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State of the state; 2016 January 7, 2016

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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, 2015

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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, 2015

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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, 2015

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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.

My Opinion on Markets September 8, 2015

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Since everyone seems to be asking me, I will give a brief opinion on the state of the oil and stock markets. Note, my crystal ball has been broken for a long time, hence my actual positions are long term and not driven by short term variation [no matter how dramatic].

The stock market has fallen back a little in August and in my opinion will see little real progress for a while. I would expect some up and down going forward but at some time a good 25% drop or so would be positive. This type of variation is relatively good for folks in EIULs as any downward movement is capped at 0% and the upward movements are captured. A 25% drop would clear out a lot of downward pressure and give the market some room to progress. We are still overdue for a significant drop.

The oil markets are still very bearish. However, we are seeing green shoots. Oil usage is up around the world including China [where much of the worry of economic malaise rests]. China is filling its strategic reservoir with this cheap oil, buying 10% more oil than last year. In the US it is up 9% year on year. India’s economy is chugging along, increasing at 7%, which should mean increasing oil usage at around the same point.

As to production, many believe that Saudi Arabia is producing all out at this point. If it isn’t it is close. The much talked about tight oil production in the US/Canada has stopped its crazy up slope in production in December. A peak in December, followed by a leveling off until another peak in April followed by decreases since then has reversed the production slope of NA oil production. Lost in the noise is that until December production had been increasing at a huge rate for 2 years. Since then, that dramatic increase first stopped and is now decreasing at an increasing rate.

All the major tight oil producing companies lost money in the first half of 2015 even after reducing CAPEX. In fact, with the exception of Continental, CAPEX was reduced so much as to not able to sustain reserves at current production level.

What all this points out is the likelihood of the supply/demand mismatch disappearing soon. When? Your guess is as good as mine, but would bet that next year will surprise a lot of bearish analyst.

I think that much of the teeth knashing over China is just that “worry” that will not bear out in the long run. Does China continue double digit increases in GNP? No way. But 7% is probably likely. Add in India [the second most populous country] at 7% and you see continuing world wide growth. US is still expanding at more subdued rates and Europe seems to be stagnated currently.

Bottom line is that I am still in the “patience” mode for my stock portfolio, and am pleased with my EIUL performance.

Record amount pulled from stock funds last week! August 28, 2015

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I want to apologize to my readers for not having posted for a while, but I have been moving. I am now settled in.

I just wanted to drop folks a note that last week there was a record amount of $$$$ pulled out of stock funds at $29.5B in the week ending Wednesday. This is typical of what happens to folks who are invested in mutual funds as they sell into the panic. Classic sell low, buy high phenomenon that Dalbar, Inc. studies document and the main cause of the 3.8% return the average investor has gotten out of their stock funds over the last 30 years.

I’m sure the mutual fund sales people/Wall Street will simply blame their clients for the failure as they always have, ignoring the real life demonstration of behavior based on how all our brains function.

My clients in EIULs had no such damaging behavior because their was no losses to deal with.

Bawld Guy Retirement Income Seminars July 3, 2015

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Retirement Income Seminars. Jeff Brown has organized monthly seminars around the country that are focused on strategies for maximizing retirement income. As you know I have for a long time used real data to develop efficient retirement income strategies that work. For years Jeff and I have put together purposeful financial planning based on a multiple prong strategy of real estate investing and EIULs. The data on successful retirement strategies is succinct in documenting what works and what doesn’t work. The seminars present experts on all aspects of successful retirement income strategies including myself. Please look over the list below and visit the link the month of the seminar you can make. The small cost of attending could be the most important decision you make in creating a fruitful financial future.

Bawld Guy Live


Detroit, MI July 10-12
Dallas, TX August 7-9
Las Vegas, NV September 25-27
Newport Beach, CA October 23-25

The story of oil over the last year June 18, 2015

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Much bandspace in the internet world is given over to speculation on oil. It is assumed that the Saudi’s are trying to crush the shale oil production. And the paranoia gets worse from there. Here are my thoughts:

Saudi’s smartest men in the oil business
They know without the 5+M BPD from North American shale oil the world would be in a big hurt with demand outstripping supply by 4M
They were concerned with $100 oil dampening world wide demand, especially in developing economies
They were aware of supply overcoming demand starting in Jan. 2014

So they waited until the price of oil collapsed as was inevitable with the pace of increasing production from the shale oil cowboys. And then they did nothing as planned with their production, causing a price panic. Their thinking was simple. The shale oil cowboy’s were going full out with their production and caused the issue of over production, so needed to learn some market discipline. Cheap oil would increase demand more rapidly and change the growth rate significantly in developing countries making them more dependent on oil in the long run. And as a bonus, Americans would react by going back to their love affair with SUVs. Also the pace of alternative energy production would fall in Europe and America.

They were more than comfortable to bear the short term pain of low oil prices for long term gain of a world more dependent on oil. So far, IMO, they have been correct in their analysis. Americans are back to purchasing SUVs and driving more miles. Alternative energy projects have stalled. Developing countries [check out India] growth rates are increasing. Oil demand has ramped up. Shale oil production growth has stalled and started to drop.

In the last month or so, SA has increased their own production a little. This is probably to prepare for the summer where their internal energy use skyrockets. They are also developing a strong relationship with China and regained some market share. But, and this is my opinion based on geologists reports, they don’t have much spare capacity for production.

What this means? Sometime in the next year, demand will outstrip supply, causing oil to go back up. How far? Don’t know, but wouldn’t be surprised if we end up in the $80-$90 range. At that time what shale oil producers are still viable, will start to crank up again. But this time, I think, they will modulate their production more to current demand. So we will see shale oil production increasing above current levels long term, but a a more conservative pace.

And we will see the major oil companies and the nationals have a huge issue with depletion because they have pushed out needed projects a couple of years. There will be a scramble to get more oil on-line before 2020 and a resultant increase in price during this process.

So in short, this issue of over supply caused by the shale oil cowboys will create a worsening issue long term with the oil supply. We may look back at 2015 with nostalgia just as we look at the 1990s as a period of cheap oil that caused us to behave stupidly.

Comments of the 1st Quarter of 2015 May 27, 2015

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I will do this in outline form for brevity:

The stock market continues to rise although at a lower rate than 2014.  At some time in the near future we will see a correction. This is a much needed event as we have not seen a correction in quite a few years.  For those who are invested long term we use these events as an opportunity to pick up bargains.

EIULs continue to perform as structured.  As a group sales of EIULs broke a record and have attracted the attention as a threat to whole life companies as well as mutual fund/stock companies.  New rules will come down that will severely limit the ability to illustrate these policies at anything close to real world experience.  This won’t stop the attraction of EIULs to folks looking to secure their financial future.

The price of oil made a move up this quarter, but has since stalled.  World oil production continues to be a record levels while demand has seen some growth.  China demand for oil up 9% with 6% the result of transportation [SUV sales up 50%].  India up strongly too.  US demand up with strong increase in miles driven and sales of SUVs up.  Even some positive movement in Europe.  Russia and Latin America lag in demand for oil.  Saudi Arabia sees increase in internal use.

North American tight oil [which I don’t invest in], has seen falling production since the first of the year.  This should really take affect in the second half of 2015 reversing the current world wide overproduction of oil.

My energy stocks moved up, but are significantly in the red.  Despite this, I remain confident in their ability to get back in the black over the next 24 months.

Berkshire Hathaway off its highs but continues to do well in this environment.  It produces a huge amount of cash flow each day.

Real Estate rents remain strong in the US.  Prices continue to increase as bankruptcies and foreclosures decrease. Real Estate remains a great place to invest.

The overall dividend environment for blue chip companies is positive as dividends continue to move upward.

If you had followed the strategy [ies] that I advise you would be in great shape for whatever happens next.

1. EIUL [protected against market downdrafts and taxes]

2. Investment Real Estate [rents continue to increase]

3. Dividend producing Blue Chip Stocks [dividends continue to increase]

4. Annuities [for guaranteed life long retirement income]

What you don’t know can hurt you; Fear of the unknown is the #1 issue in people’s lives December 17, 2014

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As regular readers know, my background is in social psychology. Applying what I understand on how our minds’ work to financial matters lead me to several different strategies which include using equity indexed universal life policies to help fund retirement income.

The other day I received this e-mail note from a client:

I wanted to send you word that since I rearrange my retirement plan over the past two years, I am now riding out this stock market crash with little panic. I have moved most of my money into a combination of real estate, discounted real estate notes, and an EIUL.

I feel like I understand the risks at play, and how people all around me must be panicking like crazy due to this giant drop in oil prices. I feel like I can see the systemic risk you have been preaching about for years, for which mutual funds were supposed to be our savior. And yet, look at them now!

Thanks for helping me build REAL net worth.

This client has constructed a financial profile that allows him to sleep well at night.
This is perhaps the best financial advice I can give: Construct your personal financial situation in such a way as to allow you to sleep well at night. There are no guarantees in this world. But there is one thing I have discovered over the years; we are our worst enemies. Let me explain. Our brains are hardwired to take action in the face of perceived danger. When that saber tooth tiger entered our cave, the survivors were the ones that ran or used weapons to fight. Those that quietly, serenely, surveyed the situation were eaten. Fight or flight or freeze? The reaction to extreme stress creates real physiological changes. Transfer this known psychological reaction and its encouragement of action to our current financial world. The data is clear that people react to the ups and downs of the stock market in similar ways that are not good for their accounts. They buy high and sell low. What should they do? Nothing. Back in pre-history doing nothing gets you eaten. In the financial world doing nothing has proven to be the only way to do well over the long run.

How hard is it? Really hard. While I watch my energy stocks go down, my entire being was screaming sell….sell….sell. I went back and re-read Warren Bufffet to settle me down. But as I tell my clients when they ask, can you sleep at night when your portfolio of stocks [or mutual funds] goes in free-fall? Because if there are any doubts, then you don’t need to be in the equities market. The ability to resist your brain is very difficult and takes a certain personality.

Now, the above client might not have a set of financial strategies that work for you. But, you need to find strategies that work for your situation and personality. Nothing less will end up in disaster as the current data on personal wealth indicate for the vast majority.

Does an EIUL work for you? Maybe? Real Estate? Mutual Funds? Stocks? Bonds? Discounted Notes?
Figure it out, because your financial life depends on it.

Have a Merry Christmas and Happy New Year!