Spending Year-End Bonuses Wisely
April 19th, 2010 // 7:02 am @ Andrew Rosenbaum
It’s Wall Street bonus time, and the big surprise is what is on so many bankers’ shopping lists: whole life insurance.
After last year’s economic freefall, it’s not just Main Street investors seeking safer financial products; Wall Street players are adding whole life products to their portfolios.
And many of them are using guaranteed financial products to balance portfolio risk.
They’ve seen how other investors protected their wealth with products such as whole life insurance when the economy sank.
Sophisticated investors have begun to question the common belief, “Buy term and invest the rest.”
They see it is a misconception, because (1) most people don’t invest the rest, they spend it, or (2) they invest it in something that they think will produce a high return, but that is more like gambling than investing.
Bonus time is a great time to invest in your economic security.
Consider taking part of your bonus and putting it toward guaranteed financial products that will weather the storm, whether markets go up or down.
Category : Financial Risk &Investing &Life Insurance &Market Volatility &Permanent Insurance &Recession
Average Returns v. Actual Yields, & Why Whole Life is a Great Bet
December 30th, 2009 // 4:00 am @ Andrew Rosenbaum
Here’s a message for all investors who like playing with high-risk investments: Math is not money, and money is not math.
Imagine you are investing $1,000 in a mutual fund. You have a fantastic first year, earning a 100 percent rate of return, bringing your balance to $2,000.
In year two, things go poorly and the investment loses 50 percent. Your balance is now back to $1,000.
In year three, the market goes up and you earn 100 percent again, bumping your balance back up to $2,000. The fourth year markets tank again and you lose 50 percent. Your balance has now fallen back to $1,000.
Notice that your beginning and ending balances are exactly the same. Your actual yield is a big fat 0 percent.
Here’s the interesting thing. What is your average rate of return? 25 percent.
I know any investor would love to get a 25 percent return. A mutual fund with this exact performance could advertise, “Our fund has averaged 25 percent over the last four years.”
It’s a true statement. It is not illegal or blatantly dishonest. It simply fails to illustrate the fact that investors actually ending up with no return.
One of my clients is a major league hedge fund manager. He knows something about high-risk investments. But what does he have in his portfolio? A guaranteed contract –- a whole life insurance policy.
In the past year he doubled the size of his policy. In this economic environment, he told me, he needed to lower the overall risk of his investments. And a guaranteed contract is a smart alternative to treasury bills, which are currently paying a very low yield.
Here’s how he explains it in his own words:
Whole life is an investment with its own risks and rewards. But the risk is relatively low. The return is virtually guaranteed, you can borrow against it over time, and you can use it for estate planning purposes. I know that when I die my family will have enough money to manage their own lives. I could invest in ExxonMobil, but who knows what the stock would be like in ten years?”
He told me he thought that whole life has a bad rap, which encourages people to think they can outperform the policy. To quote him again,
Many savvy investors believe they can stimulate the characteristics of life insurance benefit on an after-tax basis – it has to be after tax because money accumulates within a policy tax-free. They think they can take $10,000 a year and invest it, but what happens is they never do it, and their portfolio is skewed.”
My hedge fund client really understands risk, and he certainly understands rewards.
Category : Financial Certainty &Financial Planning &Investing &Market Volatility &Permanent Insurance &Stocks & Mutual Funds
Can You Spot Your Investment Flaw?
December 9th, 2009 // 4:00 am @ Andrew Rosenbaum
The federal government says the country is coming out of the recession. My biggest fear is that, with the market recovery, people with a lot of ground to recover in their portfolios will chase risky high returns again.
But with high-risk investments you will inevitably lose your money. That’s not financial planning; it’s legalized gambling.
A wealth swing coach helps you spot your investment flaws. Investors try to outsmart market volatility. They mistakenly believe they can cash in at the top, then balance their portfolios to preserve their wealth.
They rarely do. Sooner or later, the market will turn down again and they’ll have lost the opportunity.
Trying to outplay market volatility is like trying to control the weather. It’s impossible.
Remember the old expression, “save for a rainy day”? Don’t assume it will always be sunny.
As a golf fan, I like golf analogies. Tiger Woods never tries to outplay the weather. He doesn’t take wild risks. He meticulously measures, plans, and calculates every move he makes.
He starts out playing conservatively and defensively. Only if the weather’s right and only if he thinks he’s playing well does he go on the offensive.
So balance your investments by including assets that will endure no matter whether markets are sunny or stormy, and you’ll be better prepared if other investments decline.
Category : Financial Certainty &Financial Planning &Investing &Market Volatility &Wealth Swing Coach
