Investing 102

[SSLance]

I'm a big fan of whole life policies, my first investment (and still to this day my best investment) was the whole life policy I bought when I was 21 years old.

It was sold to me by a financial adviser as a "reverse IRA", basically a $2,000 a year premium with a death benefit and compounding tax free cash value. I have no doubts I can retire comfortably just by borrowing from the cash value of it alone if needed. Remember we have no kids and basically no debt, so term life has never been on our radar, this was strictly an investment vehicle.

That said, as you get older they are harder and harder to get to make financial sense. I've tried several times as I got older to buy more of them and the cost of the insurance is just too high to make them work. My policy's cash value crossed the invested amount between years 7 and 8. Every time I tried to buy them after that it was 9-10 years before your cash value crossed past the invested amount and the growth rate was much slower after that as well.

So the trick to cash value policies is...buy them early...and keep them forever. I smile every year when I write that premium check and see how much the cash value of the policy rises...tax free. My only regret is I didn't buy more of them earlier.

[Vegas69]

That sound exactly like the pitch I got from my advisor.

Let's look at an analysis:

You invest $2000 a year at 5% for 59 years in Life Insurance.

Or

You invest $2000 a year at 8% for 59 years in stocks.


Life Insurance Compounded: $705,167

Stocks Compounded: $2,504,426

This is a prime example that compound interest has more momentum at a higher rate.

I'm leaving out the fact that you can invest more principal in stocks due to no premium. Now if you have a life insurance policy where you get the cash value and death benefit, that needs factored in. (read your fine print) You do need to back out the interest you pay to borrow your own money. Most are around 8%. I don't trust them. My assistant told me a story about how her father's life insurance failed to pay out.

How many insurance companies go out of business? Not many... The cards are stacked in their favor.

[WSSix]

Well, I just finished making my 2017 selections in the Roth for the most part. I decided to mix some things up and might do so further. For the most part, I believe in holding a position for a long time so long as it is a great company.

With that said, I still did my typical position for the year in KO. My total return for that pick has been good but there has not been a lot of growth, if any for a while. I'm ok with that but I also want some growth. I decided to open a small position in DPS so I can get my growth and dividend. We will see what happens through the year to determine what I do come 2018.

KMI has had a great run up this year. Too bad I bought in years ago through KMP. I'm deep in a hole on this one. I see no reason to bail though. I do believe they will rebound but they also have a lot of debt that gives me pause. I decided to not add to this one due to those factors and the fact that I felt there was a better place to put my money while remaining in that sector. So, my money ended up in PSX. Solid midstream company that has had good growth and pays a good dividend. I'll continue to hold KMI and reevaluate them and PSX for 2018.

WFM I'm not sure what to do with. I didn't add to my position this year. I actually think I'm going to bail even though I'm in a hole with them too. That's a tough market to be in and they are getting beaten up. I didn't expect them to be a high growth pick. I didn't expect them to tank either though. The dividend is paltry. In the grand scheme of things, my position is small. The loss I'll take isn't anything great either. I'd just prefer to try and recover my loses in another stock. This deviates from my hold for a long time style because I honestly don't think they will survive long term. To me, they are a great company but people don't give a damn about that. They only care about cost. That sector is so competitive I expect their to be some causalities and am afraid WFM will be one of them since they are high end.

The rest of the picks in my ROTH received their typical increase for 2017. As far as I'm concerned, they are moving along just fine.

I've been adding to my regular brokerage account too. So far so good now that oil has rebounded a little.

Here's hoping 2017 is good for everyone.

[GregWeld]

My quick and dirty answer to LIFE INSURANCE questions is -----


Buy enough TERM LIFE - if you need it - to protect your family in the event of an untimely demise.....


Let me qualify that.


If you have enough assets to provide for your family without life insurance - then why would you buy it? I don't have any. Don't need it. Kids are grown - house and all the other toys are debt free.


But If you have a house mortgage and car payments - and little CASH assets..... then Life insurance would certainly be beneficial to those you leave behind AND IT'S TAX FREE.... So you could leave a paid for house and cars and whatever else you choose to toss in there.

You single? Buy a $10,000 policy so somebody can bury you. Done.

[JKnight]

Definitely agree with both Todd and Greg. I kinda got setup on this path as my parents started this policy when I was a baby. They paid the premiums for the first 22 years, then I took over when I graduated college. I never really questioned it since it "seemed" like I was doing the right thing continuing it. There's been some opportunities to expand the death benefit at intervals through the last 10 years, so I did. At 33, I'm married, but not debt free, so I can see how it would be good to keep what I have in case of untimely demise, but I don't think I'm going to increase it anymore at the next 3-4 intervals. I'll have to look into the details some more though. Glad this got brought up.

To Todds point, can you imagine if my folks would have just invested the money they paid into this policy? I sure as hell wouldn't have needed to take out student loans to get my undergrad!

[SSLance]

Originally Posted by Vegas69

That sound exactly like the pitch I got from my advisor.

I had to chuckle because your pitch sounds exactly like the one the last two financial advisers (stock brokers) I had gave to me to try to get me to invest more money with them instead of in real estate or life insurance.

It's all good, I've been down the to buy or not to buy life insurance debate many times. I fully understand both sides of the discussion. I have seen the Life policys that go broke, don't return as projected, and companies that do not pay out as promised when asked to do so. It is a touchy vehicle for sure, research and timing is key.

Personally, my overall annual ROI on my market investments since I started investing back in the early 90s has been no where near 8%. In fact those returns look paltry compared to the 6ish % my Whole Life policy has returned (tax free) to my account year after year. The net asset value of my life policy has never had a down year, never lost value and never failed to pay a dividend. Also, if you ever borrow from the cash value of my policy, you pay interest sure...back to your own policy... You are basically borrowing money from yourself. Maybe I'm lucky but I prefer to think I just did my homework and picked a good one at just the right time...just like a lot of us have done with our dividend paying stocks in this thread.

If I get some free time, I'll create an updated ROI spreadsheet on my life policy and share it with everyone. Right now I'm buried in year end payroll duties, tax return prep, estimated tax payments and preparing for a 3-4 week vacation trip out West in a couple of weeks. Priorities ya know...

[Vegas69]

The S&P 500 has nearly doubled since 1997 and tripled since 1987. Have you invested as consistently in the market and in good growth vehicles like index funds or individual stocks?

My strategy comes down to holding LONG. Should you cash out a decent whole life policy with only 5-15 years left to retirement, probably not.

[GregWeld]

I've warned here many times about RISING INTEREST RATES and their correlation to values of your holdings.

We CAN NOT ignore the relationship. House values are affected by rising rates... as the rush to beat the rise in rates temporarily pushes buyers in to the market - they'll be the ones paying the highest prices ------ until the rates reach a point where they simply price out the average buyer and then home prices will need to be adjust DOWNWARD to get the monthly payments down to where people can afford to make them.

Autos --- We've seen a big cycle of renewal... bolstered by low rates that are often near or at ZERO...

Banks.... they borrow your money at super low rates and lend it out at higher rates - "the spread" - this increases as rates rise. Remember that banks use leverage in their lending.... and a simple .25 rise in the spread makes the banks a lot of money.

Capital spending here in the USA..... this can only be a good thing for the USA. But there will be lots of bumps in the road because nothing ever really just steams ahead as planned.... so while we should see a increase in capital expense here -- if rate rise too fast too far - that will pinch corporate profits and slow cap ex.... so we need a nice balance here. Sales and profits might continue to fund Cap Ex spending..... squeeze one too hard and it pinches the other off. I think we'll see a rush to borrow to get ahead of rising COSTS.... The more you borrow now -- the smarter you'll look down the road. But you have to have the CONFIDENCE to invest in plant and equipment etc - so we need confidence to stay high as well.


Healthcare ----- Oh my...... Who knows where this is going to go. My guess is we'll see LOTS of pressure to bring down prices and costs.... that is going to have to come from somewhere.... usually someones bottom line until they adjust their costs. But someone will be a winner in this space.... we just don't know what that is going to look like yet. I expect winners and losers in this space - rising costs - rising borrowing costs - and a FED that is hot on the trail of making changes.


Why does any of this matter? ---- Because PROFITS are what drives the stock market in the end. In the end this is what really matters. So if your costs rise -- are you able to sell more to make up for this? Are you able to raise your selling prices? If BUSINESS IS GOOD.... then it's not a big problem. It's a problem when cost rises and sales falter.... Remember we need TOP LINE (SALES) growth and BOTTOM LINE (PROFITS) to have a good stock market. To have a good stock market - we have to have a healthy sales environment. WATCH FOR ANY CHANGE. A reset or rebuilding of America can be an absolute boon to our economy -- but we must be ever vigilant of the ugly elephant of INFLATION as we heat up.... You couple rising overhead costs (rates) and price increases to cover said rising costs.... and that can become hard to contain and can spiral out of control like it did in the early 80's.

[XLexusTech]

My options ... my dividend stocks .... my mutual funds ... open a new Roth ? (Note 8% of the 15 mentioned above goes into a Roth)

[Vegas69]

Originally Posted by GregWeld

I've warned here many times about RISING INTEREST RATES and their correlation to values of your holdings.

We CAN NOT ignore the relationship. House values are affected by rising rates... as the rush to beat the rise in rates temporarily pushes buyers in to the market - they'll be the ones paying the highest prices ------ until the rates reach a point where they simply price out the average buyer and then home prices will need to be adjust DOWNWARD to get the monthly payments down to where people can afford to make them.

Autos --- We've seen a big cycle of renewal... bolstered by low rates that are often near or at ZERO...

Banks.... they borrow your money at super low rates and lend it out at higher rates - "the spread" - this increases as rates rise. Remember that banks use leverage in their lending.... and a simple .25 rise in the spread makes the banks a lot of money.

Capital spending here in the USA..... this can only be a good thing for the USA. But there will be lots of bumps in the road because nothing ever really just steams ahead as planned.... so while we should see a increase in capital expense here -- if rate rise too fast too far - that will pinch corporate profits and slow cap ex.... so we need a nice balance here. Sales and profits might continue to fund Cap Ex spending..... squeeze one too hard and it pinches the other off. I think we'll see a rush to borrow to get ahead of rising COSTS.... The more you borrow now -- the smarter you'll look down the road. But you have to have the CONFIDENCE to invest in plant and equipment etc - so we need confidence to stay high as well.


Healthcare ----- Oh my...... Who knows where this is going to go. My guess is we'll see LOTS of pressure to bring down prices and costs.... that is going to have to come from somewhere.... usually someones bottom line until they adjust their costs. But someone will be a winner in this space.... we just don't know what that is going to look like yet. I expect winners and losers in this space - rising costs - rising borrowing costs - and a FED that is hot on the trail of making changes.


Why does any of this matter? ---- Because PROFITS are what drives the stock market in the end. In the end this is what really matters. So if your costs rise -- are you able to sell more to make up for this? Are you able to raise your selling prices? If BUSINESS IS GOOD.... then it's not a big problem. It's a problem when cost rises and sales falter.... Remember we need TOP LINE (SALES) growth and BOTTOM LINE (PROFITS) to have a good stock market. To have a good stock market - we have to have a healthy sales environment. WATCH FOR ANY CHANGE. A reset or rebuilding of America can be an absolute boon to our economy -- but we must be ever vigilant of the ugly elephant of INFLATION as we heat up.... You couple rising overhead costs (rates) and price increases to cover said rising costs.... and that can become hard to contain and can spiral out of control like it did in the early 80's.

Is there really any doubt a correction is coming on the horizon? When you team what Greg said with the debt cycle, it seems likely in the near future. Think about what happened 7-10 years ago. Many wiped out there excessive debts through foreclosure, short sales, and bankruptcy. When the economy came roaring back, they now had a large percentage of income that could be displaced with debt. The fact is that roughly 85% of cars are financed. The US economy is very reliant on consumers taking on debt to make purchases of houses, cars, boats, furniture, etc.. When Americans start getting toward the end of their available monthly income due to excessive debt load, spending slows down. Team that with higher interest rates and.... I know I've seen people spending similar to 12-15 years ago.

I recently read in the Wall Street Journal that the stock market had it's second best run under Obama vs. any other president in history. That's 8 years of serious gains. Housing has been appreciating for 5-6 years in most markets.

Are we there yet? Who knows, but we are much closer than yesterday. If I was closing in on retirement, I'd be making some conservative moves with my money, that I know. Unless I lived off my dividends like Greg! 97% can't do that.

One thing is certain, cash will be king in the next low cycle. I hope to be ready.