Richard H. Thaler is the most recent behavioral economist to win the coveted Nobel Prize in Economics.  His work is valuable in understanding why investors do what they do and how a Registered Investment Advisor (RIA) can help save them from themselves.

One of the principles Thaler describes in his work “Easy Money or a Golden Pension:  Integrating Economics and Psychology," is the Endowment Effect.  The basis for the Endowment Effect is how people tend to experience the negative feeling of a loss more strongly than the positive feeling of an equally large gain.

Giving up something we already own is experienced as a loss, while acquiring the same thing is experienced as a gain.  In investment terms, this is known as loss aversion.

An investor in a stock does not define a deal as a profit or loss until the shares are actually sold.  This leads investors to hold shares for a long time hoping it will get better to avoid the feeling of loss.  Equally as puzzling, investors will often sell shares too soon in order to lock in a gain.  Both behaviors are driven by the desire to avoid losing.

Although counterintuitive, the opposite behavior would have rendered a better result.  Selling the stock at a loss and freeing up capital to invest elsewhere would certainly be better from a tax perspective.  And holding stocks for the long term has historically proven to be a better strategy for wealth creation.

So, what is a life settlement and how does it cure loss aversion?  A life settlement is a life insurance backed asset.  As an alternative investment, life settlement funds are utilized by investors to hedge losses.  The value of a life settlement policy is the face amount of the life insurance contract.  The investor owns the life settlement asset at a discount to the face amount.  The spread between the investor’s acquisition cost of the policy and its face amount is the investor’s total yield.

There is only one outcome and one primary risk.  The investor receives more money from their investment than it costs to acquire it and the primary risk is time to policy maturity.  A life insurance settlement can play an important role in hedging market volatility and correlation risk with safeguards put in place to safely grow your capital.  Or more correctly, how an RIA can grow their client’s capital…and their practice.

Capstone Alternative Strategies has created a More Efficient Frontier by unlocking the hidden value in a life insurance asset-backed solution that offers the investor attractive risk-adjusted yield with no exposure to downside capture.  To learn more about us and how we can be an engine for growth, contact Jason Bokina at 404-504-7006 or email contact@capaltstrategies.com.