Downside Protection

[Mount Asclepius]

I recently was made aware of the option to obtain downside protection through my bundled home-auto-umbrella insurance agency. I'm a little skeptical, but I can't find much physician-specific info out there even on WCI. Anyone utilize downside protection or familiar with pros/cons, specifically as it relates to EM (delayed earning timeline and then potentially shorter career)? Not worth considering, reasonable at any stage, or more beneficial end of career/post-retirement?

Background: I'm aiming for FIRE with a simple focus on saving far more than I spend, as well as a traditional strategy of investing in low-fee index funds (3 fund portfolio, although slightly more aggressive allocation). Through my SDG, I maximize my pre-tax savings by reaching 401K limits and supplement with a CBP. Do the typical backdoor Roth contributions. Use my spouse's health insurance plan, which isn't a HDHP and so don't think I'm HSA eligible.

---

Members don't see this ad.

 

[PianoMedic]

I recently was made aware of the option to obtain downside protection through my bundled home-auto-umbrella insurance agency. I'm a little skeptical, but I can't find much physician-specific info out there even on WCI. Anyone utilize downside protection or familiar with pros/cons, specifically as it relates to EM (delayed earning timeline and then potentially shorter career)? Not worth considering, reasonable at any stage, or more beneficial end of career/post-retirement?

Background: I'm aiming for FIRE with a simple focus on saving far more than I spend, as well as a traditional strategy of investing in low-fee index funds (3 fund portfolio, although slightly more aggressive allocation). Through my SDG, I maximize my pre-tax savings by reaching 401K limits and supplement with a CBP. Do the typical backdoor Roth contributions. Use my spouse's health insurance plan, which isn't a HDHP and so don't think I'm HSA eligible.

I don’t think I understand what kind of downside protection this is protecting you against? Nothing specific from on this in particular from WCI, but he has mentioned multiple times in the past that insurance is almost always better for the person selling it than the person buying it. Insurance companies aren’t in business because they lose money. So they have to be charging a ton for this downside protection. If you’re worried about your stock portfolio dropping, adding in bonds, in particular long term treasury bonds, is a good hedge. Long term treasuries and intermediate term treasuries have similar negative correlations with stocks and are a “flight to safety” in downturns. Long term are just more volatile and so they have more of a pop upwards in a downturn than intermediates so you can hold less of them overall. This is somewhat contrary to what many would recommend, which would be to take all of your risk on the equity side and just hold intermediates or shorter (Paul merriman and Larry Swedroe in particular come to mind).

With your early FIRE goal, you have more need to take risk, and with a consistent income such as we have in medicine (as compared to many other professions) you have more ability to take risk. The question that leaves you with is your willingness to take risk. So that’s what you have to answer: how willing am I to continue taking what you’ve described as a higher risk allocation? It’s ok to have less risk tolerance over time and to add more bonds to balance that risk out. Just make sure your investor policy statement is followed and updated accordingly. I personally wouldn’t buy downside protection on my portfolio, as I think that means I just need more bonds if I’m considering it. But this could be on something else so the rest of this post might be moot.

Hope some of that helps.

 

[Birdstrike]

I recently was made aware of the option to obtain downside protection through my bundled home-auto-umbrella insurance agency. I'm a little skeptical, but I can't find much physician-specific info out there even on WCI. Anyone utilize downside protection or familiar with pros/cons, specifically as it relates to EM (delayed earning timeline and then potentially shorter career)? Not worth considering, reasonable at any stage, or more beneficial end of career/post-retirement?

Background: I'm aiming for FIRE with a simple focus on saving far more than I spend, as well as a traditional strategy of investing in low-fee index funds (3 fund portfolio, although slightly more aggressive allocation). Through my SDG, I maximize my pre-tax savings by reaching 401K limits and supplement with a CBP. Do the typical backdoor Roth contributions. Use my spouse's health insurance plan, which isn't a HDHP and so don't think I'm HSA eligible.

I'm not an expert in this type of insurance. However, if you're talking about an insurance product to hedge against investment losses, be aware that any time you involve an insurance middle man, you're paying them a cut of your profits, in exchange for reducing your risk. With investments, you can do that for free, either with the protection of time (if you're young and don't need the money for many years) or with a more conservative investment profile. Why pay anyone a cut of your investment procedures, to reduce the ups and downs of the market when the only thing we know about the market, with 100% certainty, is that there will be ups and downs?

 

[Mount Asclepius]

Just to clarify, I'm equally wary of any product offered by an insurance company. I'm very doubtful this is something I'd pursue. I just wanted to make sure others aren't utilizing this and that it isn't something to more fully consider.

My understanding is that it is run separately from the insurance company through a partnership with a financial advisor affiliated with one of the bigger financial services companies. No specific extra fee. They manage the investment also focusing on low-fee index funds. They use caps to offer protection against market downturns. For example, with an 80/20 cap you forfeit any return above 80%, but are given downside protection preventing any loss below 20%.

 

[Birdstrike]

I just wanted to make sure others aren't utilizing this and that it isn't something to more fully consider.

I don't know how many docs own that kind of product, but I don't. The insurance and investment company knows that over the long haul, the market goes up. So, their upside of taking your gains over 80%, greatly outweighs their downside risk of covering you below 20%. I, personally, would never consider giving that up to anyone, if my timeline was such that I didn't need the money immediately. Even if I was going to retire in a few months, I wouldn't take that deal. I'd just move my investments to something that has very little chance of dropping that much.

But I'm also the type of guy that when the market dropped 30% in a few weeks, last year, people were coming into my office in a panic, asking me if they should panic sell and if I was going to. My response was, "H to the Hell no. I'm not selling, I'm buying more because when the market drops like this, it's only going to go up, as long as you've got the time to hang in there."

What happened shortly thereafter? The market exploded upwards, almost doubling in the past year and a half. Because of the fact that I did nothing, except buy more, I've hundreds of thousands of dollars. I pray that the doc that asked me that question, didn't sell then.

For super risk averse people, with very little knowledge of investing basics maybe, that kind of product might work. Maybe. But it wouldn't for me. Do what works for you, though.

 

[Mount Asclepius]

I don't know how many docs own that kind of product, but I don't. The insurance and investment company knows that over the long haul, the market goes up. So, their upside of taking your gains over 80%, greatly outweighs their downside risk of covering you below 20%. I, personally, would never consider giving that up to anyone, if my timeline was such that I didn't need the money immediately. Even if I was going to retire in a few months, I wouldn't take that deal. I'd just move my investments to something that has very little chance of dropping that much.

But I'm also the type of guy that when the market dropped 30% in a few weeks, last year, people were coming into my office in a panic, asking me if they should panic sell and if I was going to. My response was, "H to the Hell no. I'm not selling, I'm buying more because when the market drops like this, it's only going to go up, as long as you've got the time to hang in there."

What happened shortly thereafter? The market exploded upwards, almost doubling in the past year and a half. Because of the fact that I did nothing, except buy more, I've hundreds of thousands of dollars. I pray that the doc that asked me that question, didn't sell then.

For super risk averse people, with very little knowledge of investing basics maybe, that kind of product might work. Maybe. But it wouldn't for me. Do what works for you, though.

Agree completely. Buy low, sell high (but not too early). Time in the market. My initial reaction was that these companies have crunched the data and know in the long run they come out ahead capitalizing on people's risk aversion. I feel comfortable taking on more risk at this point in time, so this automatically didn't sit right. I felt it worth it to do my due diligence and couldn't find much seemingly non-biased info out there.

 

[Birdstrike]

Agree completely. Buy low, sell high (but not too early). Time in the market. My initial reaction was that these companies have crunched the data and know in the long run they come out ahead capitalizing on people's risk aversion. I feel comfortable taking on more risk at this point in time, so this automatically didn't sit right. I felt it worth it to do my due diligence and couldn't find much seemingly non-biased info out there.

Yes, "buy low, sell high and time the market." But only if you're able to predict the future. Read anything from Warren Buffett, one of the best investors of all time, and one-time richest man in the world (until he gave away 1/3 of his fortune to charity). He'll tell you not to even bother trying. Read about Warren Buffett's bet with the hedge-funders.

 

[Vandalia]

If humans can't come anywhere close with the comparatively easy task of filling out a correct NCAA bracket, they have absolutely no chance of "timing the market."

 

[Mount Asclepius]

Yes, "buy low, sell high and time the market." But only if you're able to predict the future. Read anything from Warren Buffett, one of the best investors of all time, and one-time richest man in the world (until he gave away 1/3 of his fortune to charity). He'll tell you not to even bother trying. Read about Warren Buffett's bet with the hedge-funders.

Not sure if you misread, or are just pointing out a key point that I also agree with. Time in the market, not timing the market.

 

[Birdstrike]

Not sure if you misread, or are just pointing out a key point that I also agree with. Time in the market, not timing the market.

Misread "time in" as "timing." My bad.

 

[DoctwoB]

Not sure if you misread, or are just pointing out a key point that I also agree with. Time in the market, not timing the market.

I think he was reacting to your “buy low, sell high” which implies a degree of market timing.

In reality the WCI/Bogleheads approach is buy at regular intervals. Buy low (a bit more due to rebalancing your portfolio to desired AA). Buy high (a bit less to keep desired AA). Keep on buying until it’s time to start withdrawing, then withdraw at regular intervals in accordance with your investment plan.

 

[Mount Asclepius]

Good points. Yeah, perhaps I shouldn’t have even said that to this savvy crowd. I occasionally have similar conversations as @Birdstrike with non-physician staff who freak out about investments during downturns, and so I just get used to saying buy low, sell high. When I’m reality, it’s buy, buy, buy, until time to withdraw. Time IN the market.

I’ll take the thread as settled. Doesn’t seem like anyone has any sort of downside protection and so not worth pursuing. I reluctantly bought disability insurance back in residency and can’t wait to eventually discontinue that policy. I followed WCI’s advice and pay a small annual sum for an umbrella policy that I’m equally not convinced I need, but it does seem to offer a little more peace of mind. Finding where to draw the line with asset protection is somewhat nebulous.

 

[Birdstrike]

I reluctantly bought disability insurance back in residency and can’t wait to eventually discontinue that policy. I followed WCI’s advice and pay a small annual sum for an umbrella policy

I think these two make a lot of sense for a physician. I do have an umbrella policy and very generous disability insurance (actually two non-canceling policies).

 

[bravotwozero]

What does an umbrella policy cover in this case?

 

[Mount Asclepius]

What does an umbrella policy cover in this case?

I don’t think it specifically relates to downside protection. Just in general relates to asset protection.

My local insurance agent told me that one time a physician that he covered had their second story deck collapse with over a dozen teenagers on it resulting in several primarily orthopedic injuries. The umbrella policy ended up paying out. I don’t know what amount.

 

[thegenius]

You mean downside protection against investments? like stocks?

There is a much easier way to buy downside protection than giving it to some broker.

Just buy put options. That will give you all the downside protection you want.

I wouldn't do it unless you are a few years away from retirement.....and in that case I would just switch investments and go with some stable, dividend paying stock like Coca-Cola. But even that is immune to the occasional 15% haircut every 10 years.

 

[Mount Asclepius]

I'm still wary of put options despite a few of you talking them up. I don't have a crystal ball and prefer Warren Buffet's strategy.

"As you can see, if you have a clear crystal ball, options are the way to maximize the value of your foresight. If you don't have a clear crystal ball, options are a good way to lose your entire investment. I only made the mistake of dabbling in options once, with my very first investment as a teenager (thanks dad's friend!)—yes, I lost my entire $500. And that's a lot of money to a kid who cried when he lost a $5 bill on the way to the grocery store to buy candy." - WCI on 7 Ways to Hedge Against a Stock Market Crash

 

[thegenius]

There is nothing to be wary about with put options. You buy the right to sell stock at a price. So simple. It's the most simpliest form of insurance.

Say you have 200 shares of a stock you bought at $100/share. You want to protect yourself in case there is more than a 5% drop. So meaning you want to offload your shares if it drops below 95. You can either...

1) set a stop loss at 95 and your shares will be sold the second it drops below 95...
2) you buy 2 put options with the right to sell the stock at $95 to someone else. That might cost you 1.50 / option (i.e. 1.50 * 2 * 100 = $300).

The problem with #1 is that it gets triggered the moment it drops below $95. Intraday variance might make that happen. And you may not want that.

with #2...you can invoke that right anytime you want.


Buying a put option for insurance...you are expected to lose the $300 in the above example. Some options are quite risky...other options are not risky at all.

That's all I'm saying.

 

[DoctwoB]

As others have mentioned on this thread it is an insurance product, which by definition means that the expected return is negative (otherwise insurance would not sell the product). Given this is a less competitive market space, insurance profit margins will be higher then something like term left which means the expected return is significantly negative.

So the question becomes is the outcome something that you are willing to pay to insure against? For death, disability, malpractice, umbrella coverage, the answer is generally yes. This, however is something that you can typically self insure. Either you have enough time ahead of you that the market will recover, or if near retirement you should have enough assets to stay the course through a downturn.

 

[Birdstrike]

Also, keep in mind that even if you're at a point where you're going to retire tomorrow, you don't need all of your retirement money tomorrow. Some you'll need that first year. Some you won't need for 20 years. You can be aggressive with a portion of it, particularly the portion you won't need for 10-20 years. On the other hand, you need to be extremely conservative with the portion you need soon.

 

[Old_Mil]

What Is a Put?

I'd take this over an insurance policy to cover downside risk.

One more thing you should be considering these days is not only the downside risk to the specific investment you currently hold, but the downside risk of the currency in which you hold it in.

 

[hundreddaysoff]

As WCI says, personal finance is personal. I think you'd need to dig into the details of this deal and then run the numbers yourself to see if you benefit. Agree generally to be wary of insurance salescritters.

Good new book that AFAICT shows the right way to run the numbers ourselves: _Safe Haven_, by Mark Spitznagel. Among other things, it argues that under realistic conditions, owning bonds isn't sufficient financial protection against a serious market crash, mainly since you're losing earnings potential for several years into the future.

I am working on implementing his methods for my own financial situation right now.

 

[Mount Asclepius]

As I did my research into the concept of downside protection, it seems dollar cost averaging (DCA) also represents a ‘free,’ fairly simple method of minor downside protection for investing. It’s a strategy I’ve always utilized by spreading out contributions to monthly for my pretax 401K and taxable Vanguard accounts. Although on days like today where the market dips, I’m tempted to invest immediately afterwards. Do folks strictly follow DCA or do any of you invest more heavily when you perceive dips in the market?

 

[Mount Asclepius]

Good new book that AFAICT shows the right way to run the numbers ourselves: _Safe Haven_, by Mark Spitznagel. Among other things, it argues that under realistic conditions, owning bonds isn't sufficient financial protection against a serious market crash, mainly since you're losing earnings potential for several years into the future.

Thanks for passing along. I’m going to add it my list of financial reading.

 

[thegenius]

As I did my research into the concept of downside protection, it seems dollar cost averaging (DCA) also represents a ‘free,’ fairly simple method of minor downside protection for investing. It’s a strategy I’ve always utilized by spreading out contributions to monthly for my pretax 401K and taxable Vanguard accounts. Although on days like today where the market dips, I’m tempted to invest immediately afterwards. Do folks strictly follow DCA or do any of you invest more heavily when you perceive dips in the market?

You can do both. For instance today I wrote some put options on UWMC for premium. I chose today because it is always better to write put options on down days. I could have easily just bought the stock as well. Of course when one write puts options, you have to be willing to own the stock. I haven't traded or invested UWMC for about 9 months...but it appears it has a bottom somewhere around the 6.50 - 7.00 range. It's a real company that makes over 1-2 billion dollars profit every year.

Anyway you can DCA and occasionally buy the dips too. Market dips of 5% or more don't occur all that frequently.

Being very mechanical and DCA into stocks is probably the best way to make a stable return, but it's extremely boring. It's OK to buy the dips a few times a year. Kind of keeps you involved. And it's fun. You may not buy the stock at the lowest part of the dip, but that's not the point. That is almost impossible to do.

 

[thegenius]

Good new book that AFAICT shows the right way to run the numbers ourselves: _Safe Haven_, by Mark Spitznagel. Among other things, it argues that under realistic conditions, owning bonds isn't sufficient financial protection against a serious market crash, mainly since you're losing earnings potential for several years into the future.

Yes everything I've read suggests bonds are not good investments now, and going forward, especially if interest rate yields are very low like they are now.