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Don't follow this financial advice.
Posted on Thursday, September 12, 2013
SO yesterday I spent 10 hours in a continuing education workshop for financial advisors with some of the country’s top experts in wealth protection, taxation and financial planning, discussing strategies around higher future taxes, lower benefits, the irreversible effects of government money printing and record volatility in the financial markets now and in the future. For 10 hours I sat with about 300 other investment professionals in the industry discussing ways to protect our clients and to help them take control of their futures and not have to depend on the government to take care of them and their family.
And when I finally got home for dinner last night after a long day, my wife hands me an article that she found on Yahoo Finance and says “I thought you might be interested in this, but you might want to have a drink and some dinner first”. Of course, after that comment, I had to take a quick peek at the article, and by just the title alone I knew she was right about the drink. It read “Suze Orman says ‘Don’t Follow This Financial Advice’” It then listed three things of things to avoid:
1) Permanent Life Insurance as an investment
2) Immediate Annuities
3) Bond Mutual Funds
The article then went on to bash financial advisors saying that “there is no shortage of BAD financial advice these days, and these three things are ‘the worst’.” Now in all fairness, there is some truth in that statement. There is NO shortage of BAD financial advice these days, and most of it comes from people like Suze Orman and Dave Ramsey, who are in the business of making millions, not as investment advisors but as book sellers and motivational speakers.
So today, just because you deserve the truth, I’m going to cover Suze Orman’s “things to avoid” list and teach you why you should do the exact opposite of what she recommends. Let’s talk about your money and specifically let’s challenge some of the terrible advice that is sprayed all over the internet from people who are in the business of selling books and have no business helping you protect your family fortune.
So according to Suze Ormon, in her recent interview with Yahoo finance, you should avoid three things as an investor. Today I’m only going to cover 2 of them, but maybe I will cover number 3 next week. So let’s talk about what Suze calls “one of the worst investments you will ever make in your life”.
1) Using Permanent Life Insurance as an investment: Now this criticism is an oldie but goodie that’s been around for a long time. You’ve probably heard the advice “buy term and invest the difference” which is exactly what Suze Ormon recommends. There are several problems with this advice: First, for those people who do buy term, it’s proven that they rarely invest the difference, effectively ending up with some cheap temporary life insurance and little to no investments to show for it years later. Second, most people do not have the time, training or temperament to successfully invest in the most volatile financial markets in history where over 70% of daily trades are not human…meaning done by super computers. And here’s the biggy…according to multiple studies, approximately 3% of term insurance ever pays beneficiaries a death benefit! That means that 97% of all term insurance expires worthless and never pays family members, which means that 100% of the premium was wasted. Not sounding so cheap any more right? And why is that you might ask? Because term insurance is only cheap when you are young, and it is only priced for a fixed period call a term. When that period is over, if you’re still alive and say 20 years older, your premium to continue the coverage will sky rocket sometimes 5 or 6 folding from the original. So most people find it impossible to renew. On the other hand, if you use permanent life insurance, your premiums will be much higher, but you will accumulate cash value in the policy which can be guaranteed depending on the type of insurance you use, your death benefit will be there as long as you pay your premium and you will accumulate wealth inside of what is considered the safest industry for over 200 years…not banks, not wall street but the insurance industry.
2) Alright let’s jump to the last one on Suze’s top 3 mistake list…Buying Bond Mutual Funds: So according to Suze, because interest rates might go up, you should NEVER buy a bond fund because bond prices fall when rates rise. Again, the concept of rates rising and prices falling has nothing to do with how you buy your bonds. Whether you choose a well run bond fund with a professional manager at the helm with a good record of managing risk or you buy individual bonds with the help of a professional advisor, the mutual fund vehicle is just another way to buy bonds. Personally, I buy individual bonds for my clients because I know how to build a portfolio and ladder maturities and control things like duration and credit risk. Everybody can’t do that and for those people, a well run bond fund could be a solution for their fixed income allocation.
All I am saying is that you need to be cautious about where you get your advice from and no one type of strategy is good or bad for everyone on the planet. You need to have a professional in your life that will tailor an approach to your wants and needs and to your level of risk tolerance. One size does not fit all when it comes to investing.
So the big question that everyone who’s anyone in the money world is asking these days is, “Will the Fed taper it’s stimulus program known as QE3, or what we like to call QEternity, or will the real numbers of economic growth (or lack of it) force the federal government to continue pumping $85 billion per month into the economy in its continued attempt to jump start the slowest recovery in history?” So the obvious question that we must ask today is, “Are we actually recovering, and if so could we survive without the number one biggest driver of our economy, our very own federal government?”
So to answer those questions, we need to first step back in time a bit and revisit the conditions stated by the Fed back in September of 2012 when QEternity began. Chairman Ben Bernanke told the world that the latest round of artificial stimulus (alright, he didn’t call it that) would continue until unemployment fell to a level of 6.5% and the economy was growing at a pace of 2.5%. And if you go back and read his original comments from 2012, it gets even better. He went on to say that, and I quote “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
So not only was he specific about what unemployment and economic growth needed to look like before the Fed would start to exit the scene, but he even went on to specify that stimulus would continue even after the economic recovery strengthens. So here we are today and the bond market is panicking that the Fed might start to exit its bond buying program known as QE3 and stop or slow down its $85 billion per month purchase of mortgage and treasury bonds, which artificially keeps the prices of those and most bonds in the market high, and as a result, keeps the yield or interest rates low. So the first thing we need to take a look at is whether or not we are on track to achieve an unemployment rate of 6.5% in COMBINATION with economic growth of 2.5%. And the clear answers to both of those questions is NO. Currently unemployment sits at a level of 7.4%, and economic growth is running at about 1.1% as of last month. So there is no question that the Fed’s objectives are not even close to being met. Also, as for unemployment, keep in mind a minor technicality that needs to be considered by the Fed that was likely not considered when the 6.5% number was thrown out to the world as a possible trigger to end QE3. When someone is unemployed, meaning they are collecting unemployment, if they take a part time job, they are considered 100% employed. It’s a fact that the recent miniscule drop in unemployment from 7.6% to 7.4% was driven mainly by people accepting part time jobs who need full time jobs. So even though the official government numbers have slightly dropped, a part time job for someone supporting a family is not anything to celebrate.
As for the growth of the economy, last month our GDP was running at an annualized rate of about 1.1% versus the 2.5% that Chairman Bernanke said was needed for the Fed to start backing away.
So what is the message that you can take away from all of this as an investor? Be careful making any major changes in your portfolio based on what you think might happen with the stimulus between now and the end of the year. I expect the government to be forced to stay actively involved in pumping up markets, and the real numbers clearly show that we won’t easily survive without Uncle Sam supporting the weakest recovery in American history.
As gold continues to try to find its footing and stage a possible recovery, India, concerned about the falling value of its currency, the Rupee, has now banned its citizens from buying any and all gold coins and medallions from outside the country. In other words, if you live in India and want to buy a gold coin that happens to be located anywhere in the world (other than India), it’s illegal! So why would India try to stop people from buying gold and more importantly, what will this do to the price of gold?
Why has India, after trying everything under the sun to get its citizens to stop buying gold, taken it to a whole new level? As of this moment, it is illegal for Indian citizens to buy gold coins or medallions, if they are not already in India. So why would a country do something like this? Well the simple answer is that India’s citizens love gold, and they feel more comfortable putting their money into gold than they do into the currency of their own country. So instead of India trying to improve their economy to attract more citizens to hold Rupees, they took the easy way out, as government often does, and they decided to penalize anyone importing gold into the country. First they tried a 1% import tax back in Dec of 2011. That didn’t work. Then they raised it up a bit more, and that didn’t work. And currently they have raised the import tax up to 8%, and that’s not working. So what do governments do when something is not working…they do more of the same (as we know). So the latest move by the Indian government is that they have suddenly declared it illegal to import ANY and ALL gold coins or medallions into the country! I kid you not. And if this doesn’t work, I shudder to think what the Indian government might do to its citizens if they don’t stop this stupid love affair with gold.
So as fascinating as this story may be, the question that we need to answer as investors is “how might the continued attempts by the Indian government to curb its citizens’ love of gold (or hate of the Rupee) affect the future price of gold?” And the answer is not that easy to come up with.
On one hand, we could look at the price of gold since India has attempted to curb its people from buying it and say that it has been bad for gold. After all, since December of 2011, when India began its import tax scheme, gold has dropped almost 23%, but it’s hard to say how much of that drop was a result of India’s efforts. Remember, although Indians love gold, India as a country only owns about 558 tons of gold which is miniscule compared to the overall market. To put things in perspective, the United States hold over 8100 tons of gold, Germany has almost 3400 tons and even the Netherlands holds more gold than India, so on a pure supply/demand curve, I don’t see India having much of an effect on the global price of gold.
However, from a psychological perspective, I think there is something that works in gold’s favor and may actually help its attempt to recover, which has been happening since late June. So here’s something to think about; considering pure human nature, the best way to increase the desire for anything is to tell people they can’t have it! And given the record high levels of distrust in governments around the world, gold may continue to respond very well to its almost forbidden status, not only in India, but around the globe.
Only time will tell, but keep in mind, since June 27th, gold is up about 14% and countries like India, who refuse to strengthen their economy and instead try to manipulate their currency to create the illusion of a stronger economy, might be a welcome friend to the price of gold.
So as I was writing this blog today, it occurred to me that I could have used the same opening line for this blog for 6 of the last 7 months, and it would have been accurate. And that opening line would have been… “THE STOCK MARKET HITS ANOTHER NEW HIGH TODAY WITH LITTLE ECONOMIC IMPROVEMENT IN THE OVERALL ECONOMY”.
So here we are 7 months into the year with barely any change in the overall economy, and the stock market continues its wild “orgy like” party compliments of the 3rd and latest Federal Reserve stimulus program. I mean let’s be honest, we know that the DJIA did not go from its 2009 low of 6600 up to today’s newest government funded high 15,500 based on economics or an actual recovery because up until very recently, we saw no signs of any recovery to write home about. So to say that we are where we are because of economics or the strength of our economy would be incorrect. And the recent market volatility was proof that if the government pulls the plug or even starts to dial back the drug called QETernity, the market will quickly reveal itself as unstable and unsustainable, and that will be our 3rd crash in a very short period of years.
But I am not here to bash the government or the system or the stock market because my clients and I have greatly benefited from this greatest-in-history stimulus party.
The question I want you to ask yourself today is this…Are you doing anything differently today in regards to the way you approach your investments compared to what you were doing back in the crash of 2008 or 2000? In other words, if you turned back the clock to the year 2000 or the year 2008 and looked at how you were investing your retirement funds or your kids education funds or your family foundation back then, are you doing anything differently than you did before or are you using the same basic approach? Because here’s the thing…if you’re like most investors, you got pretty banged up in 2008 and maybe worse in 2000, and you know that it’s only a matter of time before the next unbelievably-spectacular surprise meltdown occurs. And you know in your heart that this is a limited engagement show, and when the powers behind the show decide it’s time to go, you won’t be able to dodge the bullet any better than you have in the past. So HOW HAVE YOU PREPARED THIS TIME any differently than the last 2 times? Have you, in any way, made your portfolio more CRASH PROOF, or are you just willing to take another 40-50% drop to the basement and start the insanity all over again?
Now if you’re like most Americans, you are a heavy user of public swimming pool type investments where you throw your money into gigantic pools with other people and let someone you’ve never met manage the details someplace in Boston or New York. I’m of course talking about mutual funds. And if you are one of the 49 million Americans that actively participate in a 401k, I know that you think you have no choice since your company 401k menu only offers mutual funds.
So what can you do, inside of your 401k for example, that can arm you for the next battle that’s getting ready to crush your retirement account again? The answer is to start thinking like the 1% does. Stop and ask yourself, how many wealthy people do you know who got wealthy by blindly throwing their money into huge public pools with other people and basically closed their eyes and counted on some theory written in 1953 that said that what you own inside of the pie chart doesn’t matter and that it’s all about the mix between stock and bonds?. And let’s be honest, over the last 20 years since Harry Markowitz earned a Nobel Prize for his Modern Portfolio Theory (the theory of asset allocation), the only people who have consistently made tons of money are the very firms that manufacture and market mutual funds. Individual investors have meanwhile had one of the worst 20 year periods in history and were actually outperformed by risk free 30 year US Government treasury bonds during the same period. The truth is you will be hard-pressed to find one truly wealthy person who made their fortune by ignoring the details of their holdings and just taking a big picture view. Wealthy people keep a close eye on the details of what they own and the potential risks they might be exposed to. From there, they pick a handful of well chosen investments that they fully understand and keep a close eye on. That is the exact opposite of the pie chart investing model that Wall Street has sold you on for the last 23 years.
So what can you do to be more like the 1% and less like the 99%? The answer is easier than you might think. You simply need do a little homework on what’s in the water of your public swimming pools and remove the funds that don’t cut it. That means calling each fund company that you own and asking for a prospectus and top 10 holdings report. In the prospectus you are specifically looking for things like the manager being allowed to use leverage or derivatives to “boost” performance. Those tools can be great in rising markets but they become road-side bombs when markets crash. As for the top 10 holdings report, you need to get one for every fund you own and see how many of your top 10 holdings repeat themselves though out your different funds. After all, if you find that 3 of your 4 funds in your 401k have very similar top 10 holdings, you’re really not diversified as much as you think you are.
As the stock market reaches all time new highs, and things seem to be slowly improving, according to the news media, the big question for today is, “Are you feeling good about your prospects for a comfortable retirement?” Now, given the stock market’s recovery from its 2009 low’s to today’s all time new highs, you might assume that the answer is a resounding YES when it comes to people feeling prepared to be able to stop working and begin living off their nest eggs! BUT, in reality, a very small percentage of people surveyed feel that they can retire. In fact, in a recent study done by the Employee Benefit Research Institute, less than 28% of Americans surveyed feel confident that they can retire comfortably at any point, and that is the highest level of pessimism ever recorded by this 23 year old survey. So why all the long faces? Why are Americans giving up on the dream of being able to ONE DAY enjoy their golden years?
Let me share with you a couple of reasons that the survey came up with, and then I’ll tell you why I think everyone is so depressed about their retirement prospects.
According to the survey from EBRI:
1) Almost 60% of people surveyed had less than 25k to their names, not counting their home and 28% had less than 1k. So the obvious problem here is that people are not saving for retirement in a way that could ever get them financially independent.
2) 26% of people who leave their job for another, cash out instead of rollover.
3) People have too much debt to feel like they can afford to save for the future. In fact, 55% of those surveyed felt like they had a debt problem, and many of them admitted that their debt had risen since 2008.
4) Most people have no idea of how much money they will need to be able to support their desired lifestyle. In other words, they are just blindly participating in this plan or that without a clear target amount of what they need to make retirement a reality
5) 58% of people surveyed said they could get by on less money in retirement than while they were working, yet almost half of all retirees surveyed said their expenses dropped during retirement and 21% actually reported their expenses rose during retirement.
Ok, so here is my take on all of this…every one of these issues has the same root problem, and the statistics back me up. Only a very small percentage of workers ever seek professional advice to get a handle on things like:
1) How much should I be saving each year
2) How can I manage my debt while continuing to plan for tomorrow?
3) What is my number…the dollar amount I will need to be able to maintain my lifestyle in retirement?
4) How might my expenses actually rise in retirement?
So am I telling you to seek the council of a qualified registered investment advisor to determine what you should be doing with everything from your 401k to your IRA, your insurance policies, your savings plans for your kid’s college? Absolutely yes, and I will leave you with a statistic that backs me up: A recent study compared 401k participants who were “do it yourself investors” to those who received advice from professional investment advisors over a 20 year period. The results, after the additional costs for advice, were a net 3% per year in the favor of investors who sought advice. SO while the “do it yourselfers” were paying slightly lower fees for no advice, the advice crowd walked home with an additional 3% per year return on average. As surprising as that may seem, remember what your biggest risk is as an investor…it’s YOU! And while professional investment advisors can help you with investment selection, allocation and retirement forecasting, one of the biggest benefits you will get is they can keep you on track when every cell in your HERD INSTINCT wired brain says to do the wrong thing.
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