Seemingly every recent business or trade publication has an article entitled “[fill in the blank] in the time of COVID.” We are truly in troubled and frightening times, full of uncertainty. The financial markets reflect that uncertainty. They have fallen precipitously, spiked up, then down again and up again with nearly every headline.
In a recent New York Times business article, “The Market Partied Like It was 1932,” columnist Jeff Sommer stated that “Equities have seldom moved as sharply down and then up, from quarter to quarter, as they have this year. Calling the stock market a ‘roller coaster’ is a cliché.” Yet, in times of uncertainty, markets see-saw, mostly downward. Many skilled investors can avoid the adverse effects of such volatility by allocating their assets among risk categories.
But most injury victims cannot. Market volatility is the hobgoblin of the financially vulnerable, especially those with ongoing, day-to-day life care and medical needs. They cannot tolerate any risk to critical settlement funding for their injuries. Markets fluctuate by their nature, and that is an everyday risk – not just “in the time of COVID.” Market volatility is simply a constant, no matter the level of crisis.
But why is volatility a risk, say to any investor? Consider this hypothetical: An individual invests $1 million, and the market then immediately drops 10%. But, over time, the market rebounds 10%. The investor still has his $1 million, right? NO. He only has $990,000. Do the math. If the markets dropped 20% in one quarter, then rose 20% the next as it has this year, the investor only has $960,000.
For injury victims, the risk is even worse because they have monthly expenses to cover ongoing life care and medical needs. They are not the typical “buy-and-hold” investor.
CASH VERSUS STRUCTURED SETTLEMENT
An example from one of my recent cases: A 35-year-old paraplegic settles her personal injury claim for $4 million (net of attorneys’ fees, expenses and liens). She has monthly expenses of $10,000 for ongoing life care needs (rent, utilities, food, etc.), but also critical medical needs. These expenses do not fluctuate with the markets. If anything, they are likely to increase over time. The structured settlement plan we proposed would pay her $14,450.00 a month, and those payments were guaranteed to be made for the rest of her life (with other guarantees if she passed away prematurely). She would have had an extra $3,000-4,000 each month to spend, save or invest.
Her attorney strongly recommended this plan. But she opted to take all cash and manage it using a trusted financial advisor. That was in mid-January 2020. Over the next 60 days, she lost an estimated 20%. She also had those $10,000 in monthly expenses. My calculations are that on April 1, 2020, she would only have $3,178,000 (20% of $4 million less $20,000 in monthly expenses for February and March). If her investment account rebounds 20% return in the second quarter, which is extremely unusual, she will still only have $3,816,000 after 6 months. A steep downturn in the markets usually takes many months and years from which to recover. That too is the constant.
And therein lies the risk that market volatility presents to the injury victim taking all cash at settlement. Claimants like this have a lifetime of needs, and their settlement proceeds must be able to take care of them for a lifetime. A structured settlement can provide that guarantee and eliminate both the mortality and the investment risk associated with trusts and other investment accounts.
So, despite the chaos around them, structure settlement recipients can rest comfortably in the knowledge that their scheduled periodic payments will be, and are, being paid on time, as they always have, no matter what is otherwise happening in the world and in the financial markets. They are not concerned about market volatility nor uncertainty. They (and their attorneys) are sleeping easy.