MAKING CENTS: No pain does not equal no problem in the financial world

There are many times in your life where danger is looming and you think you’re all good until something happens and you realize that you were vulnerable. In day to day life, a good example is the new car you just bought where the dealer forgot to fill the spare tire with air. You’re cruising around happy as a clam until you hit a pot hole and then all of a sudden the auto dealer is not on your most favored vendor list.

In the financial world, cases like the spare with no air are extremely common. Maybe it’s an unexpected and uncovered loss, a portfolio that you didn’t think had the potential to rise or fall so fast or an asset ownership structure that is so wrong that it takes your loved one forever to have the estate settled.

I see this with life insurance regularly. People skirting the need for life insurance to save a few bucks on premiums think they’re ‘winning’ because of the money they are saving. I can’t argue; they’ve in fact won from this day looking back. But going forward, these are the same people that try to get coverage after receiving a scary diagnosis. So in lieu of trying to win by not covering your need, think in terms of what your family looks like after your potential demise and what needs to happen to win in that disastrous scenario. Do you really want your family having to beg for contributions to get the kids through college?

The same mentality exists within many investment portfolios, and for many reasons. Common problems hidden in plain sight of investors occur with concentrated positions. This may occur from accruing shares of a company while employed or through an inheritance. Lack of diversification can easily be masked by good performance or not paying attention. If you’re not watching or the company is performing well, you see no problem. But if the market turns, and that lack of diversity causes harm, it’s too late.

Those that invested similar to an index felt the same way in 2008. But when all things in that basket go bad, and your portfolio mirrors that index resulting in a large loss, you may wish you were more diversified or a more defensive portfolio.

There are millions of people walking the streets of the USA today with exposure to financial events that can completely derail their vision for a successful financial future. Many of these people have professionals; accountants, attorneys, insurance and investment people already on the payroll that may not be doing everything that may be necessary. Based on the large number of people that I meet who wish they’d taken a different approach when they thought they were all set, get an impartial advisor who can let you know about your most material exposures.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.