MAKING CENTS: Common problems hidden in plain sight a hazard for investors

There are many times in your life where danger is looming and you think you’re ok, until something happens and you realize that you were vulnerable. In your 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 are cruising around happy as a clam until you hit a pothole, then all of a sudden the auto dealer is not on your most favored vendor list.

In the financial world, instances like the spare with no air are extremely common. For some, an instance may surface this weekend by the time they dig the paper out of the snow bank and read this article. It could be tree damage, a treacherous accident or a loss of power that causes your pipes to freeze.

I see this with life insurance regularly. People skirting the need for life insurance to save a few bucks on premiums actually think they are “winning” because of the money they are not spending currently. I can’t argue; they have in fact won from this day looking back. But going forward, these are the same people that try to get coverage after they have a diagnosis that scares them. So rather than trying to win by not covering your need, think in terms of what your family looks like after the loss and what would have to happen to win under that scenario. Do you really want your legacy to go down as the family that had 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 for investors occur with concentrated positions. This can happen from accumulating shares of a company while employed or through an inheritance. The problem of a lack of diversity can easily be masked by good performance or not paying attention. So naturally if you are not watching or the company is performing nicely, you see no problem. But when things turn, and that possible problem from a lack of diversity causes you harm, it is too late to fix the problem.

Index investors felt the same way in 2008. Owning the index is indeed a cost effective way to get exposure to a specific index, such as the Standard and Poor’s 500 index. But when all things in that basket go bad, and your portfolio mirrors that index en route to a 37-percent loss, you may wish that you had greater diversification or a more defensive portfolio even if it costs more than the index.

Suffice it to say that there are millions of people walking the streets of the U.S. today with exposure to financial events that can completely derail their vision for a successful financial future. I guess that is why they call if financial planning rather than sticking your head in the sand and ignoring the realities that may completely alter life for you and your loved ones.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

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