Why did the chicken cross the road?

February 28, 2013

In November of 2009, I wrote a blog post titled: Why “the experts” confuse the average investor (here is the link). This topic popped into my mind the other day as I was talking with my 10-year old daughter. She asked me the classic question: “Daddy, why did the chicken cross the road?” Of course I knew that a rip-roaring joke was about to be laid out on the table…at least that’s how I had to portray it with her. Sure enough, she had a great answer and I busted out laughing. This got me thinking about my previously mentioned blog post because the answers to the question posed by my daughter are endless and they simply depend on who’s answering the question.

I thought, what if we asked this simple question about the chicken to various people, maybe even historical people? Would their answers have been the same or would they be different? So, here we go, “Why did the chicken cross the road?”

Their answers*

Dr. Seuss: Did the chicken cross the road? Did he cross it with a toad? Yes! The chicken crossed the road, but why it crossed it, I’ve not been told!

Ernest Hemingway: To die. In the rain.

Buddha: If you ask this question, you deny your own chicken nature.

Martin Luther King, Jr.: I envision a world where all chickens will be free to cross roads without having their motives called into question.

Colonel Sanders: I missed one?

Attorney: Chickens are invited to cross the road to join a class action lawsuit against all non-chickens.

Bill Clinton: I did not cross the road with THAT chicken. What do you mean by chicken? Could you define ‘chicken’ please?

George Bush Sr.: Read my lips, no new chickens will cross the road.

Retired truck driver: To prove to the armadillo that it could be done.

Albert Einstein: Did the chicken really cross the road, or did the road move beneath the chicken?

This is all in fun of course but the theme here is very similar to the variety of instructions given to people about solidifying their financial future. Having a clear understanding and a concise plan can be almost impossible because financial professionals virtually always disagree with each other and they never provide the same answer. Most people have heard the following conversation over and over again whenever they speak with a new financial expert: “How much money do you have? Where is it? Oh my gosh, why did they put you there!? You need to come over here because we’ll do so much better.”

Climbing Mount Everest

So, who can you trust? Who really has your best interests at heart? This is often the hardest hurdle to get past. This reminds me of climbing expeditions up Mount Everest. What is the most important phase of the climb? This single phase is responsible for over 75% of all deaths that occur during the quest to summit Everest. It’s the descent. The plan DOWN is the MOST important part of the entire expedition.

Financially it’s no different. The “climb” to the summit can be viewed as the accumulation phase as you work towards your retirement. The descent is the distribution phase of your assets to ensure you have enough money to live on for as long as you’ve planned to live. What does traditional planning focus on the most: i) simply getting to the summit or ii) getting to the summit with a very specific plan on how to get down? ING put out a series of TV commercials (here’s one of them) asking you if you “know your number”. That “number” is the amount you need to retire or more specifically the number you need TO GET TO THE TOP OF THE MOUNTAIN! But ING, what is the plan once that number is reached? Our focus should be even more intent on that phase of life than any other.

105% increase in 10 years!

Truly, if you hired a guide for your climb up the mountain and you asked him for his plan to get you down the mountain, how would you feel if he said this: “I don’t know, but once we get there we’ll figure it out.” Remember, 75% of those who die, die on the way down. Look around, how are people doing? We have an aging population, a declining workforce, an inability to save, a national debt that’s beyond comprehension and a government whose only answer is to print more money. According to whitehouse.gov (Table S5 Proposed Budget by Category) if we wiped out the entire Federal Government and the entire Military (all discretionary spending for 2012) then we’d still be short by $8,000,000,000 due to the various entitlement programs (we did a video on this very topic). Let that sink in, the ENTIRE federal government and the ENTIRE military and we’d still be short. Now, if you do this exact calculation for 2013 then we’d have a surplus of $360 billion (again, only if we got rid of the federal government and the military – obviously never going to happen) but look at the “total receipts” (all taxes collected)…they’re predicted to go up by 17.5%! If you look at the total receipts predicted in just 10 years, 2022, it’s a 105% increase from 2012. Are you ready for that? What’s your plan to deal with this issue? How are going to get down the mountain? If you’re only being told that you’ll be in a lower tax bracket in the future then you better get a new climbing guide.

Reduce future taxable income

There’s an endless amount of Congressional Budget Office reports and Government Accountability Office reports informing you that your taxes are going up plus the dollar will continue to weaken (the hidden tax). How will all of this affect you once you decide to “come off the mountain top”? Please understand, there are strategies and solutions to help mitigate some of these issues but you must be prioritizing strategies that will reduce your taxable income in the future! You will most assuredly face fewer deductions, fewer benefits, higher taxes and a weak dollar; therefore, reducing your taxable income in the future will be the biggest and most important aspect of your plan to efficiently climb down the mountain and make it out alive. The only factor that determines success is the reaction of the government. Shouldn’t we be studying them and NOT the financial products? All other discussions are only focused on making it to the summit. Our clients come to know what it means to have a plan for distribution and how their plan will ensure that they will NEVER be poor. Our job isn’t to help you strike it rich. Our job is to secure that you not only summit the mountain but that you make it down safely regardless of the conditions or challenges you face.

So, I ask you, why did the chicken cross the road? My answer, because she knew she could make it.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook

*some of these answers came from http://grandfather-economic-report.com/

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The Modified Endowment Contract

April 29, 2010

A modified what? It’s called a Modified Endowment Contract (MEC) and was a creation of the terrible twins TAMRA (Technical And Miscellaneous Revenue Act of 1988) and DEFRA (Deficit Reduction Act of 1984).

It’s important you understand why the MEC was created, who created it, and how it can effect your money.  IRS Code, Title 26, Subtitle F, Chapter 79, Section 7720 is the description.  If you’re bored feel free to read it. Here’s the point.  The very fact they, the government, made the effort to craft and pass this type of restriction and limitation on what you could do with your money, keep in mind, it wasn’t like this prior to 1988, tells us one thing: it must be good in regards to taxation.

You see, prior to 1988 you could put virtually an unlimited amount of money into cash value life insurance and get all the benefits.  What benefits?  Here’s a list:

  • money grows tax deferred,
  • can be used tax free,
  • has a competitve rate-of-return (remember no fees and no tax),
  • has guarantees,
  • returns a tax-free dividend based upon company performance,
  • the money is credit proof,
  • you could contribute an unlimited amount of money,
  • you were unlimited in your investment options because you had
  • liquidity, use and control of the money,
  • it could be used as collateral,
  • it was estate tax-free, and
  • had disability protection – meaning if you became disabled the insurance company would continue to contribute your annual outlay (what 401k will do that one?).

Take a look at this pdf and line up the benefits you have with your money compared to how these policies are designed…click here.

The government didn’t like this; therefore, they decided to “further limit the perceived abuses by preventing policyholders from paying large single premiums to purchase life insurance and borrowing the cash value, tax-free.”  Heaven forbid we have some financial tools that they don’t have their hands ALL over.  The founding fathers of this country would be up-in-arms.  Folks, this type of policy, and the benefits associated with it, had been a LONG standing tool used by virtually all the wealthy families in the country…here’s a great book that describes this very thing, The Pirates of Manhattan.  I have no association with this book it’s just a good read.  Check this out, this is an article from November of 1999 in the Denver Business Journal.  They did a special publication called The Century Book. This publication dedicated one page for every year from 1900 to 1999 and covered something from Denver’s history for each year.  For the 1929 page they talked about the Crash and introduced you to Claude Boettcher – “Denver’s most famous investor”.  Anyone who has lived in Colorado for any length of time has heard of the Boettcher family.  This article mentions how he lost everything but waited for banks and stocks to drop so low that he borrowed $2,000,000 from his cash value life insurance to buy them all up (notice he lost his investments but he didn’t lose his insurance values).  I love the line right after the mention of this – “the reason he is still known to history. Most investors had no other resources to call on.”  Read it here.  The “Infinite Banking Concept” is NOT NEW!  It has been around for over a century.

In 1988, the government created a limit.  So think about this: who determines the minimum one can pay for a death benefit of, let’s say $500,000?  Come on, who determines the minimum you, the consumer, can pay for a death benefit of half a million?  The insurance company.  They decide what they can charge you and still make a profit.  This is called term insurance.  You pay the least amount and get one benefit – death benefit.  On the other side of the spectrum, who determines the MOST you can pay for that same $500,000 death benefit?  Most people say, “I do. I determine the most I’m willing to pay.”  Wrong.  The government.  The very fact that the government limits what you are able to do with your money tells you that it must be good in regards to taxes.  You know what, they’re right.  Of course they’re right. Taxes are their biggest concern.  If they aren’t getting them then you bet your $SS they’ll go out and find them.

It then begs the question as to why whole life insurance policies are still around then, right?  Well, you can still get all the above benefits, EVERY one of them, you just have to now capitalize the policy a little slower.  Before 1988, you could put, for example, $200,000 as a lump sum into a policy and get all the benefits.  Today, you have to spread that out over, typically, a five to seven year period.  The argument of “cash value life insurance is too expensive” is plain elementary.  Those supposed experts who make that claim are right if someone is using CVLI purely for protection…i.e., focused on one benefit.  Buy term and do something with the rest.  However, if you want to act and function just like a bank then you’d pay the most amount of money for the smallest death benefit to dance just below the MEC line and get ALL the benefits above on your money.  Read that sentence again. Around year five you’d have available every single dollar you put in.  This then becomes a pool of money that you can use to replace any financing or lost opportunity for paying cash.  It’s exactly what banks do.  Take a look at this graph (it’s nothing fancy as I created it, but the data is straight from the FDIC website). I broke down the top five banks and their holdings in cash value life insurance, in the BILLIONS, and more importantly, how they have increased their holdings over the past few years.

JPMorgan Chase is the only one who’s values went down between 2008 and 2009; however, their loan balances went up by almost the exact same amount.  They very well likely utilized this powerful tool to borrow from.  We’ll know at the end of this year when we see their numbers.  Folks, these are the top five banks in the country making double digit percentage increases in their cash value holdings!  Why?  Because they are masters of liquidity, use and control, and leverage.  I ask you, are you?

You can be.  It’s my job to teach you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


How do you tell someone that their baby is ugly?

December 15, 2009

We run into this problem everyday. The majority of hard working people believe certain financial myths that require a conversation that is similar to telling someone their baby is ugly. The “conditioning” that has been experienced is frustrating, to say the least, but understandable…especially when you understand who has been doing the conditioning.

For example, and this goes out to all you Dave Ramsey and Suze Orman followers: why do banks offer you a lower rate on a 15 year mortgage than a 30 year mortgage?

Do you believe it is because they have your best interests at heart? If not, then why the discount? If the bank does not have your interest, the consumer, at heart then have you ever considered that maybe you should understand these reasons before you just accept what Ramsey or Orman say?

I sure wish they’d (Ramsey & Orman) take the time to understand because then maybe they wouldn’t lead so many people down a path of waste and wealth transfer. Speaking of wealth transfer, do you believe that Americans transfer more wealth than they accumulate? Come on now. Think of financing. Think of taxes. Think of, and wait for this one since NO ONE talks about it, think of….opportunity costs.

What are opportunity costs? Well, if you paid (or transferred) a dollar that you didn’t have to, not only do you lose that dollar but you lose what that dollar could have earned for you.

The answer to the first question will be the next post. I feel very certain that you haven’t considered the reasons for the discounted rate. As a matter of fact, there has yet to be an individual that I’ve met with, and I regularly meet with everyday-Joe’s to highly successful CFPs and CPAs, who has answered this question correctly.

So bring it on people. Give it your best shot. And if you say it’s because it carries less risk for the bank…you’re wrong.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Why “the experts” confuse the average investor

November 17, 2009

We have clients in our office every day who love to ask what our opinion is of the market and what are effective strategies to invest and win. Well, we have our opinions but I thought I’d refer to a few experts out there in the financial world to see what they say we should be doing. First, what’s the “attitude” of investors? Let’s see what the numbers say.

The Chicago Board Options Exchange’s Volatility Index (VIX), which tracks the volatility of the market, has dropped significantly; on November 20, 2008, the VIX was 80.86; on September 11, 2009, it was 24.15. So, it appears the market is “calming down” and the investors are too. Not so fast though. There are those who anticipate we’ll need another 12-18 months to gauge the change in the market before any true confidence can be determined.

Randy Carver, a financial advisor with Raymond James Financial, says “We believe the market will move higher over the next couple years, perhaps significantly so, but is likely to go lower before it does” (italics added by me). He sure covered his butt didn’t he?

The Senior Vice President at Raymond James Financial, Sacha Millstone, says, “If you got out of the markets, you have to honestly assess why you did that. Find an asset allocation you can stick with through hell or high water.” Alright, so she feels people were uninformed or made poor decisions if they “got out”.

Uri Landesman, Senior Vice President at ING (they’re pretty big) said this, “[I] don’t blame investors for pulling out of the market, as there was no way to know how far down the market was going.” So we shouldn’t feel bad for getting out? Do we really ever know for sure how “far down” it’s going to go? We knew there would be those who said it was okay to secure your principal and there would be those who said we were stupid. There will always be a variety of opinions (hey, at least someone will be right) but let’s assume that confidence is back, the “doom and gloom” is gone, and people are ready to “get back in”, what then do we do with our money?

Uri Landesman (italics added by me): “…try technology bellwethers (ex: Microsoft, Intel). If you think we’re emerging from a global recession invest in the energy and materials sectors…Investors who aren’t sure about the state of the economy can try investing in the health care sector.” Well, no matter what, he’ll have some clients happy and others who “made the wrong choice”.

John Osbon (founder of Osbon Capital Management): “New waders in the market should invest in a mix of Vanguard Total World Stock Index Fund and Vanguard Total Bond Market Exchange-Traded Fund.”

Vahan Janjigian (chief investment strategist at Forbes): recommends Supervalu, Terex Corporation, and Tesoro Corporation. At least he provided some specifics but he does add the good old qualifiers of “if” and “could” when describing his reasoning.

Jeff Rubin (head of research at Birinyi Associates): “Stock selection is going to matter more instead of sector or some other type of selecting process (high dividend stocks, low P/E or what ever it is). As of now, I continue to stick to strength, such as Apple, Google, Goldman Sachs, JP Morgan Chase.” Okay, so the way of old is no longer. Got it.

Randy Carver: “We feel there is an opportunity in long tax-exempt bonds. We would avoid long taxable bonds, and we would add hard assets/commodities.”

Dave Ramsey (Fox financial pornographer): “Stick with your money markets for short term needs and go with a good mutual fund, like we say over and over, for your long term investments 5, 10, 20 years out.”

Sacha Millstone: “It isn’t about this or that particular investment. It is about a plan and a strategy and overall implementation.” Now I shouldn’t focus on product? These general platitudes have always confused me because my plan MUST pick particular investments and/or products in order to be implemented.

Robert Rodriguez (chief executive of First Pacific Advisors in Los Angeles): “[The economy] will be up and then down, up and then down. We will be far from normal for a very long period of time. People deploying capital will end up destroying capital.” That’s an interesting take. Now I’m really confused on what to do.

David Laibson (economist at Harvard University): “Investors expect that assets on which they personally experienced past rewards will be rewarding in the future, regardless of whether such a belief is logically justified.”

Jason Zweig (journalist for the Wall Street Journal): Responding to Laibson’s comment above said this: “[Buying] more of what has gone up, precisely because it has gone up, is to fall for the belief that stocks become safer as their prices rise. That is the same fallacy that led investors straight into disaster in 1929, 1972, 1999, 2007 and every other market bubble in history.”

How do you sum up all this information? This is only the tip of what we hear everyday on the radio and TV. Some say the economy is rising, some say it’s not, some say it’s flat. We’re told to invest and “suck it up”, we’re told that if we do we’re “destroying capital”, we’re told that we shouldn’t have gotten out, and we’re told we were foolish for doing so. We’re told specific stocks, don’t focus on specific stocks, focus on sectors, don’t focus on sectors, forget stocks and go bonds…AAARRRGGHHH!

An analogy just popped into my head that seems to wrap this all up quite well. It’s like standing on the tee box of a brand new golf course. There is no map of the course and no one has played it before. You’re surrounded by golf club salesmen who have played other courses but never played this one. Some of them have played for many years. Every one of them has an opinion about the wind and the obstacles ahead. Every one believes that their golf club is the right one IF all the factors come together properly (wind, swing, ball, layout of the hole, etc). So what do you do? Do you just pick the one salesman that you like the best and take a swing and hope it works? Dave Ramsey tells us that we should pick the one advisor that “makes us feel good” about our club choice (literally, he says that to us). No matter how hard I love my golf club, no matter how good it makes me feel, if I don’t have the right swing then it still doesn’t do what I want it to do…but at least it made me feel good, right Dave?

What about this choice? What if we worked on our swing first? Now, there’s a radical concept. Or, what if we walked the course FIRST to get an understanding of what we were hitting into? If all we did was ensure our swing was sound and then get a layout of the course, wouldn’t we be better off? Can you imagine what it would be like to NEVER care what the market is doing? Can you imagine what it would be like if you had access to capital that you could invest with a “product salesman” but they only made money IF they made you money?

I sure find it interesting…and so do my clients.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


How Financial Institutions Make Money

June 22, 2009

***Updated this post with “How Financial Institutions Make Money #2″…don’t forget to check it out.***

I’ve never illustrated exactly how banks make money.  You’d think most people would understand but the majority of those I meet with don’t.  They typically have the basics down but don’t take the whole strategy from point A to point B.

This actually takes me back to philosophy class in college.  Remember when you’d create a logical syllogism?   You’d make a few claims that work together to prove a conclusion.  Here’s a Banking Concept syllogism:

  1. The banking business is very profitable.
  2. Banks succeed by attracting depositors, maintaining use and control of the depositors money for the longest possible time, charge fees and interest on the funds their depositors borrow, and return the money to the depositors as slowly as possible.
  3. Financial tools exist for individuals and businesses to function and succeed exactly like a bank.
  4. Individuals and businesses have a choice to either deposit their money as the depositor at a bank or to deposit their money into the financial tools that allow them to act like a bank.
  5. Therefore, if individuals and/or businesses funneled their money into these specified financial tools then they could profit from their own money and transactions INSTEAD of the bank.

Seems simple.  It is. That’s what we teach everyday.  Don’t think it’s legitimate?  Then why do you see banks on every corner?  How could any other business, literally, be successful like banks?  Imagine if McDonalds was on each corner of a busy intersection throughout America.  Could they really all turn a profit?  Of course not…there’s not THAT big of a need.  So how can every bank on every corner make a profit?  By functioning in the matter described above.

Let’s go a little deeper.

Banks make money differently than you do.  They first have to attract money to build their success.  Please understand, they produce nothing.  They ship nothing.  They manufacture nothing.  They are completely dependent upon you and others to deposit money.  These deposits are the bank’s “raw materials” to operate their business plan.

Let’s imagine that two accounts are opened at the time of your deposit: one for you and one for the bank.  The bank is required to keep a small portion of your deposit on hand but is free to use the rest as it sees fit.  The primary function of the remaining money is used to loan out to others, maybe even yourself, and earn the interest on those loans.

I like how Don Blanton, author of Circle of Wealth, explains it:

“The homeowner, who pays the builder, who re-deposits the money back into the bank, borrows this money.  After receiving the money from the builder, the banker quickly reactivates this process.  Once a small portion of these funds has been placed in reserve (as required), the bank loans this money out again.  Let’s assume the next loan is for a debt consolidation. Now you should start to see why being the bank is so advantageous!”

He continues, “Let’s continue with the examlple.  The money for debt consolidation will eventually be returned to the bank as payments.  After keeping the required minimum, the money immediately goes right back into circulation!  This time it could be used to provide a customer with a car loan.”

“As the money is again deposited, it could be used for installment credit on a credit card issued by the bank.  Can you see the cumulative results of this process?  The bank gets one dollar to do the work of several by focusing on multiple uses of your deposits.”

We hear and see advertisements every day of financial institutions telling us to deposit our money.  They’ll even give us an iPod or a new sweet toaster oven.  They have only two hooks: easy access to money and the opportunity to compound interest.  The strategy they themselves employ and the strategy that they want us to employ are very different.  They concentrate on deposits that can generate multiple returns while you are invited to leave yours to compound and receive one benefit: interest.

Truly, how many people do you know that have actually gotten ahead financially because of what their money did for them at a bank as opposed to how many banks have gotten ahead financially because of what your simple deposits have done for them?

What if you could redirect your “deposits” into an entity that you own and control and could therefore function just like a bank?  Wouldn’t it only make sense that you’d benefit financially in the exact same way as banks do?

Don’t use the bank, be the “Bank” and do what the wealthy have done for ages.

Blessings,

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Cash Value life insurance is a horrible investment; however…

May 15, 2009

We’ve all heard it: Cash Value life insurance is a horrible investment.

Are you ready for this?  All those gurus and experts ARE RIGHT!

The problem, there’s a “however” that needs to be added to that claim.

It should read like this: Cash Value life insurance is a horrible investment; however, if it’s not used or designed for death protection and instead is designed to maximize the MEC (Modified Endowment Contract) rule, then there’s no better place to park money.

What?

Let’s take a look at what was possible prior to 1986 when the government realized that the wealthy individuals had a tool that was too good of a tax shelter…got to love the government.  Prior to 1986 NO ONE talked bad about life insurance.  Why?  Because you could put as much as you wanted, no limits, into a policy and the insurance company would underwrite you for a small amount.

For example: someone with a million dollars could put it into an insurance policy and the insurance company would underwrite them for maybe $100,000 in death benefit.  Why would the individual do this?  For many reasons: All the money in the policy was safe from lawsuits, litigation, and even IRS liens.  The money was totally liquid and they had available what they put in.  Let me say that again: this money was completely liquid and could be used at anytime with NO qualification necessary and NO IRS involvement. The money also had guaranteed growth.

Real life example: the Denver Business Journal in November of 1999 produced what they called “The Century Book”.  This special edition provided a 100 year history of Denver and highlighted something or someone for each year of the century.  When you come to the year 1929 the event covered was of course the Great Crash.  Also within that article was the story of one of Denver’s most wealthy individuals and at the time Denver’s best market player, Claude Boettcher.  The article says this:

“When he returned (he was traveling in the Soviet Union when the market crashed), he fired the messenger who brought him news of his financial ruin.  He had the courage to wait for stocks to drop more before he borrowed $2 million for his insurance policy and bought stocks and banks – the reason he is still known to history.”

How much death benefit do you think $2,000,000 in cash value would have to have?  Back then, very little.  Notice, when the market crashed he didn’t lose his cash value.  It’s guaranteed. It can’t be lost.  He was “financially ruined” but did that effect his ability to access his capital? Nope. What is the one factor that saved him financially? Having access to capital. If this tool was not in his portfolio then Claude would have been just another story of riches to rags.  But still to this day his wealth lives on here in Denver.  Now if he was Denver’s best market player why in the world did he have so much in cash value life insurance?  He was obviously one smart man.

In 1986, the government decided that it was not fair that the wealthy had such a great tax shelter tool and decided to create what is called the Modified Endowment Contract.  Basically, this rule added the risk to the insurance company by creating a minimum death benefit for the premium being paid to fund the policy.  If a policy owner goes over this MEC line then the majority of all tax advantages are wiped out.  The policy becomes a qualified plan with the IRS all over it…forever.  This new MEC rule limits what I can do with my own money…thanks Big Brother.

Let’s get back to the original MYTH.  Virtually all gurus and experts say that Cash Value life insurance is a bad investment.  Let’s first prove they’re right before we illustrate the proper use of the MEC line.

If I had a healthy, 30 year old client who was willing to fund a policy for $25,000 per year, how much insurance do you think that would buy?  Probably around $2,500,000 in death benefit.  Why would this be a bad choice?  For the exact reason Dave Ramsey and Suze Orman say:  your cash value sucks.  Now Dave says you have no cash value for three years…even with this type of policy he’s wrong; however, it would take 12 years of paying $25,000 each year before you’d have available in cash value what you put in.  Not a good option.  If you needed $2.5 million in death protection then buy term and invest the rest.

Here’s the “however”.  However, if the policy is NOT designed to maximize the death benefit and “dance” on the MEC line then what do we have?

Same example: this client is willing to fund a policy for $25,000 per year but we use it to purchase the LEAST amount of death benefit in order to have the most cash value available.  The death benefit is only $900,000 and he has over $17,000 available DAY ONE.  When he makes his year three payment of $25,000 his cash value grows by $29,000…already getting back more than he put in.  At the end of year four when year five’s premium is paid, his total cash value exceeds what he has paid into the policy…NOT twelve years.  Let me ask you this: if you save for five years to buy a car by using a money market at your bank (which is what Dave Ramsey recommends), how much would have in the account?  What you put in right?  Plus a very small amount of interest; however, the IRS takes their share of that every year.  If Dave Ramsey recommends this type of account for purchasing items how is a policy designed in this matter a bad thing?  Keep in mind, the IRS doesn’t get their share.  Shoot, you even have a growing death benefit just in case…at year five the death benefit is over $1.3 million.

Insurance people think we’re the stupidest insurance agents around.  Why?  Because we don’t get paid on the cash portion of the policy.  The commissions would be incredible if we did the first example but we aren’t here to sell expensive death benefit policies we’re here to teach individuals how to bank.  Our commissions are significantly reduced.  Why would an insurance agent turn someone down this path when they can attempt to sell a huge policy and make a ton of money?  We don’t consider ourselves insurance agents, we’re bankers.

So why would we want to fund a policy like this? My next post will be how to USE these funds to redirect debt or purchase vehicles, equipment, etc.  Over time, if you implement this concept, you will NEVER pay another dollar in interest to another entity, you will NEVER need to finance with a bank, and you will NEVER lose a dime.

Cash Value life insurance is a horrible investment; however, if it’s not used or designed for death protection and instead is designed to maximize the MEC (Modified Endowment Contract) line, then there’s no better place to park money.  You get back everything you put in, there is no risk of principle loss, there’s a guaranteed return plus a tax-free dividend, compounding growth, gains tax-deferred but can be used later in life tax-free, no government involvement (they already ruled on all this), creates an immediate tax-free estate, and most importantly, it’s liquid and you have complete use and control of the money (read that one again – what other tool, other than a bank account, can you claim this).

You can have everything you need and anything you want. Don’t use the bank, be the “Bank”. Do what the wealthy have done for ages.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

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Dave Ramsey is CLUELESS!

May 8, 2009

Let me be a little more specific.  I do have to tip my hat to Mr. Ramsey for all that he has done to help people get out of debt.  His work has freed thousands of individuals and couples from the crippling effects of debt…that horrible thing we do that requires us to pay someone or something back WITH interest.

HOWEVER, what he recommends when the focus shifts from debt reduction to capital accumulation is just plain STUPID.  I so wish Dave would just stick to what he knows best…getting out of debt.

Let’s first take a look at what he says.  Here’s one straight from his website: “If you follow my plan, you will begin investing well. Then, when you are 57 years old and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds,…”

So what’s the big deal?  If you look at the criteria you’ll laugh out loud.  This example was a 30 year old who would invest $93 per month for 27 years into a good growth mutual fund.  The basis (the total amount contributed) would be $30,132…that must be some kind of return he’s calculating.  As of matter of fact,

  • He assumes a 17.75% annual return EVERY year.
  • Whenever he’s calculating future account balances he always uses a return between 15-18%…totally ridiculous.
  • He does this all the time by the way.
  • Recently on Fox & Friends (Fox’s morning news program) he was asked a question and responded in the same manner he always does:  “stick with your money markets for short term needs and go with a good mutual fund, like we say over and over, for your long term investments 5, 10, 20 years out.”
  • He teaches his students to NOT invest with a mutual fund that is younger than five years – “you need a good track record.”

I decided to look at 2008’s mutual funds with a return over 12%.  I thought I’d be nice and only cover the first half of the year.  Here are the results:

  • Of the Top 10 only eight had a return over 12%
  • Five of the eight were younger than three years therefore would not have been selected. One of the five was brand new and had no data at all – certainly not recommended by Dave.
  • Of the three remaining, all of them had a negative five year average. All were no-loads but averaged 1.75% in fees.
  • All remaining three had a huge spike that lasted less than 60 days.

So, five of the eight, with the returns Dave says is possible each and EVERY year, were too young.  Three of them averaged negative returns over the previous five year history.  And, they had a very short stretch of success.  Remember, he never recommends to sell so all those gains would have been lost in the second half of the year…all of them are down over 40% as of now.  As a side note, these returns didn’t include what was lost to fees and taxation.

But, the main point,

  • There are thousands of mutual funds (there are more MFs than stocks)
  • Do you really believe you could have timed it perfectly (again only a 45 to 60 day window)?
  • Do you think you would have been so lucky to narrow it down to the ONLY three which actually hit the returns he talks about?

If that’s not gambling I don’t know what is.  Playing with mutual funds is NO different than playing blackjack in Vegas.  It’s NOT investing it’s speculating.  Now look, I understand that there are people out there who can accomplish what Dave recommends but Dave does NOT deal with nor speak to those individuals who treat their money management / trading as a full-time job.  He specifically recommends this strategy and “attainable” results for your average Joe – “like we say over and over”.

Just recently Dave Ramsey held what he called Town Hall For Hope.  It was a great idea to market his get-out-of-debt business…which, by the way, is excellent.  He has great insight with this particular niche of financial assistance.

When it gets to investing he’s simply laughable.  In all seriousness it’s very frustrating because he’s just plain wrong and leads many down a path that is just not attainable (unless you are extremely talented at trading which most are not). Here’s a question that was asked of him during the Town Hall For Hope:

Q: Dave, I have been through Financial Peace University and found some of the rates of return (10–13%) you suggest for “growth mutual funds” to be unattainable in today’s marketplace. Have you revised your suggested rates of return, and where could I find those rates?

A: Those rates are what the stock market has averaged over the past 70 years. Some years it has averaged more and some less. The market may gain 15% one year, then 10% the next, then 3%, then 20%. The gain has varied year to year, but it has averaged 12%. Sometimes it may lose money, but the average is still 12%. Even in these down times, I would still project the same overall growth, based on the past. Remember, the market eventually recovered after the Great Depression, a president resigning, an energy crisis and cowards flying planes into buildings. We’ll survive this as well.

Let’s look at this answer he gave.  First of all, 12%?  There is not one respected financial entity that claims the average is 12%.  According to www.soundmoneymatters.com anyone claiming the average to be 8% is “lying to you.”  The saying is so often repeated that even newcomers know it – “over time, the average stock market return is 8-12% annually”. Dave seems to suggest that if you’re investing in the stock market you will earn 12% if you can just stay in the market long enough (so why does he calculate a 15-18% return when he’s using actual numbers?). The problem with a statement like that is incompleteness of thought and downright deceptiveness.

This statement purports the idea that if you can only buy a few (or maybe only one) stocks you are going to achieve that famous 12%. That is some really good news! Oh, by the way, which stock was that?

It’s sad but true that there are people who really believe in this mythical 8-12% stock market average return by just simply buying a stock or mutual fund and sitting there doing nothing. The flaw in the entire discussion is that the performance of “the market” doesn’t matter; what matters is the performance of the investments in your stock portfolio.  If you make a 100% return on your portfolio, you had a great year regardless of the S&P 500. If the Dow made 2% and you beat it with 2.5%, did the net result in your portfolio really give you something to brag about?

You would think then that he would be a fan of a product that actually does perform based upon “the market”, like a Fixed Indexed Annuity.  They can be linked to the S&P 500 and go up when it goes up.  One thing they don’t do is go down when the S&P goes down…SECURING YOUR PRINCIPLE.

But Dave says they are a joke for two reasons: 1. There are fees if you pull your money out within a 10 year period and 2. They are a product of an insurance company.

Okay wait, if I were to follow his advice I wouldn’t care about the 10 year term because I’m never supposed to touch this money anyway – “you don’t sell. You think long-term and just ride it out.”  As far as the second reason, I believe he’s just plain naïve here.  Look back over time and show me how many investment firms, Wall Street brokers, banks, etc have gone out of business compared to insurance companies.  Maybe, just maybe, they have something figured out.

I’m not recommending Fixed Indexed Annuities here I’m simply pointing out his inconsistencies.

Finally, I think its fine that he attempts to teach an idea to people.  The problem I have is that outside of his advice there’s only heresy and scammers who are focused on commissions.  Again, very naïve and utterly false.

Do you remember that show where Ben Stiller picks up a hitchhiker who has a great business idea?  Instead of the “8 Minute Abs” video he wanted to produce the “6 Minute Abs” video.  I think I may take a similar angle and start promoting that the average Joe getting out of debt and beginning to accumulate can toss away the recommendations of old with 12-18% returns and do my recommendation of 30-40%.  That’s it!  From now on I’m going to tell my clients to only invest their money in those “funds” and “the market” that returns them 30-40% so they can have plenty when they retire.  Then, I won’t ever recommend any specific “fund” or “market” so that I don’t look like a fool.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

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