period of passive outperformance, here in large capitalization stocks, now approaching a decade, it may be time to assume this equation will flip again.

 We believe the perfect portfolio solution is a mix of the passive buy and hold and the actively managed.  We call this mixture a multi-disciplined portfolio.

Here you can see those expected results when comparing the SG CTA trend follower sub-index with the S&P 500 index and then a 50%/50% multi-disciplinary portfolio for both indexes.

Notice how returns were better and volatility risk (standard deviation) was lowered in the process.
 
This is obviously a simplified model and depending on your portfolio size and your financial goals, this portfolio may include active investment strategies like several we run, passive buy and hold portfolios (which we also run), hedge funds, commodity trend followers (many times known as CTAs), precious metals, bitcoin and more.  Since very few of us have a crystal ball, let alone one that works, the portfolio diversity is increased to handle an environment that is more fluid and volatile.
 
Let us know if this is something, we can explore for you?

​There are a lot of misconceptions about insurance.  Some people feel naked without it.  Some would rather have a root canal than think about it.  However, everyone I think would agree that in today's society it is a necessary tool in the financial tool kit.

This month, I would like to present an interview I did with Corey Konsulis, Personal Risk Advisor for USI Insurance Services on the misconceptions many have about insurance.

​Corey, tell me a little bit about your background.

I grew up in Buffalo, New York and moved to Florida just as I was finishing up High School.  I stayed here through College, met my wife, and started my career in the insurance industry. For the past 4 years, I worked with a small independent firm based out of Tampa. I recently made the transition to the brokerage side of the business and work primarily with highly successful families, individuals and family offices. I provide risk management and insurance programs to ensure that their most valuable assets are protected, peace of mind secured, and potential exposures mitigated.

What do you enjoy most about your work within the insurance industry?

I’m an educator at heart and the most rewarding aspect of what I do is getting to educate clients and professionals about the exposures that are affecting them and their families. I also enjoy solving problems and the complexity that exists within the family office space is rewarding as well. We can get very creative in our programs for family offices and no two are alike. That’s energizing for me!

​What would you say are some common misconceptions about insurance programs in general?

I hear this all the time, “I’m not in a flood zone so I don’t need flood insurance.” That is wildly inaccurate. If you live in Florida, you have flood exposure. Although the bank might tell you that you don’t “need” flood insurance, the reality is, all of Florida is a big swamp and with the rise of urban sprawl, the water must go somewhere.

I met with a client last summer, who identified that they didn’t have flood insurance on their primary residence. We placed a policy (very inexpensive), and during Hurricane Irma they experienced severe flood damage. Because we had taken the steps to secure the proper coverage – even though they were told they didn’t need it – they were saved from a $150,000 out of pocket loss.

You know Corey, this is very interesting.  I myself just visited with a new client in Louisiana who is still recovering from what they call "a thousand year" flood.  They spent twelve months out of their home and have totally rebuilt everything in their home from the roof line down.   Fortunately, they had flood insurance.  Many others in their own family and their neighborhood were not so lucky and are instead trying to reestablish their lives without any kind of financial help.  It is sad to see!

What is another misconception you see frequently?

Another I hear constantly is, “My homeowners policy will cover my valuable jewelry.” Most homeowners policies provide $2,500 in coverage for jewelry, does not cover mysterious disappearance, and is subject to a deductible.

Most households need a separate valuable articles policy to ensure they have worldwide coverage for their important and valuable pieces. We have highly creative ways of structuring these programs to ensure robust and comprehensive protection.

What would you say are some common misconceptions for family offices or the ultra-wealthy?

The list is extensive for these folks. Many assume their excess liability program extends to Board positions they hold for profit or non-profit companies. Unless specifically structured to extend coverage for this exposure, there is no coverage built in to a standard excess liability program.

Many also wrongly assume that their homeowners policy will provide coverage for domestic staff on the property in the event an employee is injured or if a lawsuit is filed against them (homeowner). Separate extensions are required for this sort of exposure and programs like Employee Practices Liability and Workers Compensation are highly recommended. Without these, there is no coverage.

One of the biggest misconceptions has to do with communication. Many assume their Certified Public Accountant, Estate Planning Attorney, Financial Adviser, and Insurance Broker are all communicating with each other. That is very rarely the case. Due to the lack of strategic planning among these professionals, many clients remain exposed and unaware they are at risk.

I’m shocked by this and always push for a consultative approach to risk management that includes all of the professionals associated with the client to ensure that we have left no stone unturned. We’re only as good as the people we surround ourselves with.

Is there any advice you would leave my readers with?

Be proactive rather than reactive when it comes to your risk management and insurance program. Don’t wait for something tragic to happen to find out that your insurance program was not structured properly. Vet your Insurance Broker and work with someone who has experience with clients like yourself and a team of people to be able to provide robust and ongoing support over the years.

Our lives are never static and the same should be said about our insurance and risk management programs. They need to grow and adapt just as we do. Is your current program providing this? Does your current broker have conversations like this with you? Maybe it’s time for a change.

Thanks for your time and thoughts Corey.  

The best way to work with Corey is through your advisor, like InTrust Advisors, but if you would like to contact him directly, here is how:

As we have discussed on this blog before, the need for long-term care is substantial and growing in this country, especially as we continue to age as a population.  

​Here in my opinion is one of the most startling statistics related to long-term care:

So roughly a 50/50 chance that you will at least spend some time in a assisted care facility!  Not bad odds.

Apply that to a couple and the odds that one or both will need assisted care help become much closer to 70% for those over age 65 according to the Centers for Medicare and Medicaid Services (2015 Medicare & You).

That would not be so bad except for one thing:  Medicare does not pay for long-term care services as explained by the Social Security Administration: “Social Security pays retirement, disability, family and survivors benefits. Medicare, a separate program run by the Centers for Medicare & Medicaid Services, helps pay for inpatient hospital care, nursing care, doctors’ fees, drugs, and other medical services and supplies to people age 65 and older, as well as to people who have been receiving Social Security disability benefits for two years or more. Medicare does not pay for long-term care, so you may want to consider options for private insurance (emphasis added).”

​So how much does long-term care cost?  Well that depends on the city or state you live in and the amount of such care needed.  

The Centers for Disease Control and Prevention, Nursing Home Care FastStats - May 2014 stated that the average length of a nursing home stay is 835 days—or more than two years.   Obviously that is an average meaning some will have much longer stays and some will have no stay at all.

That same FastStats report stated that a median daily rate for such care was $240 nationally.  So for an average nursing home stay of 835 days that means current costs are over $200,000. (By comparison, the average hotel room is just $121/day!)

​So this is no small cost and it is quite frankly not affordable for many Americans!

The Federal Long-Term Care Insurance Program has a great website and based on my city using their Cost of Care Tool, here is what such care could cost in Tampa, excluding any inflation increases:

Again no small cost for the average American!

So the obvious question for most families is can I self fund or self insure this possible liability?

The answer is common sense as this really is a means test. It will be much simpler for a multi-millionaire than a retired government employee living on a fixed pension and/or social security to afford to self insure this potential liability.

The Federal Long-Term Care Insurance Program site gives us a tool to look at these costs in relationship to our savings, called the "Self Funding Tool?"

As an example, if you are 76 years old already and at least partially living on savings, look what such costs can do to your retirement nest egg if just one spouse needs long-term care at age 78, assuming they live in Tampa and are no longer adding to their savings. 

Wow that is pretty big hit!  Over one-half the nest egg disappears over that period of care.

What happens if you are lucky enough to be a bit younger and save $200 per month but otherwise have the same assumptions?

So you can see that with inflation rising at about the same rate as investment returns in this scenario, the cost of long-term care really takes a bit out this couple's retirement nest egg.

Finally, let's take a look at the rather obvious conclusion of adjusting the above assumptions for a greater starting nest egg of $1.0 million.

As you probably guessed, this is still a large cost, but it does not have nearly the impact on this couple's retirement depending of course on their lifestyle in retirement.

So what is the answer?

As you have probably guessed, if you are approaching your mid 50s or early 60s and you are not a millionaire today, you need to think about long-term care insurance.  This cost is just to great ignore otherwise.

There are lots of long-term care options today including tying such potential care liabilities to a hybrid life or annuity policy whereby, should you not need such care, your heirs will benefit from a larger life insurance payout or you may benefit from more annuity dollars in your retirement.

Let us know if we can help you figure this out.