In the Wednesday, March 26th Wall Street Journal the front page story entitled " Stocks Tarnished by "Lost Decade" jumped out at me and hopefully a lot of other settlement advisors and planners who are constantly confronted by the argument that stocks ALWAYS out perform fixed rate investments over time.
As someone who has always advocated that people have a balanced approach to planning their settlements assets or awards I'm familiar with the long term average yields of most major stock indexes and that depending on the measuring period that stocks averaged between 8.5% and 11.3% annually according to the studies. These numbers are often used when people compare the yields of structured settlement annuity contracts, typically between 4.5% and 7% depending on the duration, medical underwriting and interest rate environments during which they are purchased, vs equity or real estate investments. The argument always centers around the fact that structures are some how inferior to real estate and stocks and that people would be foolish to allocate to a stodgy, fixed yield annuity like a structured settlements.
Well, as this story points out, long term averages are just that, long term, and that over short terms or even over a decade of time you can have negative yields on equities. How many of us in the planning business are really aware that from April 1999 to April of 2008 that the S&P 500 has in fact only risen 1.3% per year over that ten year stretch? Factor in that the average mutual fund or equity manager is taking at least 1% to 1.5% out each year in fees an you have a decade long run where most clients who indexed funds are probably under water or breaking even. How good do the structured settlement yields, which oh by the way are income tax free and come with ZERO annual management fees look at 5% to 7% over the last ten years compared to the stellar yields of stocks during this run?
Now lets take a look at the real estate boom and bust that is occurring nationally over the last two years. Just as with stocks, the conventional and academic wisdom is that nobody ever went broke owning quality real estate over the long term, which I must say is a sentiment that I share. However, we again are talking about settlement planning here and people who don't have their old income, earning capacity or health to purchase, service, maintain and hold on to real estate for the long term in almost every case. I can't tell you the number of cases that I personally knew that cashed out in the last five years when every advisor talking to a settlement recipient would have some hot real estate deal for them to invest their money in. It got so bad that it prompted me to write my now famous market call on real estate about three years ago, ( link available by clicking here to see the post) in which I begged attorneys and advisors to stop cashing out structures or taking all cash settlements with the intention of putting people in real estate.
Again, yesterdays Wall Street Journal outlined markets all over the U.S. that are down between 25% and 50% in value as mortgage funds dry up and the financial system copes with the new limited ability to mortgage and purchase real estate. As some one who has seen this before i'm going to predict that we aren't even half way into this real estate collapse and that we probably are going to see on a national basis at least another full year of price declines before we even hit bottom. Then we can count on several years of treading water as inventory and wreckage of this decline is absorbed and sorted out before we see increases in the value of real estate. The net effect on many settlement recipients over the next few years is going to be dire as their mortgages will be under water, they won't have the income to service them and they don't have the other assets necessary to hang on long enough to get out of the cycle. Once again, how good would those clients, and their advisors, look if they had funded their settlements with structured annuities at 4.5% to 7% instead of losing up to a third of their asset value in real estate.
My point in this commentary is this; " The settlement industry needs to get off the defensive and go on the offensive when it comes to comparing the ACTUAL returns of our product compared to stocks, bonds and real estate over the last 10 years." As John Maynard Keynes once said, when asked about long term results or predictions, " In the long run, we are all dead." In other words, long term results going forward may prove a particular asset class or course of action right, but it may take so long to occur that we are "dead" by the time we are proven right. While real estate and equities remain a valuable component of any balanced financial plan, there is little doubt that over the last ten years that those who bucked the conventional wisdom of plowing client money into stocks and real estate and instead allocated funds to their structures are looking pretty good right about now. I predict they will continue to look good in the future as well.
Arm yourselves with the facts about your product and be ready to prove to a trial lawyer, their client and the other advisors that what we offer is in almost every case superior to alternative investments given the unique situations our clients face.