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Buffett’s Investment Advice: Avoid Losing Money June 4, 2014

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Investment strategies that don’t take Warren Buffett’s advice almost always end up bad for people. Now, that does not mean you will never lose money in an investment, but that your strategy should be one that minimizes that possibility. That is why Buffett’s Berkshire Hathaway will underperform in a strong positive market, but out perform in a negative market. He attempts to avoid losing money. The final result is overall over performance because as mentioned many times, negative numbers hurt more than positive numbers help.

This is pure mathematics. But there is a psychological reason that Buffett, as an investor for others understands. People can’t handle seeing the value of their investments go down. The data for this is pretty succinct and telling. When the market goes down, people sell in mass. That is a fact. [Of course, the opposite is true in that when the market goes up, people don’t want to miss out, and buy]

Understanding this I have structured my investments to minimize loss.

1. I own an EIUL, where the cash value does not go down. No matter what the market does, all gains are locked in from year to year.
2. I invest in dividend growth stocks. The dividends come in no matter what the stock value is that particularly quarter. But, just as important, I only buy when I think the price is fair. And I sell when the price has gotten so high as to be able to replace the dividends with an equally well managed business that pays higher dividends. My attention is on the dividends being produced not the market value of the company on any particular day. This changes the whole emotional component of owning stocks.
3. I own farm land that is cash positive and really have only a general idea of how much I could sell it for.
4. I have about half my stock portfolio in Berkshire Hathaway which as mentioned earlier tends to fall less than the market in bad years. [Note, that percentage is going down as when Berkshire springs up I sell some and move it over to the dividend growth section of my portfolio]

My clients that have followed similar strategies sleep well at night confident that the coming stock market correction will not devastate them either financially or emotionally. I know it has worked for me.

EIUL Update April 11, 2014

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I start out this update with some facts:
From 1990-2009, the average mutual fund outperformed the average mutual fund investor by more than 300%, annually. Since ERISA was passed in the 1974, enabling 401k accounts, the market has returned an average of 11% per year. However, the average investor has gained only 3% per year. [Found on the Big Picture by Barry Ritholtz while trying to convince you to let him manage your money]

With those facts as background, most of my clients are receiving the maximum interest credits [cap rate] on their EIULs this year as they hit their anniversary date. These gains are now locked in and can’t be taken away by a downward swing in the market.

Minnesota Life still is my go-to company for EIULs. They instituted a post 10 year bonus last year, putting it back on top of my list. The product itself has been the best performer of the EIULs over the 10+ years it has been in existence.

Here are the actual interest credits you would have received if you had purchased this when it came out. [assuming a Jan. 1 anniversary date] using the actual cap rates at the time.

2004 9%
2005 3%
2006 13.62%
2007 3.5%
2008 0%
2009 17%
2010 11.48%
2011 2.67%
2012 12.66%
2013 13%

CAGR of 8.48%. Not to shabby for some fairly tough years that caused folks to panic that were invested in mutual funds and underperform by 2/3rds.

The actual index returned a CAGR of 5.1% during the same time period.

Real Returns, not theory on how this product might work.
And now folks will start getting their post 10 year bonus to boost returns even more.

If you have been waiting to get involved with this product, now is the time before the inevitable market down draft gives away your money.

Good year of crediting for EIULs January 17, 2014

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Just a short update on 2013’s crediting on the Minnesota Life’s EIULs.
If you were in the S&P 500 index you got the full cap of 13% credit.
If you had switched to the blended index as I suggested you would have got the full cap of 16% [this is all dependent upon what month your anniversary is as the index credit has some variance from month to month. These credits assume a December anniversary date]
The variable rate loan charge is 4.5% currently, so if you were taking out a variable loan last year you would have made 11.5% on the money you had loaned out.

Obviously, if you had money in an index mutual fund you would have bigger gains this year, but as I have demonstrated many times before, the lack of losses in the account more than makes up for the occasional underperformance vis a vis the index with downside market risk.

The last year demonstrates the strategy working just as it should.

It was pointed out to me that I haven’t written a full post on using EIULs for retirement income in a long while, so I will write one this month for those new to my blog.

Minnesota Life Equity Index Universal Life Policy Gets Better September 12, 2013

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My #1 rated EIUL is currently The Eclipse by Minnesota Life.  This month it improved the future performance by adding in a interest bonus.  As usual they accomplished this in a way that allows for better performance and safety.  Since inception 11 years ago this has been the top performer in the industry.  I think this change keeps it there.  Also of interest is that the change applies to anyone that currently owns the policy.


The way the bonus works is that a bonus interest is added to the account value every year after year 10.  The bonus is calculated by adding up the previous 10 years worth interest credits and multiplying by 1%.  Once the bonus is received it is then counted in the addition for all future years so it is a compounded interest credit.

The company has calculated that this will raise the accumulated cash and potential distributions by between 13% and 18%.  I ran my first illustration using the bonus and it really adds value.  Obviously the longer you have to get the bonus the more value.  

I also recently had a very good underwriting decision for a client, the best I have seen for this particular situation.  

When I look at which EIUL to suggest to clients I look at the entire picture:

Minnesota Life

  1. Retroactively added in a benefit to existing policy holders;
  2. Added in a bonus that provides additional performance along with safety; and
  3. Great underwriting decisions for clients.  

Three more reasons to keep Minnesota Life #1!


Book Review; Bad Advisors by Roccy DeFrancesco, JD August 20, 2013

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I first discovered Roccy DeFrancesco early in my EIUL education process. I read his book The Home Equity Management Guidebook which he wrote to clarify/correct the issues in the hugely popular Missed Fortune. Two things stood out from that book, one that Mr. DeFrancesco’s writing style was caustic, and secondly he really knew what he was talking about. As I read his book I found myself nodding my head in agreement with him more often than not. Since then I would occasionally see him posting on various social media sites, always with the same caustic style.

I am happy to see that in his new book, Mr. Defrancesco has diminished that acerbic style at the same time written a book full of good advice in clear non-technical language. This book is aimed squarely at the financial services industry as it commonly functions. It lays bare the reality of folks who give advice to others on their finances. And he does it not by getting into the math and outcomes of their advice, but in illuminating their biases.

He tells you why most financial planners can’t advise clients to purchase EIULs and FIAs even if it is the best product for their clients. He demonstrates why “fee only” advisors don’t understand how some products work, why they don’t take the time to understand the products in the marketplace, and where their biases lie.
He takes on Insurance Marketing Organizations [IMOs], typical insurance agents, CPAs and Attorneys who dabble in the financial services field, and many of the sales concepts floating around the industry.

Best of all he has a list of questions for all these folks for the consumer to ask to determine if their advisor is a bad advisor. In writing this book he has exposed the underbelly of the industry and we should all thank him for that.

The LIES We Are Told May 17, 2012

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EIUL by the numbers

I have clients who come from all different professions. One of the unique things about my business is that I sell EIULs to a lot of really smart people. I have many, for example, who are computer engineers. These folks love the numbers and will spend their spare time doing all sorts of calculations to make themselves comfortable with the product. A recent client wrote code to look at the arithmetic mean returns for the S & P 500 versus an EIUL with a 15% cap. And he came up with similar numbers to what I have done 5 years ago and 15 years ago. With his permission I post them here for you to look at. Here is the url to Greg’s blog page where he outlines the math behind the numbers for you math whizzes! Oh, and if you get averages from a financial advisor always ask them if it is arithmetic means or Geometric means??? The former is useless in determining how much money you would have with any given mean return.

Greg Turnquist Blog Post

10-year stats
S&P 500 stats: Avg geom mean = 7.08 (-3.04..16.06) 68% chance between 2.22 and 11.94
EIUL stats: Avg geom mean = 8.08 (5.48..10.34) 68% chance between 6.83 and 9.33

15-year stats
S&P 500 stats: Avg geom mean = 7.30 (0.90..15.59) 68% chance between 3.58 and 11.02
EIUL stats: Avg geom mean = 8.18 (6.51..10.54) 68% chance between 7.22 and 9.14

20-year stats
S&P 500 stats: Avg geom mean = 7.16 (2.73..13.95) 68% chance between 4.07 and 10.25
EIUL stats: Avg geom mean = 8.13 (6.81..10.16) 68% chance between 7.32 and 8.94

25-year stats
S&P 500 stats: Avg geom mean = 7.15 (3.94..13.05) 68% chance between 4.77 and 9.53
EIUL stats: Avg geom mean = 8.18 (7.10..9.82) 68% chance between 7.52 and 8.84

30-year stats
S&P 500 stats: Avg geom mean = 7.17 (5.14..10.05) 68% chance between 5.66 and 8.68
EIUL stats: Avg geom mean = 8.20 (7.36..9.00) 68% chance between 7.74 and 8.66

Note in every year range that the EIUL reduces variability and increase mean returns. I have talked at length about the damage of sequence of return risk for retirement funding. [here & here]. By decreasing expected variance and eliminating negative years it dramatically reduces sequence of return risk. And there is no expected cost to accomplish that [unlike mutual funds which the proponents want you to increase your bond exposure as you age as a way to reduce variability]. In fact the expected return is around 1% higher against the actual index and even higher advantage if you take the status quo advice and mix in bond funds with your equity funds!

Following statistics are the low and high in each time period [Geometric Means]:

All years from 1951 for comparison sake:

S & P 500 Index 6.86% average mean total growth factor 53.76
EIUL [15% Cap] 8.22% TGF 114

10 year Windows
S&P 500 Worst Performance -3.03% [1999-2008 ]
Best Performance 16.91% [1989-1998]

EIUL Worst Performance 5.48% [1969-1978]
Best Perfromance 10.33 [1980-89]

15 Year Windows
S&P 500 Worst Performance .9% [1960-1974]
Best 15.59% [1985-1999]

EIUL Worst 6.51% [1960-1974]
Best 10.54% [1985-1999]

20 Year Window
S&P 500 Worst 2.72% [1972-1991]
Best 13.95% [1980-1999]

EIUL Worst 6.81% [1959-1978]
Best 10.16% [1980-1999]

25 Year Window
S&P 500 Worst 3.94% [1957-1981]
Best 13.04% [1975-1999]

EIUL Worst 7.1% [1957-1981]
Best 9.81% [1975-1999]

30 Year Window
S&P 500 Worst 5.14% [1952-1981]
Best 10.05% [1975-2004]

EIUL Worst 7.36% [1952-1981]
Best 9% [1970-1999]

OK, let’s review…..total growth since 1951 more than twice as much for EIUL. Check. Each time period higher average returns for the EIUL. Check. Reduce risk or variance for the EIUL. Check.

Now why do people still listen to all those mutual fund salesmen?

What are you waiting for? Contact me today.

Minnesota Life’s Eclipse EIUL June 16, 2011

Posted by shaferfinancial in Finance.
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For the 1st quarter of 2011 the EIUL from Minnesota Life was #1 in sales.
Why? Perhaps people are starting to really understand how well it performs.
This historic analysis points it out:

The analysis looked at 30 years of historic data. That ran 20 year and 1 year rolling month analysis.
This means they looked at all the possible 20 year and 1 year returns starting every month for the last 30 years. This assumed the current 15% cap.

Percentage of 20 year period that exceeds 7.5% = 100% Percentage of 1 year periods that exceed 7.5%= 60%
Percentage of 20 year period that exceed 8% = 97%. Percentage of 1 year periods that exceeds 8%= 59%
Percentage of 20 year periods that exceed 8.5% = 81%. Percentage of 1 year periods that exceeds 8.5%= 57%
Percentage of 20 year periods that exceed 9% = 51%. Percentage of 1 year periods that exceeds 9%= 56%
Percentage of 20 year periods that exceed 9.5% = 29%. Percentage of 1 year periods that exceeds 9.5%= 54%
Percentage of 20 year periods that exceed 10% = 7%. Percentage of 1 year periods that exceeds 10%= 52%

We all know that statistics are just numbers that can be manipulated, but historically you had about a 50/50 chance of getting a 9% average credit for 20 years and a 97% chance of getting a 8% return!
Good odds if you ask me!

Back from Vacation April 27, 2011

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Back in from vacation in Florida. Just wanted to mention that I am a couple of days from getting my web site up and running again. It has been redesigned as an informational site specific to equity indexed universal life insurance basics. I will post it when it is finished so you can tell me what you think!

Is Minnesota Life still the #1 EIUL? January 4, 2011

Posted by shaferfinancial in Finance, Uncategorized.
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As most of my readers know, I take a look annually at all the EIULs on the market to make a decision as to which ones are the best. For the last couple years the Minnesota Life EIUL has been by far the best. However, this year the gap closed.

First a discussion of the analysis; what is important to know and what isn’t really important.
Over the years I have been able to figure out what is critical and what is merely window dressing when it comes to EIULs.

First thing I look at is the financial stability of the companies as reflected in their comdex ratings.
This rating system is a composite of the major rating agencies and their comments. This is important not because the policies won’t be paid out [this has never happened in the last 100 years of life insurance policies], because their are systems in place to make sure they are paid out. But, what does happen is when a company has problems managing the reserves that back up the policies, they try to make up the losses by other means including dropping cap rates and increasing expenses to current policy holders. The result are products that don’t perform as they should because the companies are not managing their reserves as they should. Fortunately, we can avoid this by noting the ability of companies to manage their reserves in a stable manner. Hence I only sell products from companies that have high comdex ratings.

The second item I look at is the cap rate history. Cap rates on EIULs are in response to the overall interest rate environment. Many of my clients are very worried about the indexes and their returns. But, they should be more concerned about the interest rate environment because that is what really drives the performance of these products. Currently the interest rate environment is in a two generation low, so cap rates have come down. However, I take a look at the history of the cap rates in a more normal interest rate environment as well as the current one [unfortunately EIULs haven’t been around long enough to have experienced a high interest rate environment like the early 1980s] under the assumption that we will over time have a normal interest rate environment. This history gives me a good gauge on what the future performance might look like as well as what the companies are likely to do in different environments.

Next I assume nothing changes and analyze each product based on what the index has done over the last 20 years and what the current cap rates are.

Finally, I look at the various options on loans, and riders to see how these compare from company to company.

After looking at all this, I then offer the best one to my customers and a second choice for those who might want another company.

So, is Minnesota Life still number 1??????

Yes, by a nose to North American.

If everything stayed the same including the current interest rate environment for 30 years then the North American product would probably out-perform ML. However, since I think that is extremely unlikely, and the more likely event is a more normalized environment in the future then ML should out-perform NA given its higher cap rate history. ML is rated slightly higher on the comdex rating system. Expenses between the two are about the same. So if a customer preferred NA I would be more than happy to sell it to them and sleep fine.

Now remember, it is not just important to get the best product, but even more important to have it structured right for your situation. Seems from what people have shown me over the last few years most agents don’t structure them correctly.

Why EIUL? July 19, 2010

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As most of my readers know, I am a big believer in equity indexed universal life insurance as well as a seller of it.  I have my own EIUL [AVIVA] as well.  Over the last 6 years of ownership it has performed exactly as it was advertised too.  Over the last few years, since I decided to sell the product, I have learned quite a bit about the product.  Here are some key points for anyone interested in the product:

1. It is permanent insurance, therefore has all the good and bad of an insurance product.  Primarily the bad part is the front loaded expenses [over the first 10 years].  So this product is not one to be entered into on a whim.  This is a decision you make and live with.  Now the good part.  If you have dependents or heirs then the insurance aspect is a great bonus to most retirement plans.  How many 401Ks/IRAs do you know of that will pass on 5 to 10 times the invested value to your spouse?  But most of all that is why you really don’t need to worry about the front loaded expenses.  If you die prematurely, no one will worry that you paid a lot of expenses in the first 10 years will they?  In the long run the expenses will cost you between .5% and 1.5%.  This is actually below the average expenses from the mutual fund industry.

2.  When structured correctly, there will be no income tax owed on money to retrieve from the policy.  Perhaps the biggest attraction for folks is this characteristic.  What will be the income tax [both state and federal] when you need the money? Since no one can predict it, this takes a big uncertainty away.

3.  The cash value [excess premium] in your policy is not invested in the stock market, but can get similar returns.  This is perhaps the biggest misunderstanding out there about EIULs.  The strategy is not even close to investing in mutual funds. First, if the market index goes down, your cash value doesn’t.  No negative returns means less variability which is the retirement income killer.  Yes, you are capped in your ability to capture positive movements [currently 15% for the Minnesota Life product], but when you run the numbers your overall return is higher using this strategy than simply mirroring the stock index.

4. Because the cash value doesn’t go below 0, there is less panic in the product, therefore less temptation to change.  When we look at actual behavior, people are their own worst enemies.  The actual returns gotten by real live people in mutual funds is 5-7% less than what the actual market gives.

5.  This product is not for everyone.  If taxes are not of concern for you then this product probably is not for you.  If you are a “do-it-yourself” investor that loathes expenses and feels they can ride the ups and downs of the market [many people think they can, but data tells us that their actual behavior is something different] then this product is not for you.

6. This should not be your one and only savings/investment vehicle.  I have posted many times on my three legged approach; EIUL, individual equities, real estate.  Point being this should be your conservative part of your portfolio, with internal returns expected around 8%.