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An interesting trend is occurring with the people who are contacting me about EIULs. I am getting a lot of calls from folks in their early to mid thirties who start the conversation off with something like this: My 401K is going nowhere, I know there must be a better way to save for retirement. Now I find this very interesting because most of these folks weren’t in the market in 2008, the last time we saw a significant negative year.
I had this conversation recently with a 35 year old.
DS: What are you trying to accomplish?
Client: Well, my 401K is going nowhere, so I am looking for something that will do better and work for me.
DS: When did you start your 401K?
Client: Well, I don’t really remember, but it was somewhere around 2008 or 2009. Before that, I really didn’t have a great job and I wasn’t married so I was spending everything I made.
DS: Do you own a home?
Client: Yes, after getting married, my wife and I were able to buy a home with assistance from our families.
DS: How much are you able to save now?
Client: Well, between my wife and myself we are saving around $1200 month including what we put into our 401Ks. Before our 1st child was born, it was a little more.
DS: Do you remember the stock market dropping significantly?
Client: Well, I do remember it, but it did’t really affect me, so my memory of it is vague. Around 2007 or so right? But we do remember the housing prices dropping, because we were able to pick up a nice house for a decent price in 2010.
DS: Yes, 2008 was the last time we saw a big drop in the stock market.
What is surprising to me, is that this 35 year old recognizes the issues with mutual funds even though he hasn’t had a truly big negative year. People tend to forget the fear of big drops in ones finances, but the scars remain long after the memory fades. But, this person was able to recognize the issue without the scars or the memory. And he isn’t alone. I have been getting increasing amounts of calls from folks in this same situation and similar age group.
That is progress.
On Being a Contrarian September 4, 2016Posted by shaferfinancial in Uncategorized.
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Not a day goes by when I don’t speak to a very intelligent person who simply accepts the common wisdom about life. Mostly, this doesn’t cause problems for folks. Unfortunately, there are some area’s of life where just going along with the herd will lead to unfortunate circumstances.
My wife and I aren’t like that. We are contrarians. My wife after watching a ton of TV shows about tiny house living convinced me that we were wasting time and money living in a 2000 square foot abode with just 3 people. So, when we wanted to move she convinced me to move into a smaller place; 750 sq. feet. Frankly, I had my doubts, but guess what? It is working well. Before we had large chunks of our home that we never used other than to throw junk into and collect spider webs. No longer. Cleaning…..is swift and easy and because we use most of our space we keep it more tidy than before. Now when our son disappears into his room [ok his room isn’t tidy] he is simply a few steps away to call for meals. We got rid of lots of stuff we hadn’t used in years. We really do feel lighter. Hard to explain but it works. Who knew spending less money on living expenses, getting rid of excess things, and being physically closer to your family would make you feel so much better?
I do retirement income seminars with some folks. We give information on several alternative strategies for retirement income including EIULs. We took a year hiatus, but we have scheduled another one:
October 28-29 2016 San Diego California
If you have any doubts about what you are doing with your finances, you owe it to yourself to come and listen to our group of experts. For a small amount of dollars you can at the very least understand alternative strategies and possibly put your financial future on stable ground. Doesn’t matter where you live, get on a plane and come out to San Diego to meet us. You can find the link on my retirement income page.
When I talk to folks who followed our advice, they all say they feel much better; happier, less stressed. Becoming a contrarian has its benefits……..
Latest Dalbar Data June 15, 2016Posted by shaferfinancial in Uncategorized.
The latest Dalbar data is out, detailing the continue failure of the 401K/Mutual fund strategy for retirement saving. This has been an ongoing series of datum, for over 30 years, that records what actual investors’ rate of return is over varying time periods [1,3,5,10,20 and 30 years]. The data has been recognized as similar to internal data produced by the largest mutual fund companies.
It is a really simple story. Although this data is created for producers, and is slanted for them to not take responsibility for the results of their advice, this year there is a discussion on the “psychology” of investing, better known as behavioral finance. There is still a misunderstanding on what the behavioral finance scientist tell the industry.
They still call folks who react to market moves, up and down, irrational. That is folks who sell when fear has pushed the market down or buy when the market is buoyed by exuberance are described as irrational. The misunderstanding is in two points:
- Our brains are hardwired to react to fear in a “flee or fight” mode. That is exactly what is rational to do when faced with a saber tooth tiger. So what the mutual fund industry really wants you to do is irrational and goes against how our brains are hardwired. This, of course, explains why people in general don’t follow the advice of these buy and hold mutual fund sales people.
- There is no evidence that the advisors themselves are able to overcome the way their brains are hardwired and not make the same mistakes in their own lives. The industry does try to “encourage” advisors to convince people to buy and hold by tying their compensation into how much total money they are managing, but this has not proved to be capable of stopping people from their fear response.
So having pointed all this out [for the umpteen time in this blog] here are the results:
For the last 30 years the S&P 500 benchmark index has returned 10.35% while the individual investor in equity funds over those 30 years gained, on average, 3.66%. Investors stayed in their equity funds for an average of 4.1 years before selling out.
The numbers are a little better when you lower the time span down to 20 years with S&P 500 benchmark averaging 8.19% and the individual investor averaging 4.67%. This better performance is easily understood because the most damage is done during years the index goes down significantly which hasn’t happened since 2008, a full 1/3rd of the 20 year time period.
For those investing in asset allocation funds and fixed income funds the returns are even worse at 1.65% and 0.59% 30 year returns respectively.
So what does this all mean? Again, this means that the strategy of investing in mutual funds within or outside of a 401K wrapper is a strategy that is unlikely to create enough wealth to fund one’s retirement years, unless you are the lucky few that either has a large enough income to push large amounts into the mutual funds and/or you have “Buffett like” ability to ignore market movements. And, of course, this also means that your interest in creating a well funded retirement goes against Wall Street’s interest in having you invest in stocks [mutual funds or individual stocks]. The individual is left to deal with either a failing Wall Street pushed strategy or figure out a different strategy in the face of massive amount of propaganda for the mutual fund industry.
The sad thing about this state of affairs is that the people who most need to find an alternate retirement strategy [the middle class], are so fully propagandized by the mutual fund industry that they almost never can see alternative strategies without reacting to the negative propaganda put out on EIULs and Investment Real Estate. My clients tend to be up the ladder from the middle class is both income and education and especially adept at mathematical concepts.
My most common question? Why don’t you hear about EIULs or Why isn’t this more commonly done? The second most common comment? There is a lot of negative comments on the internet about EIULs. The next comment is usually, “this makes so much more sense.”
So to all those folks out there who haven’t been able to pull the chain on an EIUL yet, I say, put 3.66% into all those retirement calculators and see what the potential value is at retirement age and multiply that number by 4% [even that number is found to be to aggressive], the suggested amount you can take out yearly to make your retirement last until death. Now that you have gotten off the floor, you might want to give me a call!
What I would like to ask the mutual fund shrill’s? April 26, 2016Posted by shaferfinancial in Finance, mutual funds.
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Sometimes I imagine the ability to actually press the facts on the mutual fund industry.
Alas, this isn’t likely to ever happen. But what if it did? Here a made up scene of a mutual fund executive getting grilled on the witness stand by an attorney. Again, this is a product of my imagination!
MF= Mutual Fund Executive
TA= Trial Attorney
TA Your company has 10,000 sales people giving advice to people on retirement savings, right?
MF We don’t call them salespeople, they are Registered Investment Advisors or Certified Financial Advisors, but yes that is about the number.
TA The majority of the time they suggest clients invest in mutual funds, correct?
MF Not sure about that
TA How many of your mid income clients are suggested to be in stocks or bonds and not mutual funds?
MF In that group I would agree with you that most are in mutual funds.
TA In fact, your company in involved with over 100 of the fortune 500 employees, correct?
MF Sound about right
TA So you have a fiduciary duty to put 100’s of thousands of employees into the correct retirement savings vehicle.
TA Have you seen the Dalbar reports on individual returns for those investing in mutual funds?
MF I believe we give that out to our representatives
TA Does you company have any internal analysis of individuals’ returns that invest in mutual funds with your company?
TA What is the average returns that you are finding for individuals?
MF I’m not sure
TA Can you read the report generated by your company that I just handed you [Exhibit 34]?
MF Yes, give me a second
TA Just read the last paragraph out loud to the jury
MF Overall returns average around 3.3% over the last 25 years for individual investors……..
TA Where in your printed advertisements does that number appear?
MF Don’t know, you would have to talk to advertising
TA Does it ever appear in your companies advertisement?
MF Not sure
TA Again, are you aware if that result ever appearing?
MF No, not aware of it.
TA Does being a fiduciary mean you should disclose items like that?
MF No, the SEC has never made a rule like that.
TA So because it is not required by the SEC you don’t feel the need to be honest with your clients?
MF That is not how we think of it. If our clients do what we tell them too, they will get much higher returns than that.
TA But they don’t do they?
MF I’m not sure.
TA Did you not just read your internal research indicating that they don’t?
MF I’m not sure we are talking about the same thing
TA What is the object for these employees in their 401Ks that you are suggesting they fund with mutual funds?
MF To save for retirement
TA Would you say that the objective is to ultimately have a stream of income when your clients no longer work?
MF Yes, that would be correct
TA Would you also say that you want to have them get the largest stream of income they can?
TA Would you say that part of your fiduciary duty is to make sure you suggest financial instruments that would accomplish the largest stream of income they can achieve?
MF I would agree with that
TA Have you heard of sequence of return risk?
MF Yes, but what does that have to do with mutual funds?
TA Explain what your understanding of sequence of return risk is
MF The order of returns. In other words, is the order of returns such that it increases the risk to the overall return given a certain time period.
TA When people save for retirement are they looking for a return in a certain time period?
MF Well, yes I guess, they are going to retire at a point
TA So wouldn’t they have to deal with sequence of return risk?
MF Yes, but we have products that deal with that
TA What are those products?
MF Annuities and certain mutual funds that move the percentages of equities down as one ages.
TA What does that do to the overall return?
MF Well it would decrease it.
TA Your products that your company suggests to deal with market variation reduce the returns below the 3.3% return you previously read?
MF Well….if you put it that way….but anytime you reduce risk you reduce returns
TA What percentage of your clients are in these risk reducing products?
MF It would be a small percentage of folks approaching retirement.
TA So, for most of your clients sequence of return risk is a real concern?
MF We aren’t concerned with it for most of our clients
MF Most of our middle income clients are more concerned with overall returns
TA Do you think if they understood SOR risk they might be concerned with it?
MF We don’t speculate on that, we give the clients what they want
TA But aren’t you a fiduciary?
MF Again, the SEC doesn’t require us to talk about SOR risk
TA As a fiduciary you are not discussing the overall returns experienced by consumers and the ways to decrease SOR risk?
MF We discuss what the most appropriate vehicle is as required, and for most of our middle income clients mutual funds are the most appropriate vehicle. We have worked hard to get the overall expenses down in mutual funds and are very proud of our products that lead the industry in low fees!
TA So you are very proud of the fact that your clients are receiving 3.3% returns over the long run when the market has returned over 8%?
MF Well that is a function of investor behavior that we have no control over. The product itself does great when matched up to our competition.
Musings on the oil market and my oily stocks March 3, 2016Posted by shaferfinancial in Finance.
Two years ago no one could predict what the last 20 months would look like in the oil market. But, the one thing that people could know if they looked is that the oil market is known for having mind numbing large movements that don’t conform to the fundamentals of oil production.
Given all that, and the impossibility of predicting oil prices going forward, it is apparent we have hit an inflection point. Brent price closed up to over $37 today. Interday movement was over 3% from its high to its low [all before noon]. That in itself tells us that emotions are ruling the movements.
Shale oil is now down over 500,000 BPD from its peak. Quarterly and year end financials indicate huge losses in the industry totaling billions of dollars for 2015. Bankruptcies are increasing. The majors are lowering capex significantly. The tight oil companies have reduced capex 80% or more in some cases. Some companies are even stopping their drilling programs. OPEC producers are talking freezing production in concert with Russia and other countries.
Demand is up. India over 10%, China right at 10% and the good old USA, gasoline usage is up 2% over last year.
Now all the analyst point out that storage is filling up here in the US. But that is a little confusing as this is about imports coming in bought by the refiners. Why would they go to all the expense of storing oil if they didn’t foresee the price going up in the near future?
Compare this to 6 months ago when tight oil was still being produced at peak rates, Saudi A. and Russia was trying to increase production, and everyone was predicting that demand would level off.
Now there is considerable damage that has been done to the oil industry. Billions lost. 100s of thousands of people laid off. Projects postponed and canceled. Reserves not being replaced. Countries budgets being diminished. Production in the North Sea, Mexico, Venezuela and Brazil are in real trouble. The first three have mature fields that are depleting and not being replaced. Brazil self imploded.
But there is a time when things change, and I believe we are there. Maybe the price of oil will continue to be lower than what it costs to produce it for a while longer???? But, we are IMO, looking an a inflection point.
EIUL Update February 23, 2016Posted by shaferfinancial in Uncategorized.
Over the last year most of my clients achieved positive results. This in light of a stock market that has gone nowhere with the S&P 500 actually slightly negative. Even more important is that with stock market watchers on edge, expecting negative results, those clients and myself who have EIULs know that whatever the market does our losses are capped at 0. For those who have retirement looking at them in the mirror this has to be a very comfortable position. For those who have decades to retirement, the good night sleep or the ability to completely ignore the noise has to be worth it.
In general, EIULs have continued to become an important alternative for thinking folks who want some protection from market forces. It again was the fastest growing financial product. During the last year, Wall Street and Whole Life forces ganged up to get the SEC to change the illustrations required. This change produces illustrations that are grossly more conservative than before. Note, the SEC didn’t force mutual fund sellers or whole life sellers to become more conservative in their marketing materials. Despite this more conservative illustration regulation, EIULS continued their popularity gain. Note that with the long term lower interest rate environment, the worse possible for life insurers, EIULs continue to preform as they were designed to do. And, the insurers that sell them continue to be financial stable. We are now starting the 3rd decade since the first EIULs were introduced, and everything the critics said would happen, hasn’t. Something that can’t be said about Mutual Funds, Variable Universal Life, Whole Life, etc. Given what has happened over the last 20 years to the economy, the fact that the stock indexes are barely above where they were 20 years ago, given that the historic returns in EIULs have dramatically outstripped mutual funds, this product has fully proved itself.
I get asked all the time why this product isn’t more well known? The answer is very simply that Wall Street + the government has created a propaganda system that is all encompassing when it comes to retirement planning. But rest assured that Wall Street and the Whole Life insurers are very cognizant of the power of EIULs for retirement income. Hence, the new illustration rules.
State of the state; 2016 January 7, 2016Posted by shaferfinancial in Finance.
Tags: New Year
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I have so much to be grateful for. Sometimes I get caught in the web of day-to-day activities that I miss out on what is truly great. So here is the state of the state of my life for Jan 2016.
I have a great wife and a great kid. They continually give me joy in my life;
My business relationships continue to flourish. Doing seminars with Jeff Brown and crew has been a great way for me to get my message to a wider audience. Thanks Jeff for including me!
My stock portfolio took it on the chin in 2015, but thankfully I have learned to be patient and not reactive. Oil is now priced at less than half of what it takes to get the marginal barrel out of the ground. Makes little sense, but the market does that some times. My EIUL took no losses this year, unlike the market. Makes for a good nights sleep.
I moved this summer to a new town in NH. It has been great for the whole family. Definitely a good decision that will make our family stronger and open up opportunities for us all! Do miss all our friends in the old town though.
Change comes hard. Really glad I was able to make the changes I did over the last couple years.
Here’s to a great 2016.
Thanks to all who favored me to be in their lives. I continue to try to help as many people as I can!
Patience; The Ultimate Virtue November 19, 2015Posted by shaferfinancial in Finance.
Tags: investing, youth sports
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We live in a society that keeps moving faster and faster. We want instant success and make instant judgements, labeling people/strategies a failure in short time. I read a Florida State University football blog on a regular basis, and posters are constantly writing off these athletes as a bust if they don’t play like All-Americans in their first couple years on the team.
I see the same in youth sports. If the kids aren’t instant stars, dominating at an early age, then the adults in their lives push them to move on to other sports/activities or consider it just recreation and lower their expectations to “its a lifetime sport.” In school, if they aren’t immediately making great grades, reading at college level at age 10, or doing Algebra in 5th grade, then we need to get them tutoring.
But read the biography of successful people and you see a different line to their success. Failure after failure until finally success. I am reading a biography of the Wright Brothers that is demonstrating this.
And of course the opposite happens. Early success is assumed to mean that elite status will follow. In youth sports, we see that all the time. The kid that is 6 ft. at 13, is assumed to be on his way to being an elite athlete because he can dominate his smaller competition. The person who gets great returns on a stock pick is assumed to have some better technique for picking stocks that will last forever.
But reality is something different. US swimming has been looking at how many top youth swimmers become elite senior swimmers. It is pretty easy to document in swimming because the competition is about the stop watch [or electronic timing now a days]. So US Swimming looks at the top 10 times of 12-13-14 year olds and compares that to participants in senior nationals, junior nationals, NCAA, world competitions, etc. over the following years. So how many of those top youth swimmers end up as top senior swimmers? 10% for men and 19% for women.
What does that tell us? 1. We can’t determine who will go on to become elite athletes until after puberty. 2. You can’t tell who will become great by just looking at them. There is something there that can’t be predicted. Same with good investors. Can you name great investors over the long term? There is probably a couple of handful of folks you could name.
So what is the most important personality trait in all this? Patience. That’s right, those 90% of boys that were not considered elite swimmers during their formative years kept on going to swim practice. They kept on working. They didn’t allow someone else to tell them they weren’t good enough. And they had coaches that did the same thing. They didn’t rush their development, didn’t move these athletes to the bench, didn’t spend all their resources on the few who were looking great at age 12.
If you come to our retirement income seminar, you will hear the same thing. We have folks from different parts of life, some with incredible success already, some just starting out. But, the one thing we preach is put a plan in place and show patience.
And we try to eliminate the noise that might cause a lack of patience or a panic for our clients.
Like a good coach, we nurture folks through the process, giving them all our time no matter how successful they are when they come to us, because we know some of the most meager beginnings become our greatest successes; like the Wright Brothers.
Musings on Oil September 23, 2015Posted by shaferfinancial in Finance.
Tags: demand for oil, drilling for oil, oil
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Latest IEA report looks to 3rd quarter 2016 for the supply/demand lines to cross back over. Currently they estimate a almost 2 M BPD oversupply. For the last 6-9 months they have been overestimating US shale supply and understating actual demand. Take these figures with a grain of salt as no one knows how much Iranian oil is currently in the market and how quickly they can ramp that number up. They also totally missed the current over supply situation that started early in 2014.
However, I have learned that no one is very good at estimating oil supply/demand or predicting future price.
One thing we do know is that this is the tipping point for NA tight oil. Bankruptcies of smaller firms have begun, Wall Street has finally turned off the spigot of capital, and people are starting to actually look at companies financials to see the inability of 98% of these companies to make profit. Is this what Saudi Arabia has been waiting for?
Almost daily some oil company representative or analyst has been saying we will never get back to $100 oil. My experience suggests that such pronouncements are rarely correct, especially when you hear it from a lot of sources. My prediction; no one knows what the price of oil will be 2 months from now, let alone 2 years from now.
Finally, there is much hand wringing on economic activity changes in Asia. Yet, boots on the ground notice no difference throughout the region. One thing we do know is that people have short memories. For example, in the USA cars and truck sales have been brisk and dominated by SUVs, trucks and large sedans that get poorer gas mileage.
529 Education Plans September 17, 2015Posted by shaferfinancial in Finance.
Tags: 529 Funds, EIULs
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A client has asked me to review my thinking on 529 Education plans. Specifically, he asked that I compare them to using an EIUL for college funding. As many on this blog know, the issues of 401Ks funded with mutual funds used for retirement income are rarely talked about in the popular press. Those issues don’t go away if you change the wrapper to a 529. So most of the issues are the same plus one more big issue.
Sequence of return risk is the same as in a 401K. What happens if the market takes a dive right before your child needs to use the money for college? Well, you end up having much less than you thought you would have for college. What are the odds of this happening? If history is a guide well over 70% as the average bear market occurs every 4-5 years. To account for this most companies use “target funds” which increase the bond percentage in the fund as you get closer to the target date [estimated first year of college]. The problem with target funds is that by decreasing the equity coverage you decrease the average returns. The other issue is that bond funds can also decrease in value at the same time [as we found out in 2008-09]. The end result is that you have to be lucky [real lucky] to not have an issue with these 529 funds.
Many think they can be proactive with the funds and get the money out of funds if the market starts going bad. Studies have proven that individuals are really bad at this strategy universally. And many find that they can’t just sell their funds inside a 529 like in a 401K. Bottom line is that you have a really good chance of getting “stuck” in a fund that has huge downward variability when you have a drop dead date for using the money. Never a good strategy.
Next is that the funds must be used for educational purposes. Now I know every parent thinks their kid is an academic superstar and will end up at Harvard [tongue in cheek], the reality is that over half [65%] of them will not graduate from a accredited program. And if you don’t use the funds for education you need to pay taxes on the principal and the gains. I know this is tough to imagine for many, but there are a whole lot of folks that would be much better off not wasting their talents at college. There are many really lucrative occupations that kids would find meaningful that don’t require college. Having that money sitting there could encourage those kids to waste the funds sitting bored in a college classroom instead of finding their way in life.
Finally, putting money in a EIUL instead does 3 things. It eliminates sequence of return risk increasing the likely average return for that day they leave for college. It eliminates the possibility of taxes if the choice is not college. It creates a fund that can be used for a variety of things, from a car, to a down payment of a house, to college that can be turned off if they want to defer after a year of classroom boredom or even a trip to see the world. And it also creates a “bank” that the offspring can use “for the rest of their life.”
Borrowing out of a EIUL policy can be done two ways. The first is cost free and the second variable type loan allows for arbitrage against the interest credit. So you can actually make money on the distributions you have already used [historic numbers point to a 2-3% advantage over the long run]. The compounding continues as long as you have the policy using a variable loan in your life insurance policy.
So here are the five takeaways:
1. An EIUL offers greater flexibility
2. Sequence of return risk is eliminated
3. Positive arbitrage of funds is a real possibility
4. Life time bank that can be used, replaced or not, and used again
5. Likely greater return in an EIUL than the funds inside a 529 wrapper.
And here are two additional benefits:
1. Underwriting is done at an early age so diminished health is not an issue for obtaining life insurance at a later age
2. You control the policy and aren’t at the whims of the government telling you how you can use your own money
So what are the negatives????
1. EIULs are not made for short term thinking. If you surrender your policy in the first 10 years you are likely to not get all of your principal back.
2. To use the policy efficiently you need to keep it for life [or pretty near] and you need to plan ahead how much premium you are going to put in.
3. The total costs for the life of a policy are going to be between .25 and .4% on a child. There are many mutual funds that have lower total expenses.
4. You need to only purchase the policy from a financially stable insurer [top rated], because it is the insurer who is backing your policy.
I let the reader decide which makes more sense.