Managed or Mangled Money

Managed or Mangled Money

April 20, 2017 – If you’ve had money in an actively managed large cap fund in the United States for the past five years, there’s an 88.40% chance your manager underperformed and you would have been better off in a simple, low expense S&P 500 indexed fund instead.

Would you board an airplane that only had an 11.70% chance of reaching its destination?

According to Spiva® Statistics & Reports, managers in the United States were particularly bad at coming out ahead when compared to the general market. Only in Chile were the fund managers less successful.

Remember when, nine years ago, Warren Buffett made a million-dollar bet that a simple, low cost, passively managed S&P 500 indexed fund would outperform an actively managed hedge fund? Absent something unimaginable happening over the next few months, the Berkshire Hathaway Chairman is poised to win his bet.

This report suggests Mr. Buffett knew what his odds were.

Injured Plaintiff Beware

For the past 25 years, I have helped thousands of individuals make decisions totaling hundreds of millions of dollars from $10,000 dog bite injuries to quadriplegics receiving jury verdicts and negotiated settlements totaling more than eight figures and everything in between. For most, dedicating a sizable portion of their settlement toward a structured settlement allows them and their families to move forward from their accident and live their lives with dignity and financial, if not always physical, peace of mind.

But somewhere along the way, a push from the fund management community managed to ingratiate themselves into the plaintiff bar and convinced them, the judges who approve certain settlements and plaintiffs themselves that a managed money fund (with high taxes, fees, and costs) held more promise than a structured settlement to benefit someone whose future has been compromised.

Not all settlement planners, trust attorneys and fund managers touting these managed fund options are intentionally leading their clients to a potentially more insecure future. But with data like those linked in this post, odds of a more positive outcome just don’t seem to be in their favor.

Structured settlements on the other hand, while perhaps too straightforward for some and somewhat boring by comparison, provide safety, certainty and tax advantages not easily replicated by ANY managed fund.

S&P 500 Linked Option

Fortunately for plaintiffs anticipating personal injury proceeds, the attorneys who represent them AND those with retirement accounts wondering how to best take advantage of the market upswings without the downside risk, there are annuity options available with a market component. A shield, if you will, against market loss.

Fixed Indexed Annuities are available in most states for those with savings and retirement accounts which allow them to invest their money which increases, subject to a cap, when a chosen index increases yet remains neutral when the market declines before ultimately converting it to cash flow they can never outlive.

For those anticipating personal injury settlement proceeds and the contingency fee-based attorneys who represent them, such an option exists with even more distinct tax advantages. Pacific Life introduced its Index-Linked Annuity Payment Adjustment Rider (ILAPA) for those settling injury claims three years ago and it continues to grow in popularity as the market performs well and familiarity increases. All future income is 100% tax-free to the plaintiff while any structured attorney fees are tax-deferred if established properly.

I’m sure there is contrarian data one could point to saying all this research is flawed and actively managed funds do perform better than the attached report suggest. But you know what? I’m not willing to bet too much of my own money on it given these poor odds.

If your injury settlement money or retirement savings represents everything you’re relying on for your future, common sense suggests not taking risks you can’t afford to take and you, too, would be wise to weigh your options carefully. For most, a balanced approach will yield (pun intended) the best outcome.

Image courtesy of Sira Anamwong at FreeDigitalPhotos.net

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