Bulls, Bears and Claimants
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Ok, here we go again: big news from Wall Street. The Dow Jones Industrial Average plummeted earlier this month and is still falling. Wow, that sounds frightening but what really happened and what does it mean to you, me, and the claimants we are dealing with? Perspective…perspective…
The best that I have been able to find out is that a “perfect storm” of bad news coming out of China triggered a tumultuous market sell-off. At the center of the storm was China's benchmark index tumbling by 8.8 percent due to concerns that the Beijing government was looking to crackdown on market speculation that has driven Chinese stocks to record highs. Making matters worse for investors, former Federal Reserve Chairman Alan Greenspan said at a speech in Hong Kong that the U.S. economy might slip into a recession by the end of the year. These coupled with some other negative events caused the worst market sell off in five years.
The meaning of downturns on the stock market and how these events affect us are directly related to how much of your hard-earned money you have “at risk” (invested) in the stock market and when you need that money back. In this day and age, most everyone has some money invested in a 401(k). As this money is slated for retirement and will not be used to cover immediate financial needs, short term market fluctuations are of little consequence, so rest easy: your retirement plans are not in shambles. However, if you rely on the returns your portfolio generates in the financial markets for your everyday care and maintenance you may indeed have a problem.
It’s an alignment issue: the key is to be sure you have matched your investment choices to your actual needs. Depending on volatile markets to meet necessary immediate expenses like food, shelter, and health care is an inherently dangerous game. Even if you had the best market research and chose only the most stable companies to invest in or if you invest solely in broad index funds you still took a hit last week. You might think that Microsoft’s stock price would be more related to the release of its new operating system Vista rather than to speeches made in Hong Kong, but daily market results are the playground of traders and speculators; Microsoft’s stock price fell along with all the rest. So how to forge a financial strategy that depends on one company’s stock price to keep you living in the manner to which you have become accustomed? The simple answer is you can’t.
This daily volatility is probably best left to the bulls and the bears; for your necessary expenses, most people should just stay out of it. When your mortgage payment is in the balance, do you play the long shot or the sure thing? Personally, I’ll take the sure thing every time. Sure the guy that hit the long shot has some extra cash to throw around this month but what about next month or next year? I have seen more claimants than I care to remember blindly dismiss the benefits a tax-free guaranteed structured settlement for the lure of higher returns potentially available through more risky investments.
Last summer, a client called me into a case involving a severely impaired infant. We presented the family with several structured settlement plans specifically designed to fund the treatment called for in the child’s own life care plan. Among other impairments, this little girl was blind and will have extensive educational costs and lifetime medical needs. Through luck of circumstance, the settlement offer provided enough money to fund every single item of care detailed in the plan. But the plan was rejected outright by her family who became enamored with the idea of potential higher returns through more exotic investments. They structured zero funds for this minor child. I wonder what they think of that decision today?
Conversely, I was involved in a case last November where a claimant agreed to a settlement package that provides $ 5,000 per month for life, not less than 15 years certain beginning January 5, 2007. This claimant was a highly intelligent and rather sophisticated individual who requested the specific internal rate of return of the plan. They took the 6% actual rate of return and then calculated what the taxable equivalent yield would have had to be to match it (8.7%). While higher returns might be possible through other investments, they correctly deduced that they would have to take on a considerable amount of added risk to do it. Given that these funds represented lost wages upon which they had to live, they were in no mood to take on such risks with these funds. So, in the same week the Chinese markets gave our markets fits, I am happy to report that this claimant received their full $5,000 on March 5th, just as they will the fifth day of every month, for as long as they live. Electing to fund immediate expenses with volatile long term investments is a bet that few claimant investors will win.
Of these two claimants, which would you have preferred to be the day that market drop news broke? I can just see the one family lunging for the cell phone to call their stockbroker, while I envision the other casually flipping to the Weather Channel. By taking the prudent course, he could rest easy in the knowledge that he is never more than 30 days away from another guaranteed, tax-free $ 5,000 payment.
Are you handling a case involving claimants who could use bedrock financial security enhanced by an utterly unique federal and state tax exclusion? Call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.
