While your investment portfolios may be very well diversified have you ever thought about other areas of life where you might be financially exposed to risk? One key objective of diversification is to reduce single stock/security risk by spreading your money over hundreds of different securities.
Imagine one or two blow-up. There is minimal impact on your portfolio. This approach means you are not concentrating your exposure in any one sector or security.
But what about other areas of life? Could you be exposed in other ways to sectors or industries that are higher risk and subject to the cycles of the economy. Airlines? Travel agents? Retail?
A great and very timely example is frequent flyer points. Effectively, you are a lender to Qantas or Virgin if you have accrued points that can be exchanged for flights, or some other benefit (appliance, or hotel room). What happens to those points if Qantas or Virgin disappear? You may remember Ansett went bust in 2001. All the frequent flyer points they owed their members disappeared. Worthless.
There is no suggestion our airlines are in trouble, it appears they may receive federal assistance, but it’s an important lesson. We may think of points akin to an investment or savings account, but from a member’s perspective they’re better spent quickly. They can disappear overnight or be devalued at the discretion of the airline. Both Qantas and Virgin/Velocity devalued points and increased taxes on some routes last year.
If you are worried, consider exchanging some or all of your points for benefit (other than a flight, for obvious reasons). Virgin/Velocity has a facility to transfer points to Singapore Airline’s Krisflyer program. You will take around a 30% haircut on the transfer.
Are you sitting on any unused gift vouchers, say, from Christmas? Hopefully it’s not for Kiki-K, as they went into liquidation recently! The retail sector is going through very tough times. Many chains are disappearing. Perhaps get out and spend those gift cards, just in case?
With the demise or financial difficulty of a company or sector, the obvious “first level” of security prices (bond, shares etc.) attracts the most attention. In contrast, the everyday “second level” of company exposure can often be over looked. The risk remains real. Imagine losing one million frequent flyer points! Today people still talk about what they lost when Ansett went bust – usually they’re talking about points.
What other agreements, arrangements, bookings, benefits do you hold that might also be worth reviewing?