Homeowner’s Insurance: Covering Your Asset

Here in Charleston, the height of hurricane season is approaching and the weather reports around the country at times seem dire. Disasters, natural and otherwise, are vividly portrayed on the nightly news or in many of the entertaining insurance company commercials. Do we consider what would happen if we were the ones looking at the tree down on the roof or water pouring out our front door? Most people only think about their homeowner’s insurance policy when selling or buying a property. Even then, it is usually just a “to do” item to satisfy the lender or something to handle before the closing. There are many features in a policy that need careful consideration and it is good to understand the many options.

For example, you might be surprised to learn that opting for coverage at your home’s appraised value may, in some cases, leave you underinsured. Standard homeowner insurance policies use industry estimates to set their replacement coverage for rebuilding, replacing or repairing insured items. The cost to restore historic homes or homes with high-end customization or upgraded features may exceed what these standard policies will allow. As an article in the Wall Street Journal noted, “the cost of construction could be two, four or sometimes even 10 times the market value of the home”. Especially after a natural disaster when the price for materials and labor can skyrocket from the demand. Many insurance carriers, particularly those that specialize in high-value properties, will offer additional coverage above the industry standards for replacement costs. A knowledgeable agent can find the right amount of coverage for your property.

Also, you may have some very valuable items in your home that are worth much more than the replacement value. There are riders for particular high-value items like jewelry or art that you can insure for a specified value for replacement if lost, stolen or damaged. Usually the premium for the replacement of these valuables is well worth the cost and will allow them to be separately scheduled from the replacement coverage of your home.

In some cases, you may find you can save money by reducing your coverage, for example, on personal property or liability, especially if you already have a valuables rider or umbrella policy in place. You can also save on premiums by increasing your deductibles or self-insuring for some of the extras that a policy might cover. Installing security systems or safety features like storm shutters or sprinkler systems may qualify for discounts, as well. Be sure to let your agent know about any features like these or about any additional policies you have so you don’t duplicate coverage.

Some other things to consider:

  • There may be options in policies that offer coverages for lodging or other expenses in the event you must vacate your home during repairs.
  • Homeowners insurance does not cover damage caused by flooding, tsunamis, earthquakes or even some acts of war, like terrorism. Separate riders or policies may be needed if your property is at risk.
  • Many policies don’t cover for mold damage, sewage back-up or termite infestation. You can generally purchase additional coverage to protect against these or you may choose to self-insure.
  • Homeowners should note the liability coverage in their policy and make sure it is adequate to protect them or their guests. Additional umbrella policies can be used to cover your total net worth for extra protection.

It is always a good idea to know the details of your homeowner insurance policy. It is also smart to catalogue, videotape, or in some way record your property and the items inside. This will help you get your full value when faced with any insurance loss. At DWM, we hope you never have to face any type of insurance claim. Although we don’t sell any insurance or endorse any particular insurance products, we are happy to help you review and evaluate your insurance needs and make sure your assets are properly covered.

WSJ: “Actively Managed or Index Funds? Why Not Both?”

passiveactiveicecreamWe agree. We’re not alone. A recent WSJ survey showed that 42% of investors own both active and passive funds, while 36% own only actively managed funds and 22% own only index/passive funds. Some investors swear by index funds and some love only active management. It really shouldn’t be an either or decision.

Use indexes/passive funds for efficient markets. As the Economist pointed out in their February 22nd issue, “The costs of actively managed funds are higher than most investors realize”. Think of it, an active fund needs to do research, make lots of trades, spend lots on marketing to “sell” their strategy and therefore, their cost of operations can be 1.50% or more. An index fund merely replicates an index and cost can be as low as .05%. Is it any wonder that 60%-80% of actively traded equity funds fail to beat their market index each year? And, 60% to 90% of actively traded fixed income funds fail as well. Why? Active management has to overcome high fees, transaction costs and tax ramifications.

Expenses matter. A 1% difference in performance over long time periods can really add up. $100,000 invested that earns 6% for 30 years grows to $574,000. At 5%, it only grows to $432,000; a 25% reduction.

We believe that traditional capital markets work and price securities fairly. Despite what the financial press and fund marketing literature suggests, study after study shows the majority of active managers underperform. So, yes, passive/index funds are superior to active funds for equity and fixed income- traditional efficient markets. But, what about non-traditional inefficient markets?

Use actively managed funds for inefficient markets. The last two decades have seen a great proliferation of investments that are not correlated to the stock market. Many are publicly traded and easily redeemable. They often follow hedge-fund like strategies designed to reduce volatility. These liquid alternatives may include arbitrage funds, global tactical allocation funds, closed-end specialty funds, MLPS, and long/short funds. Studies have shown that adding non-correlated assets to a portfolio can improve return and reduce volatility.

These actively managed alternative funds will typically have an operating expense ratio in the 1-2% range. This is understandable. They do considerable research. Their trading costs are often higher due to the use of derivatives and lots of trades. And, yes, they have marketing costs to educate and inform prospects and clients. One benchmark for these funds might be an “absolute return” of 1-6% above LIBOR.

“Use a mix of passive and active funds to bring down overall expenses and to hedge against market crosscurrents” was the conclusion of the WSJ article March 4th. Again, we agree. The bulk of a portfolio, equities and fixed income, should be in index/passive funds, with a weighted average operating expense of perhaps .35% or lower.

Passive and active funds perform differently in various market conditions. While stocks were up 30% last year, fixed income did poorly and a basket of liquid alternatives we follow had an absolute return of 4%. Then, in January, when stocks lost 3-4%, fixed income rebounded and this basket of liquid alternatives was slightly positive. In short, a nice blend of passive and active funds is designed to help investors participate in the upside of markets and protect in down markets. And, because DWM is committed to protecting and enhancing our clients’ net worth and legacy, that works well for us and our clients. Very well, indeed.