May 2009
It was almost one year ago when the mortgage meltdown came to roost in my head, and it’s been there ever since. Like many in my industry, I had been watching mortgage foreclosures mount since the fall of 2007. However; I didn’t fully comprehend the OTHER side of the equation, the Collateralized Debt Obligations (CDO’s), the Collateralized Mortgage Obligations (CMO’s), and their credit derivatives that nearly destroyed our financial system in September of last year.
It finally registered when I realized I KNEW people holding these toxic and complex investment instruments. Smart , conservative , and successful investors , banks , and investment firms I knew had bought AAA ‐ rated insured debt instruments with unusually high interest ‐ rate returns . By the spring and summer of 2008 , their supposedly safe high return investments had nearly evaporated into thin air. We ALL know too well the repercussions of this historic write‐down.
There are many lessons. Human Nature being what it is, mistakes will continue to be made. Our old enemies, Fear and Greed, are still alive and kicking , and the financial service s industry continues to provide refuge for our destructive emotions.
Where? That’s the tough question. Many investors have reacted to the current market environment by moving to index annuities with guaranteed minimum returns. The opportunity to have your cake (guaranteed basis) and eat it too (near stock market returns) is enticing to say the least . But like AAA-rated insured CDO’s, if the insurance company is unable to meet their obligations, you could lose some or nearly all of your investment.
In some circles, Life Settlements are creating quite a buzz. A life settlement is the pooling of life insurance policies bought from the original owners. The investor receives a return when the insured dies. The returns can be impressive, but the same supply and demand cravings that devoured the mortgage industry could someday send the life settlement industry into a tailspin .
The bottom line is we should remain watchful (see title). The most cost effective and efficient method of risk management for long term investing (five years or more) is proper allocation among asset classes. This method of investing provides you with your fair share of return commensurate with the risk you are willing to take. Failure to recognize risk as an inevitable part of life can lead to poor investment decisions with surprising outcomes. Risk is everywhere so we must learn to accept, face, and manage it as best we can .
If you have any questions or comments, feel free to email me or call .
Take care,
Rob Schulz, CFP®
