April 09, 2008--For the first time I can recall, a major media outlet is paying attention to a strategy that is at the core of my investment approach: mutual whole life insurance as a good way to protect your money and, in effect, create your own bank that you can borrow from any time you want. View the clip by clicking here.
Feb. 26, 2008--The current credit crisis confirms the old adage that the easiest way to rob a bank is to own one. Like spoiled rich kids, the banking industry’s bad behavior is being rewarded by government bailouts that we all pay for in inflation and taxes. Why do we still trust banks?
Nervous investors should beware the mythology that the safest place for money is in bank CDs and savings accounts, or in paying down their mortgages. Instead, people should consider stashing their cash in the one investment that is like having your own private bank.
Anyone with cash to park should be looking at the investment that has never failed: old-fashioned mutual whole life insurance, which accumulates cash value the policyholder can borrow from, and earns untaxed interest. Like the Crash of 1929, and numerous meltdowns since, the current crisis was caused by bankers who gambled with money they didn’t have on risky investments, in this case “liar’s loan” mortgages.
Now that the chickens have come home to roost, the banks and their stockholders are being bailed out by the Federal Reserve while CEOs who presided over the mess slouch away with millions. The real victims of this crime of the new century are not so much homeowners who, in many cases, had little equity, but the entire economy in the form of decimated stock market values which have dragged down everyone’s retirement accounts and the ability of businesses to raise capital to grow.
The general public still buys the fiction that government-insured bank accounts are the safest place to keep your money, while distrusting the stock market, where real value resides, or the mutual life insurance industry, which survived the Great Depression intact while thousand of banks went broke. Celebrity experts like Suze Orman who advocate paying down your mortgage during times like these, are dead wrong.
The only thing worse than putting your cash into a bank CD earning a pittance is accelerating the pay-off of your mortgage. It’s the equivalent of lending your money to the bank at zero interest, strengthening the bank’s balance sheet and rewarding the perpetrator.
Feb. 26, 2008--The Wall Street Journal reports the FDIC is bracing for a wave of bank failures due to the mortgage and housing crises. Another reason not to trust banks with your money.
Click to read full article. (Note: Subscription to Wall Street Journal required.)
Feb. 25, 2008--Forget Jim Cramer and Suze Orman. The guiltiest party in the bad advice business turns out to be The Wall Street Journal, which just ran a column telling worried investors to stash their cash in money market accounts and bonds. It's a recipe for losing money.
Columnist Brett Arend, writing in the investment advice column Green Thumb, writes a column that suggests the place to park your extra cash while waiting for a better opportunity is in bank savings and money market accounts, or bonds, or for those with a "strong stomach," maybe even a mutual fund!
This is the reverse of good advice. Parking cash in the bank will lose money because rates are so low you'll never exceed the cost of inflation (which is rising fast) and taxes. Bonds are no guarantee because no one can predict interest rates or other factors. The key to wealth creation is to OWN, not lend your money to a bond issuer or a bank.
There is only one investment I know of that lets you become your own bank: participating or mutual whole life insurance. When you buy a mutual policy, you become an owner in the insurance company (thus "mutual" or sometimes referred to as "participating"). You earn interest on the premiums you pay, your premiums build cash value that you can borrow against with just your signature for any use. You don't need permission, and your policy doesn't have to earn an extra profit to pay the stockholders of the insurance company because YOU are the owner.
The Journal's sloppy reporting and misguided advice is all too typical. There's too much noise and hype and those who take trhe time to learn how money actually works will know to ignore the bad ideas and stick to a form of cash preservation that is hundreds of years old, and survived intact through the worst financial periods in history.
Feb. 23, 2008--Banks are the spoiled rich kids of the financial world, causing periodic crises that end up with taxpayers having to bail them out. It's happening again, yet people still cling to the fiction that banks are the safest place to park their cash. Nothing could be further from the truth.
The back of our currency bears the noble statement, “In God We Trust,” but it is actually banks we most trust with our money, buying into the notion that they are the safest places to park our hard-earned wealth. Banks have played on this over the years by plugging the word “trust” into their names.
That’s fiction.
The fact is that dark-suited, “conservative” bankers have been the main culprits behind all the financial meltdowns our country has ever faced: the bank failures of the Great Depression; the international debt crisis of 1982; the savings and loan crisis at the end of the 1980s; the collapse in 1998 of hedge fund Long Term Capital; and now the sub-prime mortgage meltdown.
This crisis may be costing some people their homes, but let’s remember that most of them bought during the bubble with no-documentation loans (called liar’s loans) and they have very little if any equity at stake. In fact, there is now the phenomenon that many people are simple walking away from their homes, leaving the keys in the mailbox for the bank.
The real loser in this current financial bank crisis is the everyday American who has lost real value not only in their real estate but also in their 401-K’s due to the effect this crisis has had on the stock market.
Worst yet is that the culprits—banks--are benefiting from their crimes because when the stock market tanks, where do people instinctively put their money? In the very banks that caused the problem to begin with!
Banks in our society are like the spoiled rich kid: no matter what the kid does wrong, Daddy--the federal government or the Federal Reserve--will always bail him out. They screw things up and are rewarded by deposits of funds drawn out of real investments and put into low-paying savings accounts and CDs. The more cash banks have on deposit, the more money they can make lending that money out, many times over.
The bankers we blindly trust with our cash are the same ones that, in one day in 1982, lost all their past earnings (cumulatively) when the developing world couldn’t pay back their international loans. The bankers we blindly trusted caused the savings and loan scandals almost a decade later that cost taxpayers $500 billion in bailouts and ruined the real estate markets.
In spite of all this spoiled-rich-kid behavior, many people still think that banks’ FDIC insurance will protect their wealth while they distrust the insurance companies, an industry that survived every financial disaster, including the Great Depression, and kept its promises while banks were closing by the thousands.
People have a knee-jerk reaction during scary times to pull their money out of stocks (an ownership vehicle) and buy bank CDs (a lending transaction). This is financial suicide. Bank CDs and savings accounts pay a pittance in interest, a money loser when you factor in inflation and taxes. So the banks create panic, people sell stocks out of fear, and then hand their money over to the banks, which turn around and make money on it by lending it to others at a higher interest rate.
Bankers never put their own money at risk. But they will be happy to take your savings and put it at risk to make them money.
So where does one put their money during scary times? Do what the banks do. They put their own precious funds into insurance companies in the form of old-fashioned participating life insurance policies where the policy-holder is both owner and beneficiary.
These mutual insurance companies (New York Life, Northwestern Mutual, and others) are in the business of managing money for their owners—you, the policyholder--and no one else. These policies pay about 6 percent interest, the interest is untaxed, your premiums build cash value that you can borrow against (thereby becoming your own bank), and if the insurance company does a really good job and earns a the surplus, they give it back to you as the “owner” of the company. These mutual insurance companies have been doing this steadily for hundreds of years.
Mutual life insurance policies are the safest place to put your money and the companies never act like spoiled rich kids: the insurance industry has never caused a financial crisis and never required a taxpayer bailout.
It’s time people got back to basics, and stop rewarding the bad behavior of our “conservative” banking establishment.
Jan. 28, 2008--Oil's up, home prices are down, the economy's weak, the dollar's sick, the stock market's sagging, bond yields are anemic, and the question on everyone’s lips is, “Where do I stash my extra money when nothing looks good?”
I hear this question everywhere I go these days, and invariably people think the shelter of last resort is plain vanilla bank CDs or insured money market funds. This helps people sleep better but while they sleep, their buying power is steadily eroding thanks to the cost of taxes and the relentless effect of inflation.
At current money market rates of about 4.25% (with interest rates expected to decline), you lose an average of 3% to inflation, and the rest to taxes. Not much of a choice. Government bonds are paying even less, and then you have the risk that if interest rates rise, the value of your bonds will fall.
There is a way to have your cake and eat it, too, and has been since long before the Depression. It is the ultimate bomb shelter during scary financial times, and can even be a hedge against falling home prices. But few investment professionals know how it works, and even if they did, it isn’t a sexy sell like Wall Street’s latest investment product-du-jour, like hedge funds were, and ETFs and annuities are now.
The perfect bomb shelter is your grandparents’ life insurance, the kind that, up until the late 1970s, dominated the industry. Until then, the majority of life insurance companies were mutually owned by the policyholders—if you bought a policy you automatically became an owner, much the way a credit union works. Famous names have included companies such as Northwestern Mutual and Mass Mutual.
Everything changed in the early 1980s when the stock market boom began, financial deregulation came into fashion, and Wall Street’s investment bankers got the bright idea they could make a lot of money “demutualizing” those insurance companies by taking them public.
Mutually-owned, or “participating” whole life insurance companies, dwindled in number and their policies fell out of favor as the newly constituted stockholder companies began to invent and market new “products” to make more money. But now, according to trade journal Investment News (Oct. 15, 2007), the mutuals are making a comeback, for all the right reasons, and especially for Gen Xers.
When you buy a life policy from a mutual company, you become an “owner” instead of a customer of an enterprise that has to make enough profit on you to satisfy their shareholders. As an owner instead of a customer, your premiums earn you interest, the interest is untaxed, and you can borrow against the accumulated cash value to buy a car or invest in something more promising.
Mutual whole life policies today earn around about 6 percent, tax free, on your accumulated cash value. For example, if you had a policy with a death benefit of $200,000 and you had accumulated a cash value of $100,000, you’d earn $6,000 a year, compounded annually.
Because it’s an insurance policy, it carries an ironclad guarantee: your cash value and the death benefit will always be there. But unlike other types of insurance policies, you can also borrow your own cash value anytime, without a credit application. (The loan reduces the death benefit by an equal amount, since you are borrowing against the value of the policy.) People have used cash values for purposes as practical as a home down payment or the cost of invitro-fertilization.
The mutual insurance company continues to credit you 6 percent on the total of your cash value, including what you borrowed. Then they send you a bill. You can ignore the bill, in which case the insurance company simply takes away the interest credit on your borrowings.
But if you had invested the money you borrowed from yourself and earned more than 6 percent, you can pay the insurance company interest bill and deduct it from your realized investment profits as an expense, thereby reducing your taxes. If you borrowed $100,000 and made $12,000 in a mutual fund, you’d pay $6,000 back into your cash value (it’s your interest income), and only pay taxes on half the $12,000 gain.
Thus you become your own bank.
What few people know, and isn’t taught or talked about by many investment advisers, is that the insurance industry was one of the few sectors of the economy that survived the Great Depression essentially intact. It remained the one investment that kept its promises.
One of the ways some people can use participating whole life policies today is as a hedge against the housing crisis. As prices crumble, people who paid off most or all of their mortgages might investigate whether they can protect their net worth by borrowing against their equity and putting that cash into a mutual whole life policy. It’s not only the safest, cheapest, most accessible, and most predictable place to escape uncertainty and get a good night’s sleep, but many such policies include long term care coverage.
In my lectures and discussions about investing, I always enjoy the “Aha!” look on people’s faces when they understand how whole life works. It’s the one retreat where you can put your money with guarantees, no risk, no uncertainty, when you want to get out of the higher-risk investing game. It’s the bank you own, with all the benefits a real bank enjoys.
Investing should not be about trying to make a big score in the market or real estate or any other asset class. It is a three legged stool where one leg is the money you need to live on, one leg is the money you invest for growth, and one leg is the bomb shelter you can go to every few years when the rest of the financial world seems to be falling apart and you’d like to be able to sleep at night.
Jan. 8, 2008--A new survey finds boomers regret not making better retirement choices at a younger age. Now these old dogs have to learn a new trick: how to tell fact from fiction in a plethora of "new" investment products.
One of my Ten Truths of Wealth Creation is to focus on life goals, instead of financial goals, and to minimize future decisions. The Baby Boom Generation minimized their future decisions by not making any. If offered a chance to travel back in time, many boomers would change their planning strategy for retirement, according to a new survey by Zogby International. About a third said they wished they had done a better job of creating lifetime income and 70% said they would return to work if they had to (and if they can find work!).
The survey found that people often put off retirement planning until key life changes take place. Women often begin planning when a loved one, such as a spouse, dies. Men are most likely to begin planning after a job change, the survey found.
Meanwhile, the investment industry is planning to roll out ever more investment "products" this year to pander to the fears of boomers that they'll wind up their lives in poverty, shackled to the Golden Arches. The key selling point will be guaranteed income. In evaluating any investment, the most important question should be, "Do I own something, or am I just lending money to an insurance company or a bank that has to make money to satisfy its shareholders?" Most investment products sold today do not give you an ownership position. They are exactly what they are called, "products," and not true investments.
Jan. 7, 2008--Oil's up, home prices are down, the economy's weak, the dollar's sick, the stock market's sagging. It's a scary world out there, but don't let scary times panic you into making bad choices.
This is a good time to remind ourselves that there is always something to worry about, there are always scary times, and the secret to investment success is to do exactly the opposite of what your emotions are telling you.
Remember this rule: Be greedy when others are afraid, and afraid when others are greedy. This is hard to do, but once you’ve internalized it, you’ll be making money while others are counting losses.
Thanks to twenty-four-hour-a-day business and financial news, CNN, CNBC, Bloomberg, the new FOX Financial Network, and all the print media, we are treated to a parade of talking heads reminding us of all the horrors awaiting us around the next corner.
It’s a good time to calmly assess your financial future, revisiting your planning goals, resisting the emotion fanned by negative events and fear-mongering. It’s a good time to focus on how to transform these events into opportunities for growth, progress, and achievement.
With all the investment noise and media hysteria designed to keep you glued to your set, we have a hard time keeping fear and greed in check. The media is notorious for profiting from the perception of crisis and it is not uncommon for one media outlet to report as good news a story another outlet decides is bad news. The main goal of the media is to grab your attention.
For example, if you lived in San Francisco on September 1, 1998, your day would have begun with this headline in that morning’s San Francisco Chronicle: “PANIC HAMMERS MARKET”. Above the headline were eleven red, downward-pointing arrows showing the bloodbath in selected stocks and indices. Below the headline was a photograph of a trader standing at his desk and holding his head in his hands. Scary times!
But wait! On your way home from work, if you picked up a copy of the afternoon San Francisco Examiner, you’d find another huge headline: “STOCKS BOUNCE BACK, Dow up second-biggest point gain ever”. Happy days are here again!
Nine years later, we’re going through a similar period of uncertainty, which makes the media happy because uncertainty and extreme events attract readers and viewers. This constant barrage is not only absurd, it actually aggravates whatever trend is already in place, making bull markets last longer and bear markets feel worse, and influencing people’s spending and investing choices.
Many of you know my focus has always been to study history to understand the present. The market crises of 1929, 1987, 1998, and today’s mortgage crisis all resulted from excessive use of borrowed money to trade financial instruments so complex no one could figure out what they were worth until they were worthless.
The real culprit is a financial system that has allowed companies to use other people’s money to generate ever bigger returns for their stockholders. The average investor knew the housing boom could not continue forever. But publicly-held homebuilders continued to raise cash by selling stock to investors, and then putting that public money at risk by buying more land to build on even as the housing market began to slow.
Lenders supported this folly by providing public funds and loosening standards for mortgage qualification because they knew they’d be selling off those mortgages and dumping the problem in someone else’s lap. It was not the bank’s money on the line, so nobody cared whether buyers had a prayer of meeting their mortgage payments.
You should invest independently, avoid trends, resist fear and greed, and hire professional money managers to build portfolios that will weather even the worst storms and scary times. We are reminded that slow and steady wins the race.
Jan. 1, 2008--Behind the headlines-the subprime meltdown, soaring foreclosures, and plunging home prices-there is a class of people who have been robbed by the worst financial advice ever dispensed: always pay off your mortgage before you invest.
Those who followed this bad advice⎯made popular by misguided columnists and the Suze Ormans of the world⎯may feel more secure believing they have made a good decision by putting their spare cash into their homes. But what they have done is locked up their wealth and now, with stagnant or falling home prices, they are condemned to watch helplessly as their net worth is eroded by market forces and inflation.
The idea that paying off your mortgage is a smart move is Depression-era thinking that makes no sense, and didn’t even during the Depression. The math is simple and can be quite painful, as one of my clients recently discovered.
He and his wife fell in love with a piece of property and decided they wanted to sell their present house, which they owned free and clear, and build a new one. The rest of their wealth was invested in the stock market.
I urged him to borrow all the equity he could from the old house first and park it in an interest-bearing account to make certain he’d have the cash to make the down payment on the new house. But it made him nervous to be applying for a mortgage on a new home while having one on the old. The fact that he owned his house made him feel safe. He could always borrow against it if he needed to.
He signed the papers committing to the new house, which called for a down payment of $300,000. A year later the new house is nearing completion, but his old house has been on the market a long time and things have gotten so bad now that no one’s even bothering to come look at it.
If he had taken my advice and borrowed the equity out of his house first, he’d be getting the mortgage-tax deduction on his mortgage payments, and earning money on the cash. But once the house was listed for sale, it became ineligible for a mortgage. The only other possible source for the $300,000 he needs would be to sell some of his stocks. He’ll have a sizable profit on his investments, but a big chunk will be eaten up by taxes.
My client has managed to create a perfect financial storm by following the wrong instinct. Mortgage debt is not a sin, it’s a tool, as long as it’s used for the right reasons and in the right way.
Another client who is already retired has a similar problem. He wants to move to a coastal resort city and needs money for a down payment. His house has lots of equity but he may not be able to sell it and he can’t mortgage the first house to finance the new one. He has a large retirement account, but if he takes any of that money out now, he’s going to get hit with a big tax bill.
My clients are not alone. This same scenario is rippling across the landscape and helping to contribute to America’s real estate gridlock, which is going to get worse before it gets better, and take a long time doing so.
When people fail at managing this most valuable asset, America’s investment jewel-in-the-crown falls apart. That’s why a problem in what was a specialized corner of the market⎯sub-prime loans⎯has had such an enormous impact. It’s not that the economy is so bad that people are losing their jobs and can’t pay their mortgages. It’s that too many people either used their home equity to buy expensive toys and vacations, or left it locked up and now can’t get at it.
As a result, right at the moment when the baby boomers are starting to hit retirement age, wanting to sell their homes and start the next stage of their lives, they’re stuck. The houses that are selling are not fetching what they would have a year or two ago, mortgage standards are higher, and it’s tough to get a mortgage when you’re leaving the job market.
Seventy years after the Great Depression, Americans are still being guided by a fear that has always been misplaced, and bad advice that is still being dished out by advice givers who don’t really understand how money works. In spite of falling real estate values, it’s still true that real estate is the greatest creator of wealth, but not the way most people think.
"Divide your portfolio into tiers. John Girouard, author of The Ten Truths of Wealth Creation, suggests dividing your money into three groups, depending on how soon you need it. The size of each one will vary by person, depending on financial goals and age. The first group should be in investments protected from market instability, such as money market funds and savings accounts, which pay around 4 to 5 percent a year. That money is available for immediate spending. The second, which contains money you plan to use after five years, should be divided relatively evenly into stocks and bonds. And the third, which you plan to use after 10 years, should consist mostly of stocks. "You've got to layer your investment portfolio," he says, to make sure the money you need tomorrow isn't threatened by market cycles."
